A Guide to See-Through Trusts
With the passing of the SECURE Act (both 1.0 and 2.0), the use of a See-Through Trust became popular. Learn how this estate planning tool can help you pass your retirement assets to your loved ones, and when it makes sense to use one.
The SECURE Act 2.0 is now law; it’s the second iteration of the SECURE Act that was passed in 2019 which greatly impacts retirement planning. These pieces of legislation are intended to help strengthen the nation’s retirement system, but any time there’s a change it is critical to understand how they may impact you and your estate planning personally. With the passing of the SECURE Act (both 1.0 and 2.0), the use of a See-Through Trust became popular. Keep reading to find out how this estate planning tool can help you pass your retirement assets to your loved ones, and when it makes sense to use one.
What is a See-Through Trust?
A See-Through Trust is a vehicle used by someone who wants to pass their retirement assets to beneficiaries indirectly through a Trust. After the account owner passes away, distributions from the individual retirement account (IRA) are made to the Trust rather than to any designated beneficiaries. Then, the Trust distributes assets to its chosen beneficiaries per its terms.
The key benefit of utilizing a Trust as a part of an Estate Plan is to better protect assets from creditors and certain types of taxes.
How Does a See-Through Trust Work?
In 2019, the Trump administration signed the Setting Every Community Up for Retirement (SECURE) Act. It was at this time that See-Through Trusts began to garner more attention.
Prior to the SECURE Act, there was a provision that allowed for the “stretch IRA.” Non-spousal beneficiaries could essentially stretch out their required minimum distributions (RMDs) for decades if they chose to, which helped reduce their tax liability and allow the money to remain invested in the market and grow for longer durations. (RMDs were calculated using the beneficiary’s life expectancy.)
This provision was eliminated through the 2019 SECURE Act. Now, all assets from an IRA must be distributed within 10 years of the account owner’s passing. This essentially forces assets from IRAs to be distributed and prevents them from accumulating indefinitely without taxation.
However, the stretch provision is not eliminated for everyone. Congress still allows certain eligible beneficiaries to enjoy the stretch provision through the use of a See-Through Trust, as long as the Trust meets strict requirements.
Here are the possible types of eligible designated beneficiaries (EDBs):
Surviving spouse
Children of the account owner under the age of 21 (grandchildren not permitted)
Individuals with disabilities
Individuals with chronic illnesses
Individuals who are not more than 10 years younger or older than the IRA owner
If you own an IRA and have a beneficiary who is eligible per the definitions above, then you can legally pass your retirement assets to this beneficiary through the use of a See-Through Trust. Further, the Trust can make minimum distributions per the beneficiary’s life expectancy and is exempt from the 10-year rule.
IRS See-Through Trust Rules & Requirements
In order to use a See-Through Trust, meticulous rules and requirements must be satisfied. These rules are set forth by the Internal Revenue Service (IRS).
Here are some of the set requirements to note:
To be valid, the Trust must comply with the rules set forth by the state where it is established
The Trust must either be irrevocable or will become irrevocable upon the death of the Grantor (its terms cannot be altered)
The beneficiaries of the Trust must be identifiable as eligible beneficiaries (EDBs)
The Trust’s Trustee must submit the proper documentation by October 31st of the year following the Grantor’s date of death to the custodian of the retirement account
When setting up a Trust with a see-through provision, it is critical to ensure that these rules are satisfied, otherwise your beneficiaries will not be eligible to enjoy stretch IRA benefits.
Why Use a See-Through trust?
Using a See-Through Trust has several advantages.
As the owner of an IRA, you can leave your assets to a designated beneficiary when you pass away. However, this doesn’t allow you to control the manner and timing in which your beneficiary inherits these assets. In many cases, the beneficiary may choose to withdraw the assets as a lump sum, which can trigger high taxes. This may also not be preferable. Perhaps the beneficiary will play a short-term game where they make expensive purchases instead of playing a long-term game of reinvesting the money to grow long-term wealth.
By setting a Trust as the beneficiary of your IRA, you have more control over how distributions are made. Perhaps you have a beneficiary who is younger than 18, or a loved one who has a disability or a chronic illness. While you still have to follow IRS rules, utilizing a Trust with a see-through provision gives you more control to decide how your assets should pass. Many individuals utilize the Trust to help lower their beneficiary’s tax bill, as well as delay distributions to help defer taxes for as long as legally allowed.
Further, See-Through Trusts provide protection from creditors. A Trust can shield assets that otherwise wouldn’t be protected by bankruptcy proceedings or lawsuits. Thus, you can preserve more of your assets to benefit your loved ones.
Types of See-Through Trusts
In general, there are two different types of Trusts with see-through provisions: Conduit Trusts and Accumulation Trusts. Both of these Trusts help achieve the shared goal of distributing retirement assets to beneficiaries. The difference lies in the manner in which the assets are distributed and taxed.
When using a Conduit Trust, the Trustee takes any assets distributed from the Grantor’s IRA and immediately transfers them to the Trust’s beneficiaries.
In contrast, an Accumulation Trust gives the Trustee the autonomy to either retain or pay out distributions made to the Trust. This means that any assets retained within the Trust can continue to grow.
Due to the nature and timing in which distributions are made by either type of trust, the tax treatment also differs. Beneficiaries of a Conduit Trust will pay regular income tax on any distributions they receive. In contrast, distributions from Accumulation Trusts typically face higher tax rates.
FAQs About See-Through Trusts
See-through Trusts can be a great boon to your Estate Plan, but they can be a bit complicated to comprehend and set up without some help. Here are some answers to popular prompts to help clarify any questions you might have.
What is the difference between a see-through trust and a conduit trust?
A See-Through Trust actually isn’t a special type of a Trust. It is a Trust that has been set up such that the IRS can “see through” it and recognize that your beneficiary is a real, identifiable person. Trusts with a see-through provision are typically in the form of a Conduit Trust or Accumulation Trust. In other words, a Conduit Trust is a type of Trust that can have a see-through provision.
How do you qualify for a see-through trust?
Technically, anyone qualifies to use a See-Through Trust as long as they set it up correctly and satisfy the rules set forth by their state and the IRS. The question of whether or not you want a Trust with a see-through provision depends on your personal circumstances.
Assuming you and your loved ones would benefit from the inclusion of a See-Through Trust for your retirement assets, here are the requirements that must be satisfied:
The Trust must be valid in the state in which it was created. It’s recommended that you research the requirements for a valid Trust in your state of residency. Typically, requirements related to the creation of a Trust document include witnessing and notarization.
The Trust must be irrevocable, meaning that its terms cannot be altered, the beneficiaries cannot be changed, and the Trust itself cannot be revoked. The Trust may be revocable and changed during the Grantor’s lifetime, but it must become irrevocable upon their death.
Beneficiaries named in the Trust must be legally named, identifiable and eligible per the IRS rules regarding eligible designated beneficiaries.
See-Through Trust documentation must be submitted to the retirement account custodian by October 31st of the year following the account owner’s passing.
What is a look-through trust?
The term “Look-Through Trust” is just another name for a See-Through Trust, which can be used interchangeably. They allow an individual to exercise more control over how their individual retirement account assets will be distributed after they pass away. Trust documents allow the individual to specify multiple beneficiaries, as well as the manner and timing in which assets are distributed.
Note that neither See-Through nor Look-Through Trusts are special Trusts. Rather, they are Trusts with a provision (manner of setting up) that allows the IRS to “see through” the Trust terms and verify that the beneficiary is a real, eligible individual.
Is a See-Through Trust Right for You?
A See-Through Trust is a helpful estate planning tool for someone who wants to distribute IRA assets to a designated beneficiary. With the passing of the SECURE Act, the stretch IRA was eliminated for most beneficiaries, except for several classes of eligible designated beneficiaries. By setting up a Trust with a see-through provision, the retirement account owner can designate an EDB as a beneficiary and pass retirement assets to the EDB via the Trust. Further, the required minimum distributions (RMDs) are calculated based on the EDB’s life expectancy. They are not required to withdraw the entirety of the retirement account within 10 years like everyone else. This can help provide a loved one with additional shelter, protection, and allow their inherited account to grow in a tax-deferred environment for as long as possible.