See-Through Trust

What Is a See-Through Trust?

A see-through trust is a vehicle through which individuals may pass retirement assets from their individual retirement accounts (IRAs), via a trust, to their chosen beneficiaries. See-through trusts let IRA owners choose who will be the beneficiaries of the account after the owner is deceased. But very specific limitations and logistical requirements surround these vehicles.

Key Takeaways

  • A see-through trust lets individuals pass the retirement assets generated from their individual retirement accounts (IRAs) to beneficiaries of their choosing via a trust.
  • Among the rigid set of qualifications that must be met for a see-through trust to take effect, the account must be valid and legal under state law, the trust must be irrevocable upon the plan owner’s death, and all beneficiaries must be easily identifiable, eligible, and named.
  • There may be multiple beneficiaries of a see-through trust, where the required minimum distributions (RMD) are determined by each recipient's individual life expectancy.

Understanding See-Through Trusts

In order to set up a trust as a designated beneficiary of a retirement account, several requirements must be satisfied, including the following mandates:

  1. The trust must be considered valid and legal under state law, which typically means the creation of the trust document must be witnessed and notarized.
  2. The trust must be irrevocable upon the plan owner’s death, meaning that the listed beneficiaries can be changed up to the point where the IRA owner passes away, but not after.
  3. All beneficiaries must be easily identifiable, eligible, and legally named.
  4. Documentation of the see-through trust must be provided to the custodian of the IRA by October 31 of the year following the IRA owner’s death. The regulations governing the trust and how it relates to the distribution of the IRA are part of 26 Code of Federal Regulations Section 1.401(a)(9).

Required Minimum Distributions (RMD)

Although an IRA owner maintains the legal right to name whomever he wishes to be the beneficiary of their IRA, due to the fact that Congress does not wish these accounts—and other similar retirement accounts—to have the ability to continue for at least 10 years after the original IRA owner passes away, the beneficiaries are mandated to take required minimum distributions (RMD). The purpose of this rule is to ensure that the accounts are liquidated over time, so that they don’t live in perpetuity.

In order to calculate the RMDs, see-through trusts rely on the life expectancy of the beneficiary. As such, see-through trusts present a unique advantage, in that if there are several beneficiaries, they may split up the IRA into separately inherited IRAs, rather than all beneficiaries having to use the oldest beneficiary’s lifetime for the RMD calculations. Simply put: see-through trusts don’t shackle the beneficiaries to a crude, one-size-fits-all distribution schedule.

Other Trust Types

See-through trusts aren’t the only game in town. Another type of common trust is a marital trust or fiduciary relationship between a trustor and trustee, which benefits the surviving spouse and any heirs of the married couple.

Non-living entities such as charities may not be named as the beneficiaries of see-through trusts, because they do not have life expectancies, which are needed to calculate the Required Minimum Distributions.

Also called an "A" trust, a marital trust takes effect when the first spouse dies. Assets are moved into the trust upon death, and the income that these assets generate funnel to the surviving spouse. When the second spouse dies, the trust then passes to its designated heirs.

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