Accumulation trust

Which beneficiaries count?

Both beneficiaries with access independent of another beneficiary’s death and residual beneficiaries who could receive undistributed retirement amounts can count, subject to the exclusions below.

These rules concern amounts representing the deceased owner’s retirement plan interest in a qualifying see-through trust. Payments for someone’s benefit count as amounts that person could receive.

The first group includes anyone whose access neither depends on nor waits for another trust beneficiary’s death, unless that other beneficiary predeceased or is treated as having predeceased the owner.

The residual group includes accumulation trust beneficiaries who could receive retirement amounts not distributed to the first group. Delayed access alone does not exclude a residual beneficiary.

A limited exclusion for remote successors

A successor is disregarded if access arises solely because someone in the residual group dies. This exclusion fails if that person predeceased or is treated as having predeceased the owner, or also belongs to the first group.

A separate mandatory distribution exclusion

Another exclusion applies when a first group individual must receive all retirement amounts by the later of the following two deadlines:

• The end of the calendar year following the owner’s death year.
• The end of the calendar year containing the tenth anniversary of that individual’s attainment of majority, which occurs at age 21 for this rule.

A beneficiary whose access depends on that individual dying before full distribution is then disregarded, unless that beneficiary independently belongs to the first group.

How counted beneficiaries affect distributions

With multiple designated beneficiaries, one counted beneficiary lacking eligible designated beneficiary status generally prevents eligible treatment for the account. Exceptions cover the owner’s child below majority at death, an applicable multi-beneficiary trust, and qualifying separate accounts described below.

Eligible status is determined at the owner’s death. Categories include the surviving spouse, the owner’s child below age 21, disabled or chronically ill individuals, and individuals no more than ten years younger than the owner.

Chronic illness requires certification of an indefinite, lengthy inability. The owner’s child ceases to qualify through minority at age 21, after which the remaining interest must be distributed within ten years.

Applicable multi-beneficiary trust

An applicable multi-beneficiary trust can preserve eligible treatment for qualifying disabled or chronically ill beneficiaries even when other beneficiaries lack eligible status. All of these conditions must be met:

• It is a see-through trust with multiple beneficiaries, all of whom are designated beneficiaries, subject to the charitable exception below.
• Its terms identify one or more individuals meeting the regulatory disability or chronic illness definitions who belong to the first counted group.
• No beneficiary outside that qualifying group has any right to the retirement plan interest until every qualifying beneficiary has died.

For this qualification test, a charitable organization described in section 408(d)(8)(B)(i) is treated as a designated beneficiary.

Early termination of a qualifying beneficiary’s trust interest is permitted only if the restriction on everyone else’s rights continues. At the last qualifying beneficiary’s death, the others are treated as added through a trust modification.

Separate accounts and trusts divided at death

Separate treatment of see-through trust beneficiaries’ interests is generally prohibited. The exception requires trust terms mandating immediate division at the owner’s death into separate see-through trusts.

As of death, the original trust must be terminated, with no discretion over allocation of later retirement plan distributions among the separate trusts. Each separate trust must independently satisfy the trust beneficiary and distribution rules.

Administrative delays are permitted if amounts received during the delay are allocated as though division occurred at death.

Separate accounting must assign every distribution to the receiving beneficiary’s account. Before accounts are established, investment gains and losses, contributions, forfeitures, and expenses must be allocated proportionately in a reasonable, consistent manner.

Separate investments may replace proportionate allocation of investment gains and losses if each account receives only the gains and losses attributable to its own assets.

Separate application generally begins after the owner’s death year. If qualifying accounts are established after the end of the following year, later aggregate required distributions are calculated without separate treatment.

That aggregate amount is allocated by each beneficiary’s share of the total remaining balance, and each beneficiary must receive their allocated share. Unless the trust division exception applies, the trust is the payee for the required distribution excise tax.

Life expectancy calculations

When distributions use the multiple designated beneficiary life expectancy calculation, the oldest counted beneficiary generally determines the denominator. For an applicable multi-beneficiary trust meeting the conditions above, only its qualifying disabled or chronically ill beneficiaries determine the oldest beneficiary.

Qualifying separate account treatment described above is another exception. A counted residual beneficiary alongside a surviving spouse also prevents the spouse from being the sole beneficiary for the special spousal commencement rule.

Income retained and income distributed

Taxable income accumulated or held for future distribution can be taxed at the trust level, with the fiduciary paying the tax. This includes taxable income the fiduciary may either distribute or accumulate.

If grantor trust rules treat another person as owning a trust portion, that person accounts for the attributable tax items. An IRA distribution is included in income only to the extent the IRA tax rules require.

For trusts outside subpart B, section 661 allows a deduction for income required to be distributed currently and other amounts properly paid, credited, or required to be distributed during the taxable year.

The deduction cannot exceed distributable net income and excludes amounts attributable to items outside the trust’s gross income.

Under section 662, beneficiaries include income required to be distributed currently, whether distributed or not, subject to the applicable distributable net income limits. Other covered distributions also produce beneficiary inclusion within those limits.

When aggregate distributions exceed distributable net income, inclusion for other distributions is allocated proportionately using distributable net income remaining after currently required income. Included income generally retains its character in the beneficiary’s hands.

Section 663 excludes qualifying specific gifts or bequests, qualifying charitable amounts, and amounts already covered by a preceding year’s distribution deduction.

A qualifying specific gift or bequest must be paid at once or in no more than three installments. A payment available only from income does not qualify.

Two related terms

See-through trust. A trust whose beneficiaries are considered for retirement distribution rules because it is valid under state law, becomes irrevocable by death, has identifiable beneficiaries, and satisfies applicable documentation requirements. IRA custodians need not receive that trust documentation.

Conduit trust. A see-through trust whose terms require all retirement plan distributions it receives to be paid directly to, or for the benefit of, specified beneficiaries.

Common questions