IRA Accumulation Trust as Beneficiary? Pick Your Poison

by | Sep 4, 2022 | Spousal IRA | 7 comments

IRA Accumulation Trust as Beneficiary? Pick Your Poison




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The new rules of the SECURE Act have significant consequences to those IRA owners who have named a trust as the beneficiary of their IRA or retirement account.

IRA owners want to name a trust as the beneficiary of their IRA for a couple of reasons. First, IRA owners want the post death control that they get from naming a trust as a beneficiary – when a trust is named as a beneficiary, then their child cannot spend all of the IRA funds immediately after the IRA owner dies.

Other IRA owners, in the past, named a see-through conduit trust as the beneficiary of their IRA because they did not want their children/beneficiaries to be able take more than their required minimum distribution after the IRA owner died – the IRA owner wanted the taxable distributions to be “stretched” over the trust beneficiary’s lifetime.

If a trust must be used a beneficiary of an IRA, the IRA owner will have to decide between the favorable income tax treatment of a conduit trust, where all distributions are taxed at more favorable individual income tax rates, but the trust is empty 10 years after the IRA owner dies. Or the IRA owner will choose the accumulation trust, giving the IRA owner more post death control, but realizing that distributions accumulated in the trust will likely be taxed at 37%.

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This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Estate Planning Attorney…(read more)


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7 Comments

  1. danny jensen

    We did a conduit trust for my Mom(DOD 2/2022) with my Dad (91yo spouse) as the primary beneficiary and I am the Trustee(age 62). Three children age 55-62 are secondary beneficiaries. I'm working through the details and watching all your videos! Thanks, you are great with the details. I was hoping I could use my Dads SS number on the Vanguard and Fidelity IRA accounts now that the conduit trust is the named owner of my Mom's IRA assets. If I understand correctly my plan would be to do MRDs based on my Dads age until his death. After Dads death, get a trust EIN and distribute the assets over 10 years to the secondary beneficiaries. The beneficiaries may want a quicker distribution so I have the option in the trust of breaking the trust at that point into sub trusts to facilitate tax timing issues. I wonder if I am on the correct path. I still have videos to watch. Thanks again all the help.

  2. H B

    Cumulation trust for posts-death control seems not worth it at the higher tax rate 37% Even though you could stretch it out over the beneficiaries lifetime. I’m thinking maybe most middle class people probably go with the conduit trust or the grantor income trust. Paul I’m binge watching all your videos. Thanks.

  3. Stephen Pappaterra

    I'm an estate planning attorney and have wrestled with these issues. I have to say that yours was an extremely helpful explanation. It was nice to hear you say that it took some time to get a handle on this as I have found it to be hard to get my head around. Very much appreciate your exposition of this complicated planning area.

  4. A Muse In the craftroom

    How does this work for a Roth IRA in the accumulation trust?

  5. Ryan Lacava

    If I have $100,000 in an IRA in an SP fund and want to put it in a Trust for my Brother if I die I will have 2 options: Conduit vs Accumulation.

    1) The Conduit Trust will grow my Principal in an SP fund over 10 years. Over these same 10 years, my brother will be able to withdraw 10% of the Fund each year and have to pay income tax on the withdrawal. The remaining balance in years 2-10 of withdrawals will be dependent on the growth/decline of the SP fund.

    2) The Accumulation Trust will grow my Principal in an SP fund over over the expected lifetime of my Brother, following an initial 37% deduction upon my death. This Fund's value will be dependent on the growth/decline of the SP fund over the remainder of my Brother's life.

    For the Accumulated Trust would my Brother ever pay income tax on the withdrawals? Or does the Accumulated Trust 37% tax apply with every deduction my Brother makes over his expected lifetime (e.g. The fund would grow tax free but be heavily taxed each year when he makes a withdrawal)?

  6. PA Ocampo

    Scenario: Husband and wife want to leave a $1.5M IRA to two grown and responsible children who each are earning $100k in annual salary.

    10% $0 to $19,400

    12% $19,401 to $78,950

    22% $78,951 to $168,400

    24% $168,401 to $321,450
    32% $321,451 to $408,200

    35% $408,201 to $612,350
    37% $612,351 or more

    Assuming each gets half ($750k), they can take one tenth distributions from year 1 to year 10 of $75k per year (or larger up to $221k to speed things up). With this schedule, they will only be bumped up from the 22% to 24% tax bracket. A surprisingly small price to pay to take the payout and shelter the proceeds in something other than a highly restrictive “plan.” Loss of the stretch doesn’t seem all that bad. Conduits primarily serve the remaining 4 designated beneficiary classes and virtually are useless for everyone else. Accumulation trusts will generate usury IRS tax rates given the compressed trust brackets and will require a 1041 filing each year. I’m with Mr. R in keeping things simple and just leave the IRA to directly to a responsible individual. Other than splitting into as many beneficiaries as possible to keep taxes manageable and Roth conversions (if you’re so inclined), there’s pretty much only Charitable Remainder Trusts and life insurance left in terms of replacing the lost stretch for non-spouses and for spendthrifts / minors. The former will create trust complexity and the latter will depend on if the IRA owner is even insurable but both are reasonable options to consider.

  7. Slim Dawg

    I have special need child that I'm not sure will qualify for secure act exemption and we also need to control funds to support his lifetime. Looking at 3rd party SNT (accumulation). I have heavy % of roth in 401k. Any suggestions as to who i should consult with to double check details of what our attorney is suggesting for us? Is it bad form to ask for a 2nd set of eys review of what our our attorney is drafting for us? Just wanting to measure twice, cut once.

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