Our friends at DP Legal Solutions discuss how trusts are a staple of sophisticated estate planning, but when you mix them with retirement accounts, things can get complicated. We often review trusts that were intended to protect heirs but inadvertently created a tax nightmare. A trust lawyer can help ensure your documents are properly structured and compliant with current regulations. Contact an experienced lawyer today to let us review your trust’s language and ensure it is “see-through” compliant.
What is an Accumulation Trust?
An “accumulation trust” is a trust where the trustee has the power to either distribute the IRA money to the beneficiary or “accumulate” it within the trust. While this offers great protection against creditors or a beneficiary’s poor spending habits, it comes with a significant tax “hitch.”
The “10-Year” Tax Trap
Under the SECURE Act, most accumulation trusts are forced to fully liquidate an inherited IRA within 10 years. This is true even if the primary beneficiary is someone who would normally be allowed to “stretch” the payments, like a spouse or a disabled individual.
If the trust is not drafted as a “conduit trust” (which requires all distributions to be passed out immediately), the IRS may look at all potential beneficiaries of the trust to determine the payout period. If even one of those potential future beneficiaries is not an “Eligible Designated Beneficiary,” the entire trust loses the ability to stretch the distributions.
Higher Tax Rates
Another risk of accumulating money in a trust is the tax rate. Trusts reach the highest federal income tax bracket much faster than individuals do. If the trustee keeps the IRA distributions inside the trust, you could be paying significantly more in taxes than if the money had been paid out to a person.
The Solution: “See-Through” Provisions
To avoid these issues, your trust must meet specific “see-through” requirements set by the IRS. This involves meeting four specific conditions that allow the IRS to “look through” the trust to the actual human beneficiaries.
Is your trust working for your family or for the IRS? To find out and make any necessary corrections, contact an experienced lawyer today.
