How Trusts Affect Retirement Accounts: Tax Rules, RMDs, and Beneficiary Strategies

May 29, 2025
Rockland Estate Planning

Understanding How Trusts Work with Retirement Accounts

When planning for retirement and estate distribution, using a trust as a beneficiary of a retirement account can offer control, asset protection, and potential tax benefits. However, not all trusts are treated equally under IRS rules—especially when it comes to required minimum distributions (RMDs) and income taxes. Here’s what you need to know about how different types of trusts impact retirement account inheritance.

What Is a See-Through Trust?

The IRS classifies a trust as either see-through (look-through) or non-see-through, and this distinction significantly affects how RMDs are calculated.

  • See-Through Trust: Allows the IRS to “look through” the trust and base RMDs on the life expectancy of the underlying beneficiaries. This generally leads to longer distribution periods and better tax deferral.

  • Non-See-Through Trust: Lacks qualified beneficiaries or proper documentation. As a result, the IRS requires faster distributions, often leading to higher taxes in a shorter timeframe.

Conduit Trusts vs. Accumulation Trusts

There are two main types of see-through trusts used with retirement accounts:

1. Conduit Trust

  • Automatically passes any distributions from the IRA or retirement account directly to the beneficiary.

  • Acts as a “pipeline” and doesn’t retain funds.

  • RMDs are calculated based on the beneficiary’s life expectancy.

  • Taxable income is reported by the individual beneficiary—often resulting in lower taxes.

2. Accumulation Trust

  • Gives the trustee discretion to retain distributions instead of immediately passing them to the beneficiary.

  • Useful when protecting assets from creditors, lawsuits, or irresponsible spending.

  • Trust income that is not distributed is taxed at the trust’s higher tax rate.

Who Pays Taxes on Retirement Account Distributions?

Retirement account distributions are generally taxable. Whether the trust or the individual beneficiary pays the tax depends on how and when the income is distributed:

  • If income is distributed to the beneficiary in the same taxable year, the beneficiary may pay the tax (usually at a lower rate).

  • If the trust retains the income, the trust pays the tax—often at a much higher bracket.

This makes proper tax planning essential when naming a trust as an IRA or 401(k) beneficiary.

When It’s Worth Paying Higher Trust Taxes

Sometimes, it makes sense for the trust to retain retirement distributions even if it means paying more in taxes. Situations where this might apply include:

  • The beneficiary is facing bankruptcy or creditor issues

  • The beneficiary has substance abuse problems or poor financial decision-making

  • Protecting minor beneficiaries until they reach maturity

In such cases, asset protection and control may outweigh the tax costs.

Key Takeaways for Retirement and Estate Planning

Trusts can be incredibly effective tools in estate and retirement planning—but only when structured correctly. Key decisions such as whether a trust is see-through or non-see-through, conduit or accumulation, will directly impact:

  • Distribution timelines

  • Tax efficiency

  • Asset protection for beneficiaries

Consulting with an estate planning attorney or financial advisor can help you choose the best strategy for your goals.

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