Tax Reporting of IRA Beneficiary Trusts: Conduit vs. Accumulation and RMD Calculations

Description

The use of a trust as an IRA beneficiary is an increasingly popular tool for both tax deferral and asset protection. These “see-through” trusts can provide valuable flexibility in a comprehensive estate plan but also carry income tax consequences and strict IRS qualification requirements.

Tax advisers and compliance professionals must understand the unique characteristics of IRA beneficiary trusts to avoid costly tax compliance mistakes.

IRA beneficiary trusts generally come in two types: “conduit trusts” and “accumulation trusts.” Conduit trusts have specific requirements for calculating required minimum distributions over the lifetime of specified beneficiaries. Accumulation trusts generally provide greater “stretch” treatment but are more complex and may result in less favorable income tax treatment.

Fiduciaries and their tax advisers must be able to identify and apply the RMD rules by identifying the designated beneficiary. RMD amounts are measured over the life expectancy of the oldest beneficiary at the time of the IRA owner/trust settlor’s death.

RMD calculations are more complex than would appear, and certain trust provisions (such as powers of appointment) can serve to deny “see-through” treatment.

Listen as our experienced panel provides detailed guidance on the operation and tax reporting of see-through IRA beneficiary trusts.