How separate retirement account shares and subtrusts work

The trust must require division at death

Retirement distribution rules generally cannot apply separately to the interests of beneficiaries within one qualifying trust. The exception requires the trust terms to divide it immediately at the owner's death into separate trusts that each qualify for beneficiary look through.

Under this exception, beneficiary identification and distribution rules apply separately to each resulting trust. Merely naming subtrusts does not satisfy the requirements.

Immediate division requires the governing trust to terminate as of death. There must be no discretion over the extent to which retirement distributions after death are allocated among the separate trusts.

Administrative delay in physically dividing and terminating the trust does not itself defeat immediate division. During the delay, amounts received must be allocated as if division occurred at death, and the mandatory division and fixed retirement allocations must still apply.

Each resulting trust must qualify

Each resulting trust must meet all four requirements for looking through a trust to its beneficiaries:

• It is valid under state law, or would be valid except that it has no assets.
• It is irrevocable or becomes irrevocable under its terms at the owner's death.
• Its beneficiaries are identifiable from the trust instrument.
• The applicable trust documentation requirements are satisfied.

For an IRA, the trust documentation need not be provided to the IRA trustee, custodian or issuer.

For a closer review of qualification and specialized trust exceptions, use the trust beneficiary guide in the resources below.

Separate accounts have a deadline

For calendar years after the owner's death, retirement distribution rules apply separately to beneficiary interests held in separate accounts that meet the accounting requirements below, subject to the trust exception above.

Establish qualifying separate accounts by the end of the calendar year following death to avoid the late account rules. These retirement distribution regulations also apply to IRAs, substituting the IRA owner for the employee and subject to IRA specific rules.

If qualifying accounts are established after that deadline, required distributions are not determined independently for subsequent distribution years. For distribution years after the accounting requirements are satisfied, determine the aggregate required distribution without separate account treatment.

Allocate that aggregate amount according to each beneficiary's share of the total remaining account balance. Each beneficiary must receive their allocated required distribution.

The accounting must follow the interests

Allocate every retirement distribution after death to the separate account of the beneficiary receiving it.

For the period before separate accounts are established, allocate all investment gains, losses, contributions, forfeitures and expenses after death proportionately among the accounts in a reasonable and consistent manner.

Instead of proportionately allocating investment gains and losses, separate accounts with separate investments may receive only the gains and losses attributable to their own assets.

Income tax separate shares serve a different purpose

When one trust has multiple beneficiaries with substantially separate and independent shares, Section 663(c) treats those shares as separate trusts solely to determine distributable net income under Sections 661 and 662.

That treatment is not elective and does not make the shares separate trusts for other purposes. Separate retirement distribution treatment requires the division, qualification, timing and accounting conditions described above.

Two related terms

Conduit trust. A conduit trust is a qualifying trust whose terms require retirement plan distributions, upon receipt, to be paid directly to or for the benefit of specified trust beneficiaries.

Accumulation trust. An accumulation trust is a trust that qualifies for beneficiary look through but is not a conduit trust.

A perspective on starting the conversation

The hesitation to discuss estate planning comes up in investor conversations too:

"So I would just encourage all the listeners, if they haven't had a conversation with their estate planning attorney, or they've put off estate planning like most Americans, just 'cause they don't want to think about it"

Common questions