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A see-through trust is a trust that the IRS "looks through" to treat the individual beneficiaries as if they were named directly on a retirement account. When a trust qualifies as a see-through trust, required minimum distributions from the IRA are calculated based on the life expectancies of the individual beneficiaries rather than being accelerated to five years. Without this qualification, a trust named as an IRA beneficiary must empty the account within five years of the account owner's death.
Think of it like a frosted window that still lets the right person see through: the trust holds the assets, but the IRS sees the human beneficiaries behind it for tax calculation purposes.
The IRS sets four conditions a trust must meet to be treated as a see-through trust. The trust fails to qualify if any one condition is not met.
There are two types of see-through trusts, and the difference determines how distributions are taxed.
A conduit trust requires the trustee to pass every distribution received from the retirement account directly to the individual beneficiaries. The beneficiaries pay income tax on those distributions at their own individual rates, which are often lower than the trust tax rates. The tradeoff is reduced asset protection: any amounts paid out to beneficiaries become accessible to their creditors.
An accumulation trust gives the trustee discretion to retain distributions inside the trust rather than passing them through immediately. This provides stronger creditor protection because assets remain inside the trust structure. The cost is that income retained in the trust is taxed at trust rates, which reach the maximum 37% federal income tax rate at just $15,200 of income in 2024.
Before the Setting Every Community Up for Retirement Enhancement Act took effect on January 1, 2020, many non-spouse beneficiaries could stretch inherited IRA distributions over their own life expectancy. The SECURE Act eliminated the stretch for most beneficiaries. Now, most non-spouse beneficiaries must withdraw the entire inherited IRA balance within ten years of the account owner's death, regardless of whether the beneficiary is an individual or a qualifying trust.
Eligible Designated Beneficiaries, which include surviving spouses, minor children, disabled or chronically ill individuals, and individuals within ten years of the account owner's age, are exempt from the ten-year rule. A properly structured see-through trust naming an eligible designated beneficiary as the trust beneficiary can still access the stretch provisions.
Naming individuals directly as IRA beneficiaries is simpler. But trusts become useful in specific situations. A trust protects minor children who cannot legally manage their own inheritance. A trust protects beneficiaries with creditor problems or who might squander a lump sum. A trust can prevent a beneficiary with a disability from losing eligibility for government benefits. A trust ensures assets flow to intended remainder beneficiaries, such as children from a prior marriage, rather than being consumed by a surviving spouse's estate.
If your estate plan already uses trusts for estate tax or asset protection purposes, it is essential to review how your IRA beneficiary designations interact with those trust structures after the SECURE Act changes.
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