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Thorny Issues When Leaving IRA to Trust for Young Children

Why do back flips to qualify for a life expectancy payout that may soon cease to exist?

Question: My client wants to leave his IRA to a trust for his children. Each child's share would be used for such child's care, education, comfort, and support until the child reaches age 30, at which time the child would take control. If a child dies before age 30, his/her share would pass to his/her issue if any, otherwise to the other children's shares.

I told the client he needed to name a "wipe-out beneficiary" in case all his children were to die without issue while there is still money in this trust--a most unlikely event but one which nevertheless must be covered in the trust. The client said in that case the trust should pass to his "heirs-at-law."

Naturally the client wants the trust to qualify as a "see-through trust" so the IRA can be paid out gradually to the trust over the life expectancy of his oldest child.

My trust draft specified that the "wipe-out beneficiary" group (client's heirs at law) would exclude any individual older than the client's oldest child. I understand this is a standard practice when seeking to assure that the life expectancy payout will be based on the age of the primary beneficiaries of the trust, not that of some older remote contingent wipe-out beneficiary.

But the client objects to this--he points out that all the "heirs at law" whom he would like to benefit under that clause (his mother, his siblings) are older than his oldest child, who is only 9 years old. Is there a better way to resolve this problem?

Answer: Under current IRS rules for naming a trust as beneficiary, there are several alternatives, but each has significant drawbacks.

When an IRA owner dies, it is usually considered favorable to have the IRA paid out to the IRA owner's beneficiary in annual installments over such beneficiary's life expectancy. But the life expectancy payout is available only for individual (human) beneficiaries. If you leave benefits to a trust (which is not an individual), and you want to qualify for the life expectancy payout, then the trust must comply with the IRS's "minimum distribution trust rules"--in which case the IRS will "look through" the trust and treat the trust's human beneficiaries as if you had named them directly.

So if an IRA is payable to a properly drawn "see-through trust," then the benefits can be distributed after the IRA owner's death in annual installments to the trust over the life expectancy of the oldest trust beneficiary.

The problem is that in determining who is the "oldest trust beneficiary" the IRS generally looks at all potential trust beneficiaries--including contingent remainder beneficiaries. Thus, an adult wipe-out beneficiary (who will inherit the trust and the IRA only if the real primary trust beneficiary dies before reaching a certain age) counts as a trust beneficiary just as much as the real beneficiary.

Is there any way to have a normal family-type trust for minors and get around this rule? Here are your client's options.

1. Conduit trust. If all distributions the trust receives from the IRA must be forthwith distributed out to (or for the benefit of) the children, then the trust would be in a special category--a conduit trust. With a conduit trust, the only beneficiary who counts is the conduit beneficiary. Any beneficiary who comes in only after the death of the conduit beneficiary doesn't count. I'm betting, however, that this rigid pass-out-all-IRA-distributions-right-away format will not be satisfactory to your client. 

2. Last man standing trust. If there are lots of young children, and the client is willing to take a bit of a chance, the trust could provide (A) exactly what the client wants so long as there are at least two children living and (B) if at any time there is only one child living the trust terminates and goes outright to that last surviving child. With this structure there are no older contingent beneficiaries to disregard. Depending on how many children there are and their ages, this might appeal to the client, but there’s always the chance that a freak accident or illness wipes out the entire family except one toddler, and the toddler ends up with outright ownership. Again, hardly an ideal structure.

3. IRS position changing? Some recent IRS rulings seem to show possible softening of their previously rigid interpretation of their own regulation. Some practitioners might be willing to write a "normal" trust and rely on such PLRs. However, without some more authoritative pronouncements from the IRS (or your own advance ruling), it is hard to recommend placing reliance on a few PLRs that are inconsistent with prior PLRs.


I would suggest the client consider having you draft the trust exactly the way he wants it, to provide for his children in the way he deems best; assume the retirement plan will be cashed out shortly after his death because the trust doesn't qualify as a see-through; and buy some life insurance so the trust will have money to pay the resulting income taxes. A factor favoring this approach is the recurrent rumor (though this has not been included in any recent proposed legislation) that Congress wants to get rid of the life expectancy payout and replace it with a five-year payout for most inherited retirement plans: Why should the client do back flips to qualify for a life expectancy payout that may cease to exist before he dies?

In short, the client can pay you to draft an estate plan that he doesn't want (just to qualify for the life expectancy payout), or he can pay the insurance company to get the estate plan he does want for his children.

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP specializing in estate planning for retirement benefits.The views expressed in this article may or may not reflect the views of Morningstar. The electronic version of Natalie's book, Life and Death Planning for Retirement Benefits, is now on a new platform with expanded features. The e-book gives you the entire book in word-searchable format, plus two chapters (on life insurance and annuities in retirement plans). Visit to subscribe or learn more.