When planning your estate, one of the most critical decisions is determining how to pass on your 401(k), IRA, or other retirement accounts. You have two primary options: naming beneficiaries directly or naming a trust as the beneficiary. Each approach has distinct advantages and disadvantages, particularly concerning tax treatment, asset protection, and control over distributions. Understanding the nuances of see-through and non-see-through trusts, as well as conduit and accumulation see-through trusts, can help you make an informed decision.
Disclaimer: This information is for educational purposes only and not financial or legal advice. Consult with a qualified professional for personalized guidance.
Option 1: Naming Beneficiaries Directly
Pros
Cons
✅ Simplicity – The beneficiary receives the retirement funds directly, bypassing probate and trust administration complexities.
✅ Tax Efficiency – Beneficiaries typically pay taxes at their individual income tax rate, which is often lower than trust tax rates.
✅ Lower Administrative Costs – There are no legal fees or ongoing trustee expenses.
✅ More Control for the Beneficiary – Heirs can manage withdrawals based on their own financial situation and tax planning.
❌ No Asset Protection – Once the funds are distributed, they are vulnerable to creditors, lawsuits, and divorce settlements.
❌ Lump-Sum Withdrawals Possible – Beneficiaries might take distributions too quickly, triggering higher income taxes and depleting the inheritance prematurely.
❌ Minors Cannot Inherit Directly – If a minor is named, a court-appointed guardian will manage the funds until they reach adulthood, which can be problematic.
Best For:
- Responsible adult beneficiaries who can manage the funds wisely and whose estate is relatively simple.
- Situations where simplicity and tax efficiency are the top priorities.
- When asset protection is not a concern.
Option 2: Naming a Trust as the Beneficiary
Naming a trust as the beneficiary of a retirement account can provide significant advantages, but it requires careful structuring to avoid unintended tax consequences. There are two key distinctions to understand: see-through vs. non-see-through trusts, and within see-through trusts, conduit vs. accumulation trusts.
See-Through vs. Non-See-Through Trusts
See-Through Trust (Preferred)
A see-through trust qualifies for favorable tax treatment because the IRS “looks through” the trust and treats the named individual beneficiaries as the account owners for required distribution purposes. To qualify, a trust must:
- Be irrevocable upon the owner’s death.
- Only have identifiable human beneficiaries (including contingent beneficiaries).
- Provide necessary trust documentation to the plan administrator by October 31st of the year following the owner’s death.
- Be valid under state law.
Benefits:
- Allows the trust beneficiaries to stretch distributions over their life expectancy (for spouses) or 10 years (for most other non-spouse beneficiaries under the SECURE Act), limiting tax impact.
- Provides asset protection if structured properly.
Non-See-Through Trust (Less Favorable Tax Treatment)
A non-see-through trust does not meet the IRS requirements for look-through treatment. As a result:
- The entire 401(k) or IRA must be distributed within 5 years if the original account owner passed away before their required minimum distribution age.
- The trust may pay significantly higher taxes on distributions due to compressed trust tax brackets.
Downside: Non-see-through trusts do not provide tax deferral benefits, often resulting in a large tax burden.
Conduit vs. Accumulation See-Through Trusts (and the 10-Year Rule)
If a trust qualifies as a see-through trust, the next distinction is whether it is a conduit trust or an accumulation trust. However, it’s essential to understand how the 10-year rule (which applies to non-spouse beneficiaries, including children) interacts with these trust types.
Key Point about the 10-Year Rule: For non-spouse beneficiaries, the SECURE Act generally requires the entire retirement account balance to be distributed within 10 years of the account owner’s death. There are no Required Minimum Distributions (RMDs) during this 10-year period. The trustee has discretion over when and how much to withdraw, as long as the account is emptied by the end of the 10th year.
Conduit Trust (Pass-Through Treatment)
Even under the 10-year rule, a conduit trust requires that any amount withdrawn from the retirement account be immediately passed through to the beneficiary. The trustee’s discretion is limited—they cannot retain any distributions within the trust.
Pros
Cons
✅ Tax-efficient because withdrawals are taxed at the beneficiary’s personal income tax rate rather than the trust tax rate.
✅ Relatively simple to administer and avoids trust tax complications.
❌ No long-term asset protection because funds are immediately passed to beneficiaries.
❌ No control over how the beneficiary spends the money once received.
Best For:
- Adult beneficiaries who need some oversight but not full asset protection.
- Situations where stretching withdrawals over 10 years is sufficient for tax efficiency.
Accumulation Trust (Retains Withdrawn Funds)
Even under the 10-year rule, an accumulation trust allows the trustee to retain distributions within the trust. The trustee has discretion over when and how much to withdraw from the retirement account (within the 10-year window), and they can decide to hold those funds within the trust instead of immediately distributing them to the beneficiary. Retained funds are taxed at trust tax rates (which are highly compressed, reaching the highest tax bracket quickly).
Pros
Cons
✅ Provides strong asset protection from creditors, divorce settlements, and financial mismanagement.
✅ Allows for controlled distributions over time, even beyond the 10-year withdrawal rule (though the funds are still subject to income tax).
❌ Distributions retained by the trust are taxed at higher trust tax rates.
❌ More complex to administer compared to conduit trusts.
Best For:
- Beneficiaries who need financial protection, such as minor children or those with special needs.
- Families concerned about divorce, creditor issues, or irresponsible spending.
- Situations where the trustee should control long-term distributions and the potential benefits of asset protection outweigh the tax disadvantages of compressed trust tax brackets.
Which Option is Right for You?
| Factor | Direct Beneficiary | Conduit Trust | Accumulation Trust |
| Simplicity | ✅ High | ⚖️ Moderate | ❌ Low |
| Tax Efficiency | ✅ High | ✅ High | ❌ Lower (due to compressed trust tax brackets if funds are retained) |
| Creditor & Divorce Protection | ❌ None | ❌ Limited | ✅ Strong |
| Control Over Distributions | ❌ None | ⚖️ Moderate (Withdrawal amounts must be passed through) | ✅ High |
| Best For… | Responsible adults with simple estates | Oversight needed | Maximum protection, even with tax implications |
Ultimately, the best approach depends on your goals. If simplicity and tax efficiency are most important, naming beneficiaries directly is often the best option. However, if protection from creditors, financial mismanagement, or divorce is a concern, a trust (especially an accumulation trust) may be the better choice.
Would you like help structuring your estate plan to maximize tax efficiency while protecting your assets? Mathews Law can guide you through your retirement and trust planning strategy. When you’re ready, we’re ready. Schedule a time to chat to get started.