Definitions:

-      Conduit Trusts: Trusts with provisions which require distributions received from traditional retirement accounts (such as a 401(k) or an IRA) to be distributed in the same year to the beneficiary of the trust. 

-    Accumulation Trusts: Trusts with provisions allowing the Trustee to hold distributions from retirement accounts (such as a 401(k) or an IRA), rather than forcing distributions to the beneficiary of the trust immediately or in the same year. 

Context: Distributions of retirement funds from a trust in the same year in which they were received (conduit trusts) allow the calculation of the associated income tax to be based on the beneficiary's income tax rates, but the distributions may lose any creditor protection benefits offered if they were instead held in the trust. Holding retirement distributions in the trust account (accumulation trusts) requires the calculation of the associated income tax to be based on the income tax rate for trusts (typically higher than most individual tax rates); however, the creditor protection benefits offered by the trust will be applied to the associated retirement funds. 

Example:

-      Conduit Trust: Angelo is an adult and inherits a large IRA from his mother via his conduit trust. The principal of the IRA receives the creditor protection offered by his trust, but the required minimum distributions made annually must be distributed to Angelo in the same year as any distribution is made from the IRA. These distributions are taxed at Angelo's individual income tax rate.

-        Accumulation Trust: Martha receives an inherited IRA from her grandfather in an accumulation trust as a minor. The principal of the IRA receives the creditor protection offered by her trust. Under state law she cannot legally receive the required minimum distributions until attaining at least age 18, so the required distributions from the IRA must be held in the trust for her benefit, rather than distributed to her in the year they are received by the trust. The distributions are taxed at the trust income tax rate but maintain the creditor protection benefits offered by the trust. 

Significance: Following the enactment of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), the designation of a trust as either a conduit trust or an accumulation trust may create very substantial income tax ramifications for the distribution of retirement account assets. The SECURE Act significantly limited who can receive a “stretch benefit” in calculating required minimum distributions from retirement accounts, which requires careful drafting of trust terms to ensure beneficiaries receive the benefits of either a conduit or an accumulation trust. Further, consideration should be given to the goals of the trust creator for the beneficiaries, such as creditor protection concerns or tax savings opportunities.