Michael Kitces writes about using “see through” trusts as designated beneficiaries of IRAs. He notes that because Congress did not want to allow IRAs to continue indefinitely, after the original IRA owner passes away there are required minimum distributions (“RMDs”) that must be taken by the beneficiary, forcing the account to be liquidated over time.
Mr. Kitces notes that while post-death RMDs may be drawn out slowly over a human beneficiary’s life expectancy, a significant problem arises in the case of trusts. Namely it’s impossible to stretch out RMDs over the life expectancy of an entity that does not have a life expectancy. As a result, using a trust as an IRA designated beneficiary potentially loses the ability to stretch the distributions out after the death of the original owner.
On the other hand, however, Treasury Regulations actually allow trusts in certain circumstances to be treated as designated beneficiaries eligible to stretch post-death RMDs over life expectancy, by looking through the trust to the underlying beneficiaries and using their life expectancies instead. The caveat, though, is that qualifying for “see-through” trust treatment requires the trust to be drafted properly, consider crucial decisions like whether to be structured as a “conduit” or “accumulation” trust, and at best may still entail the trade-off of less favorable income tax treatment to achieve other financial and estate planning goals.
To read more, including a comparison of using conduit or accumulation trusts as IRA designated beneficiaries, see Qualifying A “See-Through” Trust As An IRA Designated Beneficiary – Conduit Or Accumulation? | Kitces.com.