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Can you Name a Trust as Beneficiary of a Retirement Account?

One of the classic investing techniques was to keep retirement accounts growing tax free as long as possible. The longer you deferred taxes by keeping funds inside a retirement account, the more they could grow tax free.

The government wants its money, so the rules require that you begin to take distributions by April 1 following the year you turn age 72. These distributions are called “required minimum distributions.” The distribution period is even faster when you inherit a retirement account.

Prior to 2019, depending on when a beneficiary received a distribution, they could take that distribution over their lifetime. However, in 2019 the Secure Act placed a limit on who could take life time distributions to the following eligible designated beneficiaries:

  1. Owner’s spouse

  2. Owner’s child under age 18

  3. Disabled individual

  4. Chronically ill individual

  5. Any person who less than 10 years younger than owner

These “eligible designated beneficiaries” have a much longer time period in which to take money out of an inherited retirement account.

If you are not an eligible designated beneficiary, but you name an individual as the beneficiary. Then that individual needs to take the inherited retirement account proceeds within 10 years.

Any other entity, including an estate or trust, will need to take the distribution out within 5 years. However, there are special rules for a trust.

If you take advantage of certain “see through” rules laid out in the treasury regulations, you can name the trust the beneficiary but treat the oldest individual entitled to receive funds as the beneficiary. This means at the very least you have a “designated beneficiary” (i.e., an individual) who is entitled to take 10 years to pull out money from the retirement account.

A question exists as to whether we can use those same “see through” rules to determine whether someone is an “eligible designated beneficiary” (i.e., are one of the individuals in the above list - spouse, minor child, etc.). The problem was that the term “eligible designated beneficiary” (adopted in year 2019 under the Secure Act) did not exist when see through rules were created. The result is that practitioners are unsure on whether the “see through” rules can be used to “see through” a trust to someone who would otherwise be an “eligible designated beneficiary.” For example, if a retirement account names a trust that names a minor child as beneficiary, do the “see through” rules enable us to use the minor’s measuring life for purposes of distributions? I believe so, but the answer is unclear.

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