Understanding Trusts and Retirement Accounts: What You Need to Know

When it comes to retirement accounts and estate planning, trusts can play a major role in how funds are managed, distributed, and taxed. But not all trusts are treated the same—especially when they’re named as beneficiaries of retirement accounts. Let’s break down the basics.

See-Through vs. Non-See-Through Trusts

First, a trust is either a see-through trust or it’s not. A see-through trust is designed to look through the trust to the underlying beneficiaries. Why does this matter? Because when a retirement account is left to a see-through trust, the required minimum distributions (RMDs) are based on the life expectancies of the beneficiaries. This generally allows for more time to stretch out distributions—and tax deferral.

If the trust is not a see-through trust, then the IRS applies a much shorter withdrawal period. That usually means higher taxes over a shorter timeframe.

Conduit vs. Accumulation Trusts

A trust can also be structured as either a conduit trust or an accumulation trust.

• A conduit trust is required to immediately pass any distributions it receives from the retirement account directly to the beneficiary. It’s essentially a pipeline from the IRA to the individual.

• An accumulation trust, on the other hand, allows the trustee to hold on to the retirement account distributions instead of immediately passing them on. This gives the trustee more control and can help protect the funds—for example, if the beneficiary is facing financial challenges or creditor issues.

Who Pays the Taxes?

Now let’s talk taxes—because retirement account distributions are typically taxable. If the trust receives income from the retirement account, someone has to pay tax on it.

Here’s how it works:

• If the trust distributes the income to the beneficiary in the same taxable year, then either the trust or the beneficiary can be responsible for the tax.

• If the trust does not distribute the income in the same taxable year, then the trust itself is on the hook for the taxes.

Why does this matter? Trusts usually fall into higher tax brackets more quickly than individuals. That means it’s often more tax-efficient for the beneficiary to report the income and pay the tax—because they’re typically in a lower bracket.

When It Makes Sense to Pay More Tax

Of course, tax efficiency isn’t the only consideration. There may be situations where it’s actually better for the trust to retain the income—even if that means paying more in taxes. For instance, if the beneficiary is going through financial hardship, dealing with addiction, or vulnerable to bad influences, it may be wiser to keep those funds protected within the trust.

The Bottom Line

Trusts can be powerful estate planning tools, especially when used with retirement accounts—but the details matter. Whether a trust is see-through or not, conduit or accumulation, can have a big impact on timing, taxes, and flexibility. Understanding these distinctions can help you make smarter choices for your future—or your family’s.