New Rules Loosen or Eliminate Documentation Rules for See-Through Trusts
The new required minimum distribution (RMD) rules recently issued by the IRS include some good news for trusts named as retirement account beneficiaries. A documentation requirement (that tripped up many trustees resulting in a shorter payout period from the inherited account) has been loosened for plans and eliminated for IRAs.
What Are See-Through Trusts and How Do They Work?
Only individuals who are named on the IRA beneficiary form (or named through the IRA custodial document if no beneficiary is named on the beneficiary form) can be designated beneficiaries. A trust is not an individual, so it cannot be a designated beneficiary. But if the trust qualifies as a “look through” or “see-through” trust, then the individual beneficiaries of the trust can qualify as designated beneficiaries for IRA distribution purposes. Meeting these requirements can allow a trust to use the 10-year payout period or, in some cases, even the stretch. Failing to meet the requirements outlined below can result in the payout period being reduced to five years.
IRS Updates: New Documentation Rules for See-Through Trusts
The final regulations keep the see-through trust concept. However, they simplify the documentation requirement for trusts that are beneficiaries of plan accounts, and do away with it entirely for trusts that are IRA beneficiaries.
Key Requirements for See-Through Trusts to Qualify for IRA Distributions
Under the new rules, to qualify as a “see-through” trust for distribution purposes, the trust must meet the following requirements:
- The trust is valid under state law or would be but for the fact that there is no corpus.
- The trust is irrevocable, or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
- The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.
Old vs. New Documentation Rules for See-Through Trusts
OLD RULE:
The required trust documentation must be provided by the trustee of the trust to the plan administrator no later than October 31 of the year following the year of the IRA owner’s death.
NEW RULE:
The required documentation rules are simplified for trusts that are plan beneficiaries. A plan administrator can require the trustee to provide a list of trust beneficiaries with a description of the conditions on their entitlement instead of the actual trust document.
How Do the New IRS Rules Impact Trust Beneficiaries of IRAs
For trusts that are IRA beneficiaries, the documentation requirements are eliminated. A trustee of a see-through trust is NOT required to provide the trust documentation to an IRA custodian.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
Frequently Asked Questions
What is a see-through trust?
A see-through trust allows the individual beneficiaries of a trust to be treated as designated beneficiaries for the purposes of IRA distributions. The trust must meet specific IRS requirements to qualify for favorable payout periods.
How do the new IRS rules change the documentation requirements for see-through trusts?
The new rules simplify the documentation requirement for trusts named as beneficiaries of retirement plans and eliminate it entirely for IRA beneficiaries. Trustees of see-through trusts that inherit IRAs no longer need to provide documentation to IRA custodians.
Why is the elimination of documentation requirements for IRAs important?
The elimination of documentation requirements simplifies the administrative process for trustees, reducing the risk of missed deadlines or errors that could affect the payout period for beneficiaries.
What happens if a trust fails to meet the see-through trust requirements?
If a trust fails to meet the IRS requirements, the beneficiaries of the trust will not qualify for the 10-year payout or stretch options, resulting in a shortened payout period of five years.
Can the new IRS rules apply to all types of trusts?
The new IRS rules specifically apply to see-through trusts named as beneficiaries of retirement accounts. Not all trusts will meet the criteria to be treated as see-through trusts for IRA distribution purposes.
How can I ensure my trust meets the new IRS requirements?
Working with an estate planning attorney ensures that your trust is structured to meet all IRS requirements for see-through status, allowing beneficiaries to take advantage of extended payout periods.
By staying updated on the new IRS rules, estate planners and trustees can simplify compliance and ensure beneficiaries maximize their inheritance through extended payout periods. Have questions? Schedule a meeting with one of our financial advisors.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.