The regulations are clear, but there is doubt.
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Question: "Mark" wants to leave his $2 million IRA to a trust for his three grandchildren, who are 12, 10, and 8 years old. He wants the trust to be a "family pot" trust, under which the trustee would have discretion to distribute income and/or principal each year to the grandchildren or for their benefit. Mark wants the trustee to have discretion to distribute based on the grandchildren's relative needs rather than based on strict equality. The trust would terminate when all the grandchildren have reached age 35, and whatever is left would be distributed to them equally at that time. If all the grandchildren die before reaching that age, without issue, the trust would pass to a charity.
To be sure that the trust qualifies as a "see-through trust" for purposes of the minimum distribution rules (so that the IRA can be paid out over the life expectancy of the oldest grandchild), Mark plans to use a "conduit trust." Can there be a conduit trust with more than one beneficiary? Or does Mark have to create a separate trust for each grandchild (which would defeat his intent to give the trustee discretion to distribute based on need)?
Natalie: Like most people who are leaving assets to young beneficiaries, Mark wants the property to be protected by a trust until those beneficiaries reach a more mature age. The problem with leaving an IRA or other retirement benefits to a trust is that doing so makes it more difficult for the benefits to qualify for the "life expectancy" or "stretch" payout after the participant's death--and qualifying for a stretch payout (meaning that distribution of the inherited plan is spread out over the beneficiary's life expectancy) is especially important when the intended beneficiaries are so young.
The problem is that a trust is not an individual, so a trust doesn't have a "life expectancy." The IRS has tried to solve that problem with its "see-through trust" regulation. The regulation says that benefits paid to a trust can be paid out over the life expectancy of the oldest trust beneficiary, if the trust complies with various rules. One of the rules is that all beneficiaries of the trust must be individuals.
Mark plans to name a charity as the contingent remainder beneficiary of the trust for his grandchildren. Because a charity is not an individual, Mark's trust would not qualify as a "see-through" trust, unless that charity can somehow be ignored. And the IRS regulations say you CAN ignore a remainder beneficiary if the trust is a conduit trust. (The IRS doesn't use that word; practitioners have adopted "conduit trust" as the nickname for a type of trust described in the IRS regulations.)
Under the example of a successful conduit trust in the regulations, a retirement plan is payable to a trust for the life benefit of "B," and "all amounts distributed from [the plan] to the trustee while B is alive will be paid directly to B upon receipt by the trustee." The regulations explain that, because no amounts distributed from the plan during B's lifetime are accumulated in the trust for the benefit of any later beneficiaries, B is considered the sole beneficiary of the trust for minimum distribution purposes. So far so good.
But what if there are multiple conduit beneficiaries, as in Mark's proposed trust for his three grandchildren? My conclusion, based on the clear language of the regulations, is that you can have as many conduit beneficiaries as you want. The only requirements are that: