Naming a Trust as Your Retirement-Account Beneficiary

Sometimes you should not leave an IRA to a person at all—if the heir is a minor, a spendthrift, on needs-tested benefits, or married to someone you would not trust with the money, you want a trust between them and the account. But naming a trust as an IRA beneficiary is a drafting minefield. The trust must qualify as a see-through trust under the Treasury regulations ( Treas. Reg. §1.401(a)(9)-4): valid under state law, irrevocable at death, identifiable individual beneficiaries, and documentation delivered to the plan administrator by October 31 of the year after death. Fail that test and the account has no designated beneficiary at all, which means either a five-year payout (if you died before your required beginning date) or distributions over your own remaining single life expectancy (if you died on or after it). The second is often slower than ten years and occasionally a better answer—but you do not get to choose, the calendar does, and drafting to a rule you cannot control is not planning. A see-through trust then splits into two flavors, and the choice governs both taxes and control:

Conduit trust

The trustee must pass every distribution the trust receives from the IRA straight out to the beneficiary in the year received. Simple to draft and certain to qualify, but it defeats much of the point of using a trust: under the ten-year rule the entire account must come out within ten years, so by year ten the full balance has flushed through to the beneficiary—spendthrift, creditors, and all.

Accumulation trust

The trustee may retain distributions inside the trust instead of paying them out, preserving real control and protection. The price is tax: retained IRA distributions are ordinary income taxed at the compressed fiduciary rates, and an inherited IRA emptied over ten years generates exactly the large ordinary-income spikes those brackets punish most (section “Distribute or Accumulate: Making the Decision”). For a beneficiary who genuinely needs protection, that is a price worth paying; for a responsible adult, a conduit trust or an outright designation is cheaper.

Drafting requires precision: an accumulation trust with a charity or other non-individual among its potential beneficiaries can blow see-through status—wall off charitable and “mere potential” beneficiaries in the drafting. And for a disabled or chronically ill beneficiary, a properly drafted accumulation trust can still qualify as an EDB and stretch over life expectancy—one of the few remaining ways to recreate the old stretch IRA (and a natural pairing with the special needs trust, section “Special Needs Trusts”).