Take-Away: As more individuals direct their retirement accounts and IRAs to be paid to irrevocable trusts to exploit the required minimum distribution (RMD) rules,  consider creating a separate trust that is designed solely to receive those pre-tax retirement assets to accommodate all of the unique ‘see-through’ trust rules and limitations.

Background: Beneficiaries of a retirement account are generally subject to the required minimum distribution rules. [IRC 401(a)(9).] Because a life expectancy is required to be used, only individuals may be designated beneficiaries for RMD rules. Thus, charities and estates are ineligible to exploit the required minimum distribution rules (RMD) and they must receive the decedent’s IRA either over a 5-year period if the decedent died before his/her required beginning date (age 70 ½) or over the decedent’s life expectancy (under the IRS Tables) if he/she was beyond their required beginning date. But there is the exception of the see-through rules where a trust, a non-individual, can still qualify for RMDs, where the oldest trust beneficiary’s age is used to calculate the RMD taken by the trustee from the IRA.

  • Conduit See-Through Trust: A conduit see-through trust pays the RMD and all other distributions from the IRA directly to the beneficiary during the beneficiary’s lifetime and does not accumulate in the trust for the benefit of anyone else. Due to this annual distribution requirement, the trust beneficiaries are in a similar position as if they were directly named as the beneficiaries of the IRA. Only the beneficiary’s life expectancy is used to calculate the RMD that is paid to the beneficiary. Overall, the conduit trust structure maximizes simplification, at the expense of beneficiary protection from either the beneficiary’s creditors, or the beneficiary’s own mismanagement of the required distributions.
  • Accumulation See-Through Trust: An accumulation see-through trust has no mandatory payments and thus it can accumulate the RMDs paid to the trust. This enables the trustee to manage the account in its discretion and provides maximum oversight of the IRA and protection from the beneficiary’s creditors. Obviously, the accumulation trust is less tax efficient due to the compressed income tax brackets applicable to irrevocable trusts. But this type of trust offers more flexibility, as the trustee can either withhold distributions in its discretion or make distributions that will carry-out the taxable income to the trust beneficiary. The challenge with an accumulation trust is identifying the oldest trust beneficiary. Specifically, contingent beneficiaries will also be considered in the ‘pool’ of trust beneficiaries when evaluating the trust beneficiary with the shortest life expectancy. As noted earlier, charities and estates have no life expectancy, so that if they are part of the beneficiary ‘pool’ arguably the RMD paid to the trust will be calculated over a very short period of time.
  • Mere Potential Beneficiary: Making life even more complicated is that the IRS has created an exception when identifying the beneficiary ‘pool’ for an accumulation trust for mere potential beneficiaries. A mere potential beneficiary is one who would take a distribution from the trust only after a predecessor beneficiary for whom the trust by its terms requires immediate and outright distribution. [IRC 401(a)(9)-5; PLR 200644022] Example: #1- Assets are left in trust for son for his lifetime, remainder to the American Red Cross. The American Red Cross is a contingent beneficiary, it is part of the beneficiary ‘pool’ and if the decedent was under age 70 ½, then the entire IRA payable to the trust will have to be paid by December 31 of the fifth year after the decedent’s death. [Reg. 1.401(a)(9)-3, Q&A 1 and Q&A-2.] Example #2: Assets are left in trust for son until he attains age 65 years, at which time the trust terminates and all assets are distributed to son. If son dies before age 65, assets pass to the American Red Cross. The American Red Cross is only a mere potential beneficiary, since the only time it would possibly take the IRA assets paid to the trust is if son dies early; son was entitled to the immediate outright distribution of the assets had he attained age 65. With that said, there is often a lot of heartburn generated determining who is within the ‘pool’ of beneficiaries in the search for the shortest life expectancy.


  • State Intention to Create a See-Through Trust: Best practice is to state the settlor’s intent to qualify as a see-through trust in the trust instrument itself, and to specifically define the retirement accounts to which the retirement provisions of the trust will apply, e.g. will tax deferred annuities be treated the same as IRAs?
  • Follow the See-Through Trust Requirements: The requirements for a trust to be treated as see-through are easy, but one can create a trap. There are 4 requirements, the first 3 of which are easy to meet. #1 The trust is valid under state law; #2 The trust becomes irrevocable on the settlor’s death; and #3 The trust beneficiaries are identifiable from the trust instrument (to facilitate the search for the oldest beneficiary with the shortest life expectancy.) The last requirement is in the hands of the trustee: The trustee must provide a copy of the trust instrument to the plan administrator or IRA custodian, or certain other information with regard to the trust beneficiaries, by October 31 of the year following the account owner’s death. If that information is not timely provided by the trustee, then the trust will fail to qualify as a see-through If that is the case, then the trust’s beneficiaries will not be designated beneficiaries and they will be subject either to (i) the 5-year distribution rule if the account owner died before his/her required beginning date (age 70 ½) or (ii) RMDs must be taken over the account owner’s life expectancy if the owner died after their required beginning date (which is usually a substantially shorter period of time than the life expectancy of the oldest trust beneficiary.) Note that with a Roth IRA, the IRA owner will always be treated as if he/she dies prior to his/her requirement beginning date, which means that a Roth IRA that is payable to a non-see-through trust will always be subject to the 5-year distribution rule.
  • Caution with Testamentary Trusts: If a testamentary trust (created under the account owner’s Will) is used, recall that the account owner’s estate can never be a designated beneficiary. Consequently, the actual testamentary trust should be named under the IRA beneficiary designation, to clarify that the retirement account cannot pass through the deceased account owner’s estate (and ultimately to the testamentary trust.)
  • QTIP Trusts: If a QTIP trust is to be treated as a see-through trust, a couple of quirks arise. Since the QTIP trust functions as a conduit trust (all income must be paid annually to the surviving spouse) the surviving spouse will be considered the sole beneficiary of that trust. Consequently, RMDs will not apply for the trust until the surviving spouse attains his/her required beginning date. More importantly, when the survivor reaches his/her required beginning date, the RMDs will be recalculated annually thereafter using the IRS’ Uniform Life Table, which is more favorable than the IRS’ Single Life Table. This results in a smaller (taxable) RMD that must be taken and paid to the survivor. Note that where a QTIP trust is to receive retirement benefits, the QTIP election must be made for both the QTIP trust and also for the retirement account itself.
  • Uniform Principal and Income Act: Section 409 of the UPIA presumes that 10% of any RMD that is paid to the trust consists of income, and the balance is added to trust principal, except in the context of a marital deduction trust which allows income to be set on a trust within a trust basis (referencing the internal investment income) or as a unitrust. Any additional payments that are received from the retirement account are allocated entirely to trust principal under the UPIA. This is particularly important for a QTIP trust, in light of the importance of ensuring that all income is paid to the surviving spouse
  • Charities: Obviously repeating myself, charities can be, and arguably should be, beneficiaries of retirement accounts. Distributions from the inherited IRA are taxable income in respect of a decedent. The beneficiary (conduit) or the trust (accumulation) will pay an income tax on the distribution received from the IRA. Charities normally do not pay income taxes. Rather than name the charity as a beneficiary under the trust instrument, which creates all sorts of administrative problems, it is better to name the charity directly on the IRA beneficiary designation as to a fixed amount or a fraction or percentage of the IRA account balance.
  • Use a Stand-Alone Trust Instrument: These days’ trusts are drafted with considerable flexibility in mind. Consider the strategy of giving a designated beneficiary a limited power of appointment over the trust corpus. Or consider a common boilerplate trust provision that directs the trustee to discharge estate expenses or to satisfy estate pecuniary bequests using trust assets. Or consider the rush by states to adopt decanting statutes where a trustee may exercise the decanting power to re-write the trust to possibly include ‘new’ older trust beneficiaries, e.g. decanting the trust assets to a new trust that gives the existing life beneficiary a limited testamentary power of appointment to appoint assets to class of beneficiaries including charities. All of these provisions to add flexibility or to address shifting funds from a funded trust to a probate estate can create all sorts of problems if a see-through trust is involved in the estate plan. Presumably these risks can be mitigated in the trust drafting phase by: (i) restricting any power of appointment in favor of older beneficiaries or non-individual entities; (ii) restricting the trustee’s power of decanting or trust modification with respect to the trust if it is to receive retirement accounts; or (iii) prohibiting the use of retirement accounts paid to the trust used to pay costs, administration expenses and taxes of the estate of the IRA account owner (otherwise the estate becomes a beneficiary.) But if the retirement accounts to be paid to the trustee are substantial, it may be advisable to create a separate trust instrument that is dedicated solely to receiving retirement accounts. Using a separate, dedicated trust to receive retirement assets reduces the risk of losing a designated beneficiary status for the trust due to unintended application of a provision of the general trust instrument, and conversely unintentional consequences to the remainder of the trust instrument from the application of the see-through retirement account limitations. Just a thought.