If you have an IRA trust as the beneficiary of your IRA, you may need to revisit the trust with your attorney if 1) your IRA is a traditional IRA 2) your IRA trust is a conduit trust (i.e. a “pass through trust”).
Conduit trusts have been a common tool used 1) to keep spendthrifts from taking any more than the required minimum distribution and 2) to name the beneficiary of the remaining amounts in the IRA (if any) after the spendthrift’s death. As an example, a 30 year old who inherited a $2 million IRA in 2019, would have a RMD of roughly $37,000. This amount would be paid to the conduit trust which would then pass the RMD through to the 30 year old annually. The IRA participant could designate the remainder beneficiary of what remains of the IRA (if any) at the 30 year old’s death.
Now that the SECURE Act has passed, a $2 million IRA paid to a conduit trust has to be distributed in full within 10 years of the year following the participant’s death (there is no required minimum distribution) so the entire $2 million will be paid to the trust in year 10, which will then be passed through to the beneficiary. Under most conduit trusts, this results in 1) no distributions until year 10 since there are no required minimum distributions 2) a huge tax burden 3) a large one time distribution to a beneficiary (which was often the point of the trust…protecting a spendthrift) 4) no control over the disposition of the remainder of the IRA since there is none. This defeats the purposes for which the IRA trust was established.
What can you do? You should discuss your options with your advisors, but a few considerations are:
- Consider a ROTH conversion.
- Revise or eliminate conduit trusts.
- Consider an alternate disposition of your assets.