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Frequent Contributor

SECURE Act and Conduit Trusts

As we all now know, effective for those who inherit an IRA (Traditional or Roth) from an owner who dies in 2020 and later, unless the beneficiary is an Eligible Designated Beneficiary (EDB), must withdraw the full balance of the inherited IRA not later than 12/31 of the year 10 years after death of the IRA owner beginning with the year following the year of death (11 years if you count the year of death). But what about those non-EDB beneficiaries for whom the IRA owner wants to limit the amount of each IRA withdrawal to the RMD amount? This often applies to minor children where the RMD goes into a custodial account, an adult child who is at risk of creditors or to adult children who tend towards being spendthrifts, meaning the IRA owner does not want them to be able to fully withdraw the IRA balance and blow it on wild women (or wild men), dope and general lavishivity. The way this has been managed is by creating a 'conduit trust' and naming it as the beneficiary. The trust generally limits the annual withdrawal to the calculated RMD, which it 'passes-through' each year to a taxable account of the beneficiary (e.g. bank account).

But therein lies a major problem. For the non-EDB, there is NO RMD until the final withdrawal year. So for those conduit trusts created prior to 2020 that are not modified or rescinded and rewritten as of the date of death of the IRA owner, the trustee will be required to meet the terms of the irrevocable conduit trust and hold all distributions until the 10th and final withdrawal year when it will distribute the entire IRA balance. This would be November-Golf in two ways.....the adult child would receive no income from the IRA for 10 years, and when he/she does, depending on the size of the IRA, a large chunk of the IRA will be lost to Federal and possibly also state income tax.

One of the remedies for such a situation is to rewrite the trust to be an accumulation trust, which allows the trustee to vary distributions....that is, they are not tied to the RMD. A couple of drawbacks to this form of trust is these things tend to be expensive to set up and administer each year and any earnings retained by the trust will be taxed to the trust at generally much higher tax rates than the trust beneficiary.

Just some info

BruceM

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Follower ○○○

Re: SECURE Act and Conduit Trusts

I've been thinking about this situation for awhile.  Planning to meet with our estate attorney and a successor corporate trustee in the next few months about this topic.  We have two late 40's kids (spendthrift & disability concerns) (one high income the other low) and a five year old grandson.

We were content with just distributing the trust income and the RMD stretch prior to the Secure Act.  With the change we're considering stay on that same plan, but at the end of ten years let the TIRA's and Roth's (7 figures) go into trust and distribute income from there.  Our thinking is higher taxes better than wasteful spending and being sure there's something left for the grandson after the kids.

Your thoughts on that approach appreciated.  And any other approaches under the circumstances? 

Thanks!

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Frequent Contributor

Re: SECURE Act and Conduit Trusts

Rule72

If you don't mind, after you've met with Estate Planning attorney, would you post back here on what he/she recommends for your situation. I'm curious how the trust would revert to, say, an income trust at year 10, where all net income is distributed each year.

Thanks

BruceM

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Follower ○○○

Re: SECURE Act and Conduit Trusts

Sure will.  I expect it will mid-late summer before the meetings take place.

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Re: SECURE Act and Conduit Trusts

Same here. My estate plans went out the window with the SECURE Act. Looking for ways to leave a legacy to my children/grand children without over overburdening them with taxes or create an environment that does not respect the hard work and sacrifices of their elders.  

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Re: SECURE Act and Conduit Trusts


@Rhody wrote:

Same here. My estate plans went out the window with the SECURE Act. Looking for ways to leave a legacy to my children/grand children without over overburdening them with taxes or create an environment that does not respect the hard work and sacrifices of their elders.  


Yes...same for me.

A major 2020 goal is to redo estate planning re the new IRA rules.

I don't currently have any "conduit trusts" associated with my IRAs, nor do I foresee using any in new estate plans.  But I am assessing a lot of creative financing on these matters.  Establishing a charitable foundation (think Rockefellers or Clintons) is likely also in the cards, managed by my two granddaughters.

BTW can anyone answer this.  I am planning on leaving a goodly sum to my Catholic High School in Penna, the earnings to be used annually for support.  However, just read where the 11th Penn Catholic diocese filed for bankruptcy (molesting issue).  If that happened to the Catholic entity I donate to, are my funds under risk of capture in a bankruptcy??  May need to go the foundation approach and keep monies under control.

TIA.

R48

 

 

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Re: SECURE Act and Conduit Trusts

The world has sure changed since my last post.  Hope everyone is staying safe!

Still in process of deciding how to revise the trust, but it's late summer so I thought I'd give an update.

Overall my current solution even if I do nothing it's not as bad as I envisioned earlier.  However, the secure act has made it more complicated for everyone and there are more ways to get estate planning wrong than ever before.   Here's what I understand now.

Corporate Trustee (Fidelity) comments:

I asked if we both passed today how would they handle the changes in law.  We are currently set up to distribute trust income and follow RMD schedules for the TIRA & RIRA.  Their basic response is they will work with the beneficiary.  Depending on situations, not mine specifically, they will follow RMD sch for 10 years distribute the balance at the end of ten years, OR no distributions until the 10th year, OR distribute more than RMD throughout the 10 years to empty acct by year 10.  This is primarily for the TIRA.  The Roth being tax free distributions can sit for 10 years then go into trust, however based on beneficiary needs they could distribute during the 10 years as well.

Attorney Comments (Missouri):

The following are the attorneys comments verbatim and I've embedded my comments in parenthesis.

1. Flexibility - Changes in the Laws
You can insert a "Trust Protector" provision in the document that would identify a person or organization that would have to authority to modify the terms of the trust to make adjustments to address changes in tax and other laws. Fidelity could be designated as that party if they are willing to serve in that capacity. Not all States have trust protector laws so I don't know if Fidelity is willing to serve in that capacity.  (Fidelity says they do not now provide this service, but is considering it sometime in the future.  If a trust protector is named it's up to the protector to initiate contact for changes.)

2. Secure Act
You are correct to hold funds in the R-IRA as long as allowed for tax free growth. T-IRA withdrawals on a fixed basis over ten years could present some flexibility issues, but the Trustee may appreciate that certainty.  (Here I told the attorney that I had determined for one beneficiary to distribute the TIRA in even increments over 10 years.)
 
3. Flexibility - Changes in Beneficiary Situations
The Trustee can be given greater discretion in making distributions and with the added terms that the beneficiaries can never demand any distributions the trust shares can be more fully protected from creditors.  (Here I had posed a question not related to changes in law, but in the beneficiary circumstances)
 
I have not yet posed the question about conduit vs. accumulation trust so that will be upcoming.  I think though for us an accumulation trust may not be necessary.  My thought is during the first 10 years the trust can be invested for growth and minimise the income thus the taxes wouldn't be horrible,  After the 10 years the trust can start distributing all income and the TIRA and RIRA are gone.  I like the simplicity if it works out. 
 
Very early in the process so I don't have his final solution for me yet, hopefully within a couple months.
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Re: SECURE Act and Conduit Trusts


@rule72 wrote:

The world has sure changed since my last post.  Hope everyone is staying safe!

Still in process of deciding how to revise the trust, but it's late summer so I thought I'd give an update.

 

 
I have not yet posed the question about conduit vs. accumulation trust so that will be upcoming.  I think though for us an accumulation trust may not be necessary.  My thought is during the first 10 years the trust can be invested for growth and minimise the income thus the taxes wouldn't be horrible,  After the 10 years the trust can start distributing all income and the TIRA and RIRA are gone.  I like the simplicity if it works out. 
 
Very early in the process so I don't have his final solution for me yet, hopefully within a couple months.

Hi 72.

Can you elaborate some here on the bold above.

Such a trust (taxable account) will have to liquidate the Trad IRAs by year 10...no?  And it will be taxed at "trust rates" which are often higher than individual rates...no?

Then, at year ten you start distributing income to kids at the trust rules/amounts.  Kids will have to add this to their incomes also, no?  Capital gains may also be involved.

Also, is there a way that kids would not start receiving any dividends or gains, after year 10, until they request same from the trust.  Like perhaps when retired.

TIA

R48

 

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Re: SECURE Act and Conduit Trusts

Hi R48,
 
Such a trust (taxable account) will have to liquidate the Trad IRAs by year 10...no? (Dave: Yes) 
 
And it will be taxed at "trust rates" which are often higher than individual rates...no?  (Dave: Not necessarily/depends.  This is where it's depends on your heir's situation and why estate planning gets more complicated, but could actually be a good thing.   With a low income heir you might distribute TIRA over the 10 years in whatever manner that makes sense for their needs and taxed at the heirs rate.  With a high income heir you might let TIRA sit for 10 years then put it into trust, yes at the trust tax rates, but then they are already at a high bracket anyway so nothing lost here.
 
I see where I may have implied not distributing the income.  While we are living distributions are reinvested and taxed at our personal rates.  After we pass the income is distributed to the heirs and taxed at their, not the trust, rates.  While living we no longer need income from the trust because the RMD's are coming into trust and more than satisfy our expenses.  We just invest the trust while living in a manner to minimise income/taxes, e.g. equity ETF's vs equity & bond OEF's.  Of course once we pass the corporate trustee will invest/distribute in an appropriate manner.)
 

Then, at year ten you start distributing income to kids at the trust rules/amounts.  Kids will have to add this to their incomes also, no?  Capital gains may also be involved.  (See above.)

Also, is there a way that kids would not start receiving any dividends or gains, after year 10, until they request same from the trust.  Like perhaps when retired.  (Yes.  Our trust will have some flexibility for this.  Of course if they elect to not receive the income I believe it would then be taxed at trust rates.  If they are low income they'd never turn back the income and if they are high income they might possibly do this.
 
And remember, I'm in the early stages with an attorney for a trust amendment and I still have a number of questions to balance my desire to control and the trustee's need for flexibility to manage.  I have a 5 yr old grandson so the life of the trust could be 60 years or more.  That's longer than I've been investing myself and wow, has there not been a lot of changes to adapt to since the early 70's.
 
Maybe in a couple months I can give update if there's interest.
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Participant ○○○

Re: SECURE Act and Conduit Trusts

I am seeing some statements that are true for a conduit trust and NOT true for an accumulation trust (and vice-versa). Similarly, some of what is written is true for taxable account assets inside a trust and NOT true for tax-advantaged assets inside a trust. There are no easy answers here on the forums. After the Secure Act, it is imperative to have an existing Estate Plan re-evaluated. And as importantly, the solution for one person may not (probably won't actually) apply to another person.

"For many years, some practitioners determined that conduit trusts were the preferred option because of their relative simplicity, guaranteed results, ability to name a charity as a remainder beneficiary, and ability to grant a testamentary power of appointment in favor of non-individuals, including the beneficiary's estate if necessary to reduce GST taxes. Inherent in this analysis was that though IRA proceeds must pass outright to the beneficiary as they are received each year, the lifetime “stretch” softened the blow. Now, the SECURE Act guarantees that none of the IRA will remain in a conduit trust beyond that 10th year."

In short, conduit trusts (the common solution) drawn up prior to the Secure Act could be a horrific Estate Plan.

Perhaps this article might illuminate some of the complexities introduced by the Secure Act, particularly for conduit trusts:

https://www.schiffhardin.com/insights/publications/2020/accumulation-trusts-versus-conduit-trusts-ne...

https://www.kitces.com/blog/secure-act-see-through-conduit-trust-stretch-ira-10-year-non-eligible-de...

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Re: SECURE Act and Conduit Trusts

For clarity my tax qualified accounts are not in the trust. 

Your discussion about complexity going forward I agree with completely and why I'm taking my time to think this all through with an estate attorney.  

Once I'm farther along with the attorney I'll update if there is a change in what I understand, probably a couple months.

Thanks for the reply and links!  

 

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Frequent Contributor

Re: SECURE Act and Conduit Trusts

Thanks, VA Tech, Rule guy and Bruce...

This subject, and how to preserve family wealth with the upcoming "socialism", is taking up a lot of my time...top two priorities.

R48

 

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Re: SECURE Act and Conduit Trusts

bump...

R48

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Re: SECURE Act and Conduit Trusts

Hi R48,

If bump is for me it will be a couple months, as a guesstimate, before I resolve what we will do with our trust amendment.  And based on comments above resolve potential misunderstandings that I have.

I do plan to come back whenever I figure this out.

 

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Re: SECURE Act and Conduit Trusts


@rule72 wrote:

Hi R48,

If bump is for me it will be a couple months, as a guesstimate, before I resolve what we will do with our trust amendment.  And based on comments above resolve potential misunderstandings that I have.

I do plan to come back whenever I figure this out.

 


Bump was to give Bruce a chance to reply, if he desires.

AFAIK Bruce was recently given a "timeout" by M*; and I'm unsure if Bruce is returning to posting.

R48

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Re: SECURE Act and Conduit Trusts

I am considering establishing a conduit IRA trust with my two grand children as beneficiaries of a portion of the TIRA That was going to be distributed to my daughter. The concept is that the payments would be made over the 10 year period when they would not be subject to the Higher Kiddie Tax rates. The trustee would distribute the funds each year to to pay off the GC student loans at a lower tax rate than my daughter would pay which would save taxes. I plan to discuss this option with my attorney when I have better Idea on how I want the trust to work. If my Roth continues to out perform I could elect to give a portion of it to the GC In a IRA conduit trust to pay for their college education without any tax being incurred.

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Re: SECURE Act and Conduit Trusts

After trading a few emails with attorney we had our meeting yesterday and the following are my concluding thoughts.  

At this point I don't think it's useful to describe what I'm doing as I think the planning going forward is very situational.  The link provided earlier in this thread,  https://www.schiffhardin.com/insights/publications/2020/accumulation-trusts-versus-conduit-trusts-ne... , was very useful and I agree with it's conclusion which I repeat here:

"CONCLUSION

The SECURE Act represents a profound shift in the way wealth planners will have to approach inherited IRAs. Estate planners who regularly recommend “lifetime trusts” to clients should consider the accumulation trust as the default plan design for inherited IRAs. The accumulation trust is not a magic bullet, and there will continue to be many potential trips and traps with any one type of plan for inherited IRAs. While neither the accumulation trust nor the conduit trust will be all things to all people, attorneys and other advisors would do well to understand the differences."

 

 

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