See-Through Trusts

What is a “see-through” trust? Sometimes referred to as a “look-through” trust, it is essentially a trust drafted in a way that permits an IRA custodian to distribute RMDs from an inherited IRA based on the oldest trust beneficiary’s life expectancy. This type of trust is important to understand if you plan to name a trust as the beneficiary of your IRA or other qualified plan.

Under IRS rules, a trust is not a person and, therefore, cannot be a designated beneficiary. Why is this an important rule to understand? It’s important because many people (including some estate planning attorneys) do not understand that naming a trust as the beneficiary of your IRA eliminates the opportunity for individual trust beneficiaries to use a Multi-Generational IRA strategy.

A trust will qualify as “see-through” if all of the following elements are met:

1. The trust is valid under state law.

2. The trust is irrevocable or becomes irrevocable upon the death of the owner.

3. The trust beneficiaries are individuals who are identifiable.

4. All trust documents have been provided to the IRA custodian by October 31st of the year following the year of the owner’s death including:

a. A list of all beneficiaries including contingent and remaindermen.

b. Trust certification and certification that the beneficiary list is correct.

c. If the trust is amended, corrected certifications that change any information previously certified.

d. An agreement to provide the custodian a copy of the trust instrument upon demand.

Even if your trust qualifies as see-through under IRS rules, the trust beneficiaries may be treated as designated for IRA distribution purposes. But, at best, the trust beneficiaries cannot use their individual life expectancies to receive required minimum distributions and they are stuck using the life expectancy of the oldest trust beneficiary. IRS Publication 590 clearly states that “The separate account rules cannot be used by beneficiaries of a trust.”