The SECURE Act and SECURE 2.0 Act brought major changes to retirement accounts. Most beneficiaries can no longer use the “stretch IRA” for long-term tax deferral. Instead, they now face a 10-year deadline to withdraw funds. At first, it might seem less useful to name a trust as the beneficiary of a retirement account. In fact, trusts remain a strong way to protect assets, retain control, and plan for future generations, as long as they are carefully drafted.
This article looks at why trusts are still important in retirement account planning and highlights the key rules you need to follow to stay compliant and protect assets.
Why Name a Trust as Beneficiary?
Asset Protection from Creditors and Divorce
An outright distribution of retirement assets to a beneficiary exposes those funds immediately to:
- Creditor claims
- Divorce proceedings
- Bankruptcy risk
By contrast, a properly structured trust can:
- Keep assets in a protected environment
- Restrict distributions to an ascertainable standard (or full trustee discretion)
- Shield inherited retirement proceeds from beneficiary-level liabilities
This matters even more now, since distributions usually have to happen within 10 years. That means large amounts of money may be paid out quickly.
Protection from Beneficiary Mismanagement
The 10-year rule often results in accelerated distributions, increasing the risk that beneficiaries:
- Spend imprudently
- Fail to tax plan
- Liquidate assets at inopportune times
A trust allows:
- Staggered or discretionary distributions
- Professional or fiduciary oversight
- Tax-aware distribution strategies
Control Over Timing and Tax Strategy
Even though the account must be emptied within 10 years, the timing of distributions within that window still matters. With a trust, the beneficiary can:
- Accumulate distributions in lower-income years
- Coordinate distributions with the beneficiary’s tax bracket
- Avoid large lump-sum recognition in year 10
This approach is especially helpful for beneficiaries who have high incomes.
Multigenerational Planning
Giving assets directly to beneficiaries removes your control. Using a trust lets you keep managing the assets for future generations.
- Continued dynasty-style management
- GST planning (where applicable)
- Preservation of wealth beyond the initial beneficiary
The SECURE Framework: What Changed?
Under the SECURE regime, Eligible Designated Beneficiaries (e.g., surviving spouses, minor children, disabled individuals) may still stretch distributions, but Non-Eligible Designated Beneficiaries are subject to the 10-year rule for distributions.
For most planning scenarios involving children or more remote family members, the trust will be treated as a Non-Eligible Designated Beneficiary, meaning the entire retirement account must be distributed by December 31 of the 10th year following the participant’s death. Additionally, proposed and final regulations have clarified that if the decedent died after their required beginning date, annual RMDs may still be required during the 10-year period, not just a lump sum in year 10.
Qualifying the Trust: “See-Through” Requirements
To ensure the trust is treated as a designated beneficiary, it must qualify as a see-through trust. To qualify as such, the trust must:
- Be valid under state law
- Be irrevocable (or become irrevocable upon death)
- Have identifiable beneficiaries
- Require the Trustee to provide the required documentation to the plan administrator or account custodian
If the trust does not meet these requirements, default rules will apply, potentially leading to even faster distributions and, consequently, more rapid taxation.
Drafting for Asset Protection Under the 10-Year Rule; Conduit Trusts & Accumulation Trusts
When deciding whether to structure a see-through trust as a conduit trust or an accumulation trust, let us consider the primary difference between the two, namely, when (or if) distributions from the plan or account must be further distributed to the beneficiary of the trust. Conduit trusts require all retirement distributions to pass directly to the beneficiary, whereas accumulation trusts allow the trustee to retain distributions within the trust, thereby preserving creditor protection for the amount received.
While conduit trusts were historically favored to preserve “stretch” treatment of a plan or account based on a beneficiary’s life expectancy, with so few beneficiaries qualifying for stretch treatment, many practitioners are turning to accumulation trusts. If properly drafted, most beneficiaries will still have a 10-year period to withdraw funds from the account, with the accumulation trust providing asset protection during that period and beyond.
Final Thought
For additional information on whether designating a trust as the beneficiary of your retirement plans or accounts may be appropriate in your circumstances, please feel free to contact John R. Tullio, Esq. at (216) 621-7860, or by email at [email protected].