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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

In order to reduce the likelihood that a child or grandchild would make an unwise decision with regard to his or her “share” of remaining retirement account assets, many of our clients implement a plan in which they do not directly name a child or a grandchild as a beneficiary of the retirement account assets.  Instead, these clients structure their estate planning documents (taking the form of either a Will or Revocable Trust) to create a trust following their death (or, if married, the death of the survivor of them) for the benefit of this child or grandchild, and designate this trust as the beneficiary of remaining assets.

In this fashion, the Trustee, rather than the self-interested beneficiary, makes the decision as to when withdraws should be made.  In most cases, we draft the trust so that the named trustee is required to withdraw no less than the required minimum distribution (“RMD”) amount.  By providing the Trustee with this authority to make withdrawal decisions, rather than the beneficiary, the Trustee is in a better position to make an objective decision as to whether or not it is necessary to take withdraws from the inherited retirement account that are in excess of the RMD amount. The named Trustee can always withdraw assets necessary for the child’s care, but the Trustee is less likely to create a poor income tax result by withdrawing assets sooner than necessary and, as a result, creating an unnecessary income tax liability.

The Internal Revenue Code permits a trust to own retirement account assets only if both of two conditions are met:

  • First, the account owner’s estate planning documents must include certain language, commonly referred to as “see through trust” language. For those clients with significant retirement account assets, we strongly suggest that such account owners have their current estate planning documents reviewed by a qualified estate planning attorney to determine whether the language in place would allow for the trust to be characterized as a “see through trust.”
  • Second, the account owner must have the appropriate beneficiary designation language listed directly on the form itself. Again, it is most appropriate for an account owner to seek the assistance of a qualified advisor to assist with this language.

If these conditions are met, then the RMD amounts are based upon the child’s (or grandchild’s) life expectancy, such that the IRS “sees through” the trust to use the child’s life expectancy (or grandchild’s life expectancy) even though the trust is the legal owner.