3. Who Is An Identifiable Individual?
Whether a beneficiary is “identifiable” and an “individual” depends on whether the trust is a conduit or accumulation trust. A conduit trust requires the trustee to distribute all IRA distributions. An accumulation trust is any trust that is not a conduit trust (the trustee may accumulate IRA distributions in the trust). Differentiating between a conduit and accumulation trust is important: a conduit trust is a see-through safe harbor and automatically satisfies the requirements; an accumulation trust may or may not satisfy the requirements.
Whether an accumulation trust distributes to an identifiable individual depends on the successive beneficiaries. You must count all successive beneficiaries who could receive assets under the trust until you come to the beneficiary who would be entitled to the trust property immediately and outright upon the death of the prior beneficiaries. If no beneficiary would receive the assets outright upon the IRA owner’s death and the contingent taker is a non-individual (estate or charity), the trust does not satisfy the see-through requirements.
4. Maximizing “The Stretch”
After satisfaction of the see-through-trust requirements, the next step is determining whose life expectancy to use for ascertaining the RMDs. The simple answer: use the life expectancy of the oldest beneficiary. The conduit-versus-accumulation method is used to decide which beneficiaries are countable: for a conduit trust, only the conduit beneficiaries are countable; for an accumulation trust, all potential beneficiaries are countable. The RMD is calculated by dividing the account balance by the life expectancy of the oldest beneficiary based on the Single Life Table.
5. Separate Accounts And Dispelling “Bad” Beneficiaries
What happens if, say, a charity is a countable beneficiary and, therefore, fails the see-through-trust requirements? To reclaim the “stretch” benefits, the “bad” beneficiary (i.e. the charity) can be removed before September 30 of the year following the year of death by distributing their portion to them. In addition, a beneficiary may use his or her own life expectancy for calculating RMDs if separate accounts are established by December 31 of the year following the date of death.
6. Limitations
Naming a trust as an IRA beneficiary seems like an attractive idea as long as the trust satisfies the see-through requirements. However, there are certain limitations that need to be considered. For example, if a younger beneficiary of a trust is responsible and financially independent, naming that trust as an IRA beneficiary will prevent that beneficiary from maximizing the “stretch” that would otherwise be offered to him if he was named as a beneficiary individually. This is because the “stretch” is based on the oldest beneficiary’s age. In addition, that same responsible beneficiary of the trust may be restricted from withdrawing funds pursuant to the terms of the trust—even if there’s a legitimate need. These considerations, along with many others, need to be considered prior to naming a trust as an IRA beneficiary.