There have been questions lately on whether trusts can be used for distribution of retirement accounts under the proposed regulations of the SECURE Act. Yes, but with restrictions.

Generally, trusts can be used to distribute funds from retirement accounts to beneficiaries in a controlled manner. Some reasons people use trusts for these account distributions are to protect the beneficiary from wasting away the funds; to protect the asset from the beneficiary’s risk of loss in the event of the beneficiary’s divorce, bankruptcy or lawsuit; and to control the distribution of these funds to minor children.

A major goal is to set the trust up in a manner so the trustee can take the distributions from a retirement account over the maximum distribution period allowed for the beneficiary. This is done to protect the beneficiary from unnecessary income tax liabilities.

2 options for retirement trusts

For a retirement account trust to work, it must be considered a “see-through trust” — that is, specifically designed to regulate the distribution of retirement funds. The trust must be valid under state law, irrevocable (at the time of the owner’s death) and have identifiable beneficiaries. The trust can be a conduit trust or an accumulation trust.

For a conduit trust, it is required that the funds received by the trustee are paid out to the beneficiary. This means when the retirement account makes a distribution, those funds would be distributed to the trustee and the trustee would have to then distribute those to the beneficiary. The downside is the distributions cannot stay in trust. This defeats the purpose of protecting assets from the beneficiary’s risks.

With an accumulation trust, the trustee does not need to distribute the funds to the beneficiary upon receipt, and may hold these in the trust. Though this may meet the goal of protecting the distributions from the beneficiary’s risks, the distribution period of the retirement account would need to take into consideration the future beneficiaries of the trust. This can affect the schedule for distributions from the retirement account and may have adverse income tax consequences for the beneficiary. Additionally, if a charity or estate would be a future trust beneficiary, the trust would need to be modified to remove those potential beneficiaries.

Each trust presents restrictions that will need to be considered when planning the retirement account distributions. It is important to review retirement account distributions and current trust agreements already in place to make sure these still have the desired results under the new regulations.

Balzarini is an attorney at law for Miller Legal Strategic Planning Centers, a Division of Hellmuth & Johnson. Email your questions to [email protected].