by: Begley Law Group

by Thomas D. Begley, Jr., CELA

This is the final in a series of articles on the SECURE Act.  (Part 1) (Part 2) (Part 3)



Trusts are frequently used to protect the inheritance that individuals leave their children from the children’s creditors, divorce, or squandering the money.  There are two types of trusts recognized in the tax law:

  • Conduit Trusts. Under a Conduit Trust the money received from the retirement account each year is paid to the child in the year received.  There is an advantage to this type of trust in that the funds are not available to the child until the RMD is actually received by the trustee.  Neither the child, the child’s creditors, nor the child’s spouse can invade the retirement account, so they would not have access to the funds until distribution is actually made to the child.  This trust may offer less protection to the child than the Accumulation Trust discussed below, but it may also result in less income tax.  Tax on the distributions from the retirement account would be paid by the child rather than the trust and the child would normally have lower tax rates.
  • Accumulation Trust. Under an Accumulation Trust the RMD is paid into the trust, but the trustee decides when to make the distribution to the child.  This offers more protection, because while the retirement money is in the trust, it is protected from creditors, divorce, and squandering by the child.  However, the tax may be higher, because the income would be taxed at trust tax rates rather than the child’s tax rates.  There are certain situations, such as Special Needs Trusts, where an Accumulation Trust is required.
  • Existing Trust Review. Under old law, the 10-year rule did not apply so Trusts were typically established providing for withdrawal and distribution over the life expectancy of the child.  Since the law has been changed, these distributions must be taken under the terms of the 10-year rule for almost all beneficiaries.  Therefore, all existing trusts should be reviewed with the idea of revising that language to comply with the new law.



If the retirement account is being left to a Trust under a Will or a Living Trust, then retirement account provisions should be considered.  An analysis should be made as to whether Conduit Trust or Accumulation Trust language is appropriate.  Opinions among experts vary considerably.  From an income tax standpoint, there is an advantage to a Conduit Trust in that the monies are withdrawn from the retirement account and distributed immediately to the beneficiary and income taxes are paid at individual tax rates.  In an Accumulation Trust, monies are withdrawn from the retirement account and can be accumulated in trust.  The disadvantage to a Conduit Trust, from a tax standpoint, is that trust tax brackets are much lower than individual income tax brackets, so the actual income tax may be higher.  The advantage to the Accumulation Trust is that it offers greater protection.

Beneficiary                                                      Type of Trust Provision

Spouse                                                            Conduit Trust, except an Accumulation Trust may be considered in second marriage situations.

Disabled                                                          Accumulation Trust

Chronically Ill                                                 Accumulation Trust

Less Than 10 Years                                        Conduit Trust

Minor                                                              Conduit Trust with special Language when the Beneficiary achieves majority.


Non-Eligible Designated Beneficiary:

Usual                                                   Conduit Trust

Problem Child                                     Accumulation Trust



Current Will and Living Trusts containing retirement account language should be reviewed carefully to ensure that the retirement account provisions comply with the new law.  In some instances, clients want distributions from retirement accounts to be restricted, so that the children would not squander those funds.  The retirement account provision in those instances may have limited distributions to the children over the children’s life expectancies.  Such language would have the effect of forcing the trustee to make withdrawals over a 10 year period and accumulating the funds in the trust to be distributed over the lifetime of the child, which could result in higher taxation.



In conclusion, the SECURE Act has a significant adverse impact on stretch distributions from retirement accounts for many, if not most, beneficiaries.  There are many strategies available to deal with this change in the law, but there is no one-size-fits-all solution.  Good practice dictates that past clients be notified of the change in the law and given information as to alternatives going forward.  Future clients must be aware of the new law in planning for the inheritance of their retirement accounts.