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The SECURE Act and use of Conduit Trusts in Estate Planning

| February 26, 2020

The SECURE Act and use of Conduit Trusts in Estate Planning

One of the biggest changes for 2020 is the SECURE Act.  While not as big as the Tax Cuts and Jobs Act (TCJA), there are a number of changes that affect retirement and estate planning.  This article will highlight why you may need to revise your estate plans if using a conduit trust.


One question that often comes up during estate planning is what to do with large IRAs.  The most common solution is to designate specific beneficiaries.  The benefit of designating specific beneficiaries is that the IRAs are not included in probate (although still subject to estate tax if total assets exceed the exemption; $11.58 million in 2020) and the beneficiaries do not have to wait for your estate to be administered before having access to the funds. 

So, what’s the problem with this? When an individual inherits an IRA, they must take the required minimum distributions but have the option to take out more, which means they could liquidate the entire IRA in the first year.  Distributions from traditional IRAs are taxed at ordinary tax rates, which can result in costly tax implications if the distributions push the beneficiary into a higher tax bracket.  In addition, the funds lose their asset protection, and the owner of the IRA may not want the beneficiaries to  access all the funds at once due to concerns with how the funds will be used.

Conduit or “See-Through” Trusts

So how do you get IRA funds out of probate but not directly into the pockets of the beneficiaries?  The answer historically has been to set up a conduit trust.  In a conduit trust, often referred to as “See-Through Trusts”, the trust is named as the beneficiary of the IRA and is used like a buffer between the IRA funds and the beneficiaries.  Typically, conduit trusts are written so that the trustee must distribute the required minimum distribution to the beneficiary annually, with the discretion to distribute more if necessary.   This protects the IRA from being mis-used by the beneficiary and prevents the income from being taxed at the higher trust tax rates, since all the income is distributed annually.  This works because a conduit trust allows the required minimum distributions to be based on the beneficiary’s life expectancy, called a stretch provision. 

The ‘10-Year’ Rule

However, the SECURE Act eliminated the stretch provision for trusts that become irrevocable after January 1, 2020, and replaced it with a ‘10-Year Rule.’  The ’10-Year Rule’ states that the entire IRA must be distributed within 10 years of being inherited, meaning there are no annual distribution requirements, as long as all the funds are disbursed within 10 years.  If you have a conduit trust, and the trust specifies that it must distribute the required minimum distribution to the beneficiary annually, under the new ’10-Year’ Rule an annual distribution may not take place.  The trustee has the option of not making any distributions in the first nine years, and then distributing a lump sum in the tenth year.  This would deprive the beneficiary of income for the first nine years and then have them pay a large tax bill in the final tenth year.   After the tenth year, the beneficiary also loses out on the asset protection.

There are exceptions to the ’10-Year Rule’ such as for a surviving spouse, disabled beneficiary, chronically ill beneficiary, minor child or a beneficiary not more than ten years younger.  Note that each of the exceptions are specific and not all allow a conduit trust to be used.

Review Your Estate Plan

So, if a conduit trust is part of your estate plan, you may need to explore other options such as a combination of Roth conversions and accumulation trusts.  There is no one-size fits all answer in estate planning.  To understand all your options with the SECURE Act changes and ensure your estate plan intentions will be fulfilled, we encourage you to work with your estate attorney, CPA, and financial advisor. If you are in need of an estate attorney, we are happy to help you find one.  We proudly offer services as both your CPA and financial advisor.