An IRA owner has the right to name whoever they wish to be the beneficiary of their retirement account. However, because Congress did not want to allow IRAs (and other retirement accounts) to continue indefinitely, after the original IRA owner passes away there are required minimum distributions (RMDs) that must be taken by the beneficiary, forcing the account to be liquidated over time.
Fortunately, though, Congress does allow those post-death RMDs to be drawn out slowly over the life expectancy of the beneficiary, at least where the beneficiary is a “designated” beneficiary that is a human being with a life expectancy to be stretched across in the first place. But a significant problem arises in the case of trusts named as beneficiary of an IRA – it’s impossible to stretch out RMDs over the life expectancy of an entity that is just “a piece of paper” and isn’t alive in the first place! As a result, leaving a retirement account to a trust potentially loses the ability to stretch the distributions out after the death of the original owner.
The good news, however, is that the Treasury Regulations actually do allow an IRA inheritance trust in certain circumstances to be treated as designated beneficiaries eligible to stretch post-death RMDs over life expectancy, by looking through the named trust to the underlying beneficiaries and using their life expectancies instead. The caveat, though, is that qualifying for “see-through” trust treatment requires the trust to be drafted properly, consider crucial decisions like whether to be structured as a “conduit” or “accumulation” trust, and at best may still entail the trade-off of less favorable income tax treatment to achieve other financial and estate planning goals!
