Conduit trust
The new legislation may be most problematic for people with conduit trusts because the conduit trust will no longer operate the way originally expected it to work. Under a conduit trust, the trustee immediately pays all retirement plan distributions to the primary or lifetime trust beneficiary (“conduit” beneficiary). All retirement plan distributions paid to the trust are forced out to the conduit beneficiary and nothing accumulates in the trust. Historically, conduit trusts regulated and controlled the systematic and gradual payout of someone's sizeable retirement plan over the beneficiary’s lifetime. They were used to address the fears regarding the beneficiary’s potentially questionable financial judgment, discipline and restraint as well as concerns about creditors’ and other claimants’ (ex-spouses) attempts to access those assets, if otherwise, left outright the beneficiary.
SECURE mandates the trustee accelerate distributions under the 10-year payout rule to the conduit beneficiary rather than make small incremental distributions over the beneficiary’s lifetime unless the beneficiary is an “eligible designated beneficiary” (EDB). An EDB is a surviving spouse, a disabled or chronically ill individual, minor child of client, or an individual who is not more than 10 years younger than the client.
As a result, SECURE may expose a conduit beneficiary to an increased income tax burden and undermine the intent, purpose and utility of the trust if the designated beneficiary is not an EDB. At a minimum, people should have their conduit trusts reviewed and either modified to name an EDB, if appropriate for their circumstances, or potentially switch to an accumulation trust.
In next blogpost, we will discuss Accumulation trust.