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Financial Planning > Trusts and Estates > Trust Planning

Building the Modern-Day Stretch IRA: Proceed With Caution

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While most advisors and clients were always aware that the benefits of an IRA could be “stretched” over future generations, the Supreme Court’s recent finding that nonspousal inherited IRAs do not qualify as protected retirement assets has generated renewed interest in how to properly structure the IRA as a wealth transfer vehicle.

The easy answer has been to name a trust as IRA beneficiary in order to secure the asset protection benefits that can now otherwise be eliminated upon inheritance, but this strategy can create complexities that are often overlooked. In fact, one misstep can eliminate the benefits of the stretch IRA entirely—making this one area where competent guidance is essential to avoiding the pitfalls that abound and ensuring that the value of the stretch IRA is maximized for the next generation.

See-Through Trust Protection

A see-through trust (also referred to as a “look-through trust”) is one that meets certain IRS requirements so that the IRS will “look through” the trust and treat the individual trust beneficiaries as the IRA’s designated beneficiaries for purposes of determining the timing of required distributions after the original IRA owner’s death.

Generally, if IRA proceeds pass to a trust beneficiary that does not qualify as a see-through trust, the IRS prohibits the “stretch” treatment that would allow an individual designated beneficiary to take distributions from the inherited IRA based on his life expectancy. Instead, the nonqualifying trust is required to exhaust the account assets over a five-year period if the original owner had not begun taking required minimum distributions (RMDs). If the original owner had already begun taking RMDs, the IRA assets may be distributed over the remaining life expectancy of the original owner.

In either case, if the trust does not qualify as a see-through trust, the trust beneficiaries will typically be required to exhaust the inherited IRA assets more rapidly than if no trust intermediary was used. Trusts that do qualify as see-through trusts, however, are permitted to stretch IRA distributions over the life expectancy of the oldest trust beneficiary.

In order to qualify as a see-through trust, the trust must satisfy the four basic requirements imposed under the Treasury regulations: the trust must be valid under state law, the trust must be irrevocable (or must become irrevocable upon the death of the IRA owner), the trust beneficiaries must be identifiable as of the date of the IRA owner’s death, and a copy of the trust must be provided to the IRA custodian by October 31 of the year after the IRA owner’s year of death.

Making the Most of a See-Through Trust

Simply achieving see-through trust status does not eliminate all planning concerns in using a trust as IRA beneficiary. The IRA account owner must also consider whether he will require the trust to distribute all of the RMDs to the trust beneficiaries immediately (a “conduit” trust), or whether the trust will be permitted to accumulate assets over time for future distribution (an “accumulation” trust).

With a conduit trust, the process of determining whose life expectancy will be used for calculating RMDs is simplified if there are contingent and successor beneficiaries, because the only relevant beneficiary for this purpose is the income beneficiary who receives the distributions immediately. The account owner can name a younger beneficiary as income beneficiary in order to maximize the period over which the tax-deferral benefits of the IRA are stretched.

If the trust is permitted to accumulate RMDs, any contingent or successor beneficiaries must be considered in determining the oldest beneficiary because there is a possibility that the IRA funds will eventually be distributed to these remainder beneficiaries. Further, if an entity (rather than an individual) is named as a remainder beneficiary of an accumulation trust, the trust may lose its see-through status entirely because a nonindividual beneficiary does not have a life expectancy for purposes of the RMD rules.

Further, using an accumulation-style trust will generally require that the funds be taxed at the trust’s tax rate, which reaches 39.6% if the trust earns as little as $12,150 in 2014. Conversely, a conduit-style trust can minimize the tax liability because it pushes taxation to the individual level, where the tax rate does not reach 39.6% until a single taxpayer makes $406,750 in 2014.

However, the downside is that using a conduit trust to minimize taxes eliminates the asset protection that an accumulation trust can provide, which may be the exact reason that a client is using a trust beneficiary in the first place.


Naming a trust as IRA beneficiary can provide complications that even the financially astute client may not anticipate. Carefully evaluating the individual client’s circumstances and motivation for using the trust is therefore essential to developing a trust that will maximize the inherited IRA’s value for future generations.

Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.

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