In this episode of the Good Steward Law and Wealth Podcast, host Ledry Jennings explains how trusts interact with inherited IRAs under the SECURE Act. He begins by warning owners of revocable trusts named as IRA beneficiaries—especially those created before 2019—to review and possibly update them, because improper drafting can trigger a costly five‑year distribution rule instead of the preferred ten‑year stretch. Jennings outlines the three beneficiary categories defined by the SECURE Act and focuses on non‑eligible designated beneficiaries (e.g., adult children, grandchildren, friends) who are the most common reason for using a trust. He discusses why people place IRAs in trusts: to protect beneficiaries who may be financially imprudent, to obtain creditor and divorce protection, and to control distributions. The core of the episode details the four requirements for a “see‑through” trust that preserves the ten‑year stretch: (1) the trust must be valid under state law, (2) it must become irrevocable at the grantor’s death, (3) its beneficiaries must be identifiable, and (4) a copy of the trust (or a certificate of trust) must be provided to the IRA custodian. Jennings then contrasts two trust structures that qualify as see‑through trusts: conduit trusts, which pass IRA distributions directly to beneficiaries (taxed at the beneficiary’s rate but offering no asset‑protection), and discretionary/accumulation trusts, which give the trustee discretion over distributions (allowing asset‑protection but potentially subjecting the trust’s income to the highest trust tax rate). He emphasizes the importance of drafting language that grants trustee discretion while still meeting see‑through criteria, and advises that even well‑drafted trusts should be reviewed if they pre‑date 2019. The episode concludes with a preview of upcoming topics on spouse beneficiaries, rolling 401(k)s into IRAs, and the advantages of Roth IRAs as inheritance tools, and ends with a call‑to‑action to contact Good Steward Law for personalized planning.
Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.
Welcome back to the Good Steward Law and Wealth Podcast. Excited to have y'all here today for our second installment where we're to talk about IRAs and your estate plan. And today we're going to talk specifically about trusts and how they relate to your estate plan and your IRA. Trusts have to be very carefully drafted in order to get all the benefits that the laws of IRAs are offering. And I want to say this to start out this episode, that if you have a revocable trust and you've made your IRA a beneficiary of it, especially before 2019, it needs to be revisited and you need to double-check various things within that trust to make sure it works like you want, or there's going to be a negative consequence to that. So last episode we talked about the SECURE Act and what it did to update the inheritance laws around IRAs. So if you didn't listen to that, go back and listen to it. But generally, we talked about the 3 types of beneficiaries, the eligible designated beneficiaries, the non-eligible designated beneficiaries, and the non-designated beneficiaries. So if that was a tongue twister for you, it is. But today we're going to hit on the non-eligible designated beneficiaries. So this is most common. This is like your, your adult children, your grandkids, you know, your friend, whoever you're leaving it to that really isn't a spouse. So they will fall into this category. But why we're talking about trust is because a lot of people want to leave their IRA for these people in a trust. So let's just go off the example here of you were leaving your IRA to your adult child, maybe he's 40 and you're leaving your IRA to him. Then how do you leave it to him and why do people even want to leave it to a trust? Well, they want to leave it to a trust for, I think of a couple main reasons when it comes to IRAs is if the child is not good with money, they're just not good with managing money. They don't need to be managing money. Maybe there's a drug or alcohol problem, but the end result is they want someone else to manage the money for their child and their child still get the benefit, but someone's in charge of investing it and making distributions. So that's one reason you would leave it to a trust. Another one is creditor protection. Now IRAs themselves do have creditor protection federally, and it varies the depth by state law of the type of creditor protection. But one ruling that came out that highlights this is bankruptcy is not protected. Your IRA is not protected from bankruptcy on an inherited IRA. So a lot of people still want to get that same type of creditor protection. Is why they would leave it to a trust. And so that's how I think about those two things. Even divorce protection. Once IRAs have been transferred, if it becomes, you know, part of the marital estate, it's open to divorce. So I think about mismanagement of money, creditor protection, divorce protection. And then if we get into spouses, which will be another episode, people want to protect against second marriages or blended families, that type of thing. But for here, let's just say the adult child is just not good with money. And the deceased parents want to leave them the IRA, but they want someone else to manage the money. So they, they leave it to them in a trust that's managed by another trustee. Say it's a bank. Now to get— when they leave it to this adult child, if it was left to him outright, he would get a 10-year stretch on taking the distribution. So he has 10 years to take it all out. And that's important. Because this is taxable income and it's a strategy because we don't want to have him pay too much taxes and watch the inheritance dwindle away. We want to be smart about it and stretch it out as long as we can. Um, so it's a strategy of how you take it out over those 10 years. But if it was left to him personally, he gets that 10-year stretch. Now, if it's left to a trust, he may or may not still get that 10-year stretch. It just depends how it's drafted. And that's why people ask, you know, why are your estate plans so expensive when I can go online to LegalZoom and get it done for free? Well, this is precisely it, because it can have a 30% consequence at least on how you leave IRAs if the trust is drafted wrong. So if the trust is drafted wrong and it doesn't qualify, then you have to take it out within 5 years. If a trust is drafted correctly and it qualifies, you have to take it out within 10 years. So that's a big difference. They call the trust a see-through trust, so it has to meet certain standards to qualify for the 10-year stretch. And to be a see-through trust, it means kind of like you can see through the trust and pick out the beneficiaries. And to meet those standards, they listed 4 different standards you have to meet. One, it has to be valid under state law. So any trust drafted by an attorney should meet this standard. The second, it has to become irrevocable at the grantor's death. So how this works, practically speaking, is I set up a revocable trust for husband and wife, and this is most common, what everyone has. They can change it, it's revocable, but when they both pass away, it becomes irrevocable and goes to the kids. So most of my trusts meet that standard because that's how all revocable trusts are drafted, is it becomes irrevocable when the grantors are gone. The second or the third standard is the beneficiaries have to be identifiable, meaning we need to be able to pick out a human. And so obviously if you leave everything to your son, you can pick out that human. It says my son. But some, most trusts that we draft, I leave things to all descendants per stirpes. So that just means I'm leaving it to my descendants, and that can still qualify because we can identify those beneficiaries. We can look in and say These are the descendants of the grantors. And even it could qualify if you generally say, I leave this to all my grandchildren, you should be able to pick out grandchildren. So you can leave it to a class of people. You just have to be able to pick out people in that class. They have to be identifiable. The last standard is, this one's not a huge deal, but you have to provide a copy of the trust to the financial institution that has the IRA., when you pass away. So, the technical portions of this, how I usually go about beneficiaries is I provide a certificate of trust to the financial institution. Um, it's just a validation document that I tell clients are like the title to the trust. So I don't usually provide the whole trust when you, until you have to, to the financial institution and the certificate will suffice. But when the beneficiaries pass away, you have to provide the whole trust. I just say, go ahead and provide the whole trust. Some experts are kind of debating on whether that's required or not. Some say you can just provide relevant sections of the trust or a certification of explanation of the trust. But I just say, once they're passed away, just go ahead, provide the whole trust to the financial institution, just to make sure it's done correctly and easily. So if your trust meets those standards, then it qualifies as a see-through trust, and then your beneficiaries can get that full 10-year stretch. So it's important that trusts are drafted accordingly to that. And that's why I say that, because in the past, if you had your trust set up, even your IRA trust specifically set up for IRAs, it was not drafted to meet these standards because these standards didn't exist. So you need to update your trust if it involves an IRA. Now we're going to get on to the second aspect of trust planning when it comes to IRAs is the tax side of things. So generally a trust is taxed at the highest rate. I forget the number, but we'll just— I've been ballparking 30%, so we'll just go 30%. The highest tax rate is what a trust is taxed at. So you don't want to tax things at the trust level unless you have to. So to get in the details of that, there's two different types of trusts that you can draft that do qualify as a see-through trust. Um, one is a conduit trust. So what this means is, I think of this like a water slide. Once you jump in the water slide, you go straight down, no stopping, and straight out. So what a conduit trust means in that context is once an IRA pays to a trust, the distributions go straight in and straight out. So they go directly to the beneficiary. Now, a good thing about this is that means they won't be taxed at the trust rate. They will be taxed at the beneficiary's rate, and that's usually lower, but there's no asset protection because as soon as those benefits are going in the trust, they go out. So they're open to creditors, divorce, the mismanagement of your beneficiary. So there's no need to leave, um, an IRA to a trust if it's drafted as a conduit trust, because it loses all the asset protection anyway. And that's why you were leaving it to it. Um, but the other type of trust is called a discretionary trust. Some call it accumulation trust, but discretionary means when the IRA pays distributions to the trust, it's up to the trustee's discretion of how they make the distributions. So in the example we've been working off here, that your older son who's bad with money is the beneficiary of a trust. The bank is the trustee. Then the IRA would pay the trust. So it pays the bank. They then have the discretion of whether to distribute to the son or keep it in the trust. And that's why you name a bank or someone you trust because you trust their discretion. Um, they kind of weigh the options. So they would look at this distribution and they say, well, if I keep it in the trust, I'm going to be taxed at this higher trust rate. And if I distribute it to the beneficiary, it will be taxed at his rate. So it's more tax beneficial to distribute it. But then they say, well, if I keep it in the trust, I mean, if I don't keep it in the trust and distribute it to the beneficiary, it's theirs. It's open to their creditors. They can go buy drugs with it. They can do whatever they want to with it. So it's kind of a, you weigh the pros and cons there as a trustee is if I give this money to the beneficiary for the tax benefit, will it harm them?, and it may not be in the best discretion to do that. So then they, they still have the option to keep it in the trust and gain all the protections. Um, and it's important that a trust is drafted in a way that gives this trustee discretion. I have specific language that I know works that still gets all the benefit and the asset protection of the trust, but gives the trustee discretion to make distributions. So it's important to make sure your trust is expertly drafted and up to date. Even if it was done by the best attorney in the world, but it hasn't been updated since 2019, you need to update your trust. So to answer most questions that I get, yes, you can leave an IRA to a trust. And in fact, we do it a lot, but it needs to be drafted appropriately in order to get all the tax benefits. And next episode, we are going to hit on, um, What is the spouse beneficiary of an IRA? And then I believe the one after that, we're going to hit on how to get your 401(k)s and work accounts to an IRA and why you would want to do that. And then we're going to hit on the best inheritance tool there is out there, a Roth IRA. And I'll give a little teaser. The Roth is beneficiary because it's tax-free. There's no RMDs, so they don't have to pull distributions out like they do your regular IRA. So then this whole issue of Does the trustee have the discretion to do this or this, or should I do that? It's not really an issue because the distributions aren't required. So that's why Roth, it just, uh, hitting on the edge there is why it's the best inheritance tool out there. But this has been the Good Steward Law and Wealth Podcast, where we consider everything a gift and it's our job to manage what we've been given to the best of our abilities. Thank you for listening.
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