If you've built significant wealth - whether through a business, investments, or decades of disciplined saving - one of the single largest tax events your family will face is often the one you planned for least: the income tax triggered at death on your qualified retirement accounts.

IRAs, 401(k)s, 403(b)s, SEP-IRAs, and similar tax-deferred retirement vehicles do not receive a stepped-up basis at death. Instead, the full fair market value of these accounts is generally treated as income in respect of a decedent (IRD) under IRC § 691. The deferred income tax bill - which may have been accumulating for decades - comes due when the account passes to a beneficiary.

For business owners, this result is especially frustrating. Your corporate structures, entity elections, and operating agreements may have been carefully designed to manage tax exposure during your lifetime - only to have a substantial portion of your retirement savings consumed by income tax at death because the beneficiary designation was never coordinated with a trust structure designed to manage the distribution timeline.

The SECURE Act and the End of the Stretch IRA

Understanding the current planning landscape requires familiarity with the legislation that fundamentally changed how inherited retirement accounts are taxed.

Before the SECURE Act

Prior to 2020, a designated beneficiary of an inherited IRA could "stretch" required minimum distributions over his or her own life expectancy - potentially decades. A 30-year-old beneficiary inheriting a $2 million IRA could take small annual distributions over a 50+ year period, allowing the bulk of the account to continue growing tax-deferred. This was the foundation of multi-generational retirement wealth transfer planning.

The SECURE Act of 2019

The Setting Every Community Up for Retirement Enhancement Act, enacted as Division O of the Further Consolidated Appropriations Act, 2020 (Pub. L. 116-94), signed December 20, 2019, eliminated the stretch IRA for most non-spouse beneficiaries. In its place, the Act imposed a mandatory 10-year distribution rule.

Under IRC § 401(a)(9)(H), as amended, the entire inherited retirement account must be fully distributed by December 31 of the tenth calendar year following the year of the account owner's death. The practical effect: large account balances that could previously be distributed over a lifetime must now be emptied within a decade.

Eligible Designated Beneficiaries: The Narrow Exceptions

The 10-year rule does not apply to all beneficiaries. Under IRC § 401(a)(9)(E)(ii), the following five categories of eligible designated beneficiaries (EDBs) may still use the life-expectancy stretch:

1. Surviving spouse of the account owner
2. Minor children of the account owner - but only until reaching the age of majority, at which point the 10-year clock begins
3. Disabled individuals as defined under IRC § 72(m)(7)
4. Chronically ill individuals as defined under IRC § 7702B(c)(2)
5. Individuals not more than 10 years younger than the deceased account owner

For all other designated beneficiaries - including virtually all adult children and grandchildren - the 10-year rule applies without exception. This is the category that encompasses the vast majority of inherited retirement account situations.

SECURE 2.0 and IRS Guidance

The SECURE 2.0 Act of 2022 (Division T of the Consolidated Appropriations Act, 2023; Pub. L. 117-328) further modified the RMD landscape by increasing the RMD beginning age to 73 (effective 2023) and 75 (effective 2033).

Critically, the IRS issued proposed regulations in February 2022 (87 Fed. Reg. 10504) interpreting the 10-year rule with a significant additional requirement: if the original account owner had already begun taking RMDs before death, the non-eligible designated beneficiary must take annual distributions within the 10-year window - not merely empty the account by year ten.

Why the 10-Year Rule Creates a Tax Crisis

The mathematics are straightforward and unforgiving. When a large retirement account - $1 million, $2 million, or more - must be distributed as taxable ordinary income within 10 years, the beneficiary often has no choice but to recognize hundreds of thousands of dollars of income in years when they are already in a high tax bracket.

These figures assume combined federal and state marginal rates in the range of 40% or higher - a reasonable assumption for beneficiaries with their own professional income. The actual loss depends on the beneficiary's tax bracket, state of residence, and timing of distributions.

The Conduit Trust: Structure and Legal Basis

A Conduit Trust is a trust structure that qualifies as a designated beneficiary under the Treasury Regulations, allowing the trust to be named as the retirement account beneficiary while preserving the beneficiary's applicable distribution period - whether the 10-year rule or, for eligible designated beneficiaries, the life-expectancy stretch.

The "See-Through" Trust Requirements

Under Treas. Reg. § 1.401(a)(9)-4(f), a trust qualifies as a "see-through" trust - meaning the IRS will look through the trust to the individual trust beneficiaries for purposes of the distribution rules - if four requirements are met:

1. The trust is valid under state law, or would be but for the fact that there is no corpus
2. The trust is irrevocable, or by its terms becomes irrevocable upon the death of the account owner
3. The beneficiaries of the trust are identifiable from the trust instrument
4. Certain required trust documentation has been provided to the plan administrator or IRA custodian by October 31 of the year following the year of death

Conduit Trust vs. Accumulation Trust

The Treasury Regulations recognize two types of qualifying see-through trusts, and the distinction matters enormously for both tax treatment and estate planning flexibility:

A properly drafted Conduit Trust provides the greatest certainty of qualifying treatment. By requiring immediate pass-through of retirement account distributions, only the conduit beneficiary is counted - avoiding the complex and sometimes adverse look-through analysis required for accumulation trusts. This certainty is often the decisive advantage.

Strategic Advantages of the Conduit Trust

Even within the 10-year framework imposed by the SECURE Act, a well-designed Conduit Trust provides meaningful planning advantages that are not available when a retirement account is left outright to a beneficiary:

• Tax-deferred growth during the deferral period. Where annual RMDs are not required (i.e., the original account owner died before the required beginning date), no distributions need to be taken in years one through nine. The inherited account continues to grow tax-deferred during this window - a significant advantage over immediate liquidation.
• Strategic timing of withdrawals. The trustee can time distributions to coincide with years when the beneficiary is in a lower income tax bracket - between jobs, during a sabbatical, in early retirement, or in a year with offsetting losses or deductions - minimizing the effective tax rate on each withdrawal.
• Professional investment management. The retirement account remains intact and professionally managed during the deferral period, rather than being liquidated and distributed outright to a beneficiary who may lack investment experience or the discipline to preserve the inheritance.
• Creditor protection. While distributions from a conduit trust must pass through to the beneficiary, the undistributed account balance remains within the trust structure and is generally not reachable by the beneficiary's creditors - including in the event of a lawsuit, judgment, or bankruptcy proceeding.
• Divorce protection. Trust assets are not commingled with the beneficiary's marital property and are generally excluded from equitable distribution in a divorce, provided the trust is properly structured and distributions are kept separate.
• Protection from financial inexperience or undue influence. For beneficiaries who are young adults, financially unsophisticated, or vulnerable to outside influence, the trust structure ensures distributions are managed by a responsible trustee rather than placed directly in the beneficiary's hands.
• Coordination with broader estate plan. The Conduit Trust can be integrated with the client's revocable trust, irrevocable trust, business succession plan, and insurance arrangements - creating a cohesive wealth transfer strategy rather than a patchwork of uncoordinated beneficiary designations.

Who Should Consider Conduit Trust Planning

Common Errors That Undermine the Strategy

Conduit Trust planning is technical. The following errors can permanently compromise the structure's effectiveness - and most cannot be corrected after the account owner's death:

1. Failing to update beneficiary designations. The retirement account beneficiary designation must name the trust - not the individual. If the designation still names a person directly, the trust provisions are irrelevant.
2. Drafting a trust that does not satisfy the see-through requirements. Missing any of the four regulatory requirements under Treas. Reg. § 1.401(a)(9)-4(f) can cause the trust to fail to qualify, resulting in accelerated distribution requirements.
3. Including non-designated beneficiaries in an accumulation trust. If a charity, estate, or other non-individual is a potential beneficiary of an accumulation trust, the trust loses designated beneficiary status entirely.
4. Failing to provide trust documentation to the plan administrator. The regulations require that a copy of the trust instrument (or a certified list of beneficiaries) be provided to the plan administrator by October 31 of the year following death.
5. Not coordinating across multiple accounts. A client with three IRAs, a 401(k), and a SEP-IRA needs each account's beneficiary designation to be reviewed and coordinated with the trust.
6. Relying on generic trust language. Boilerplate trust provisions drafted before the SECURE Act may not contain the specific conduit language required to achieve pass-through treatment under current regulations.

The Private Firm Advantage

At The Private Firm, retirement account planning is not an add-on to a standard estate plan. It is a core discipline - one that our attorneys practice daily for business owners, executives, and high-net-worth families across Michigan and beyond.

Our team includes attorneys with deep experience in federal tax law, trust design, business succession, and multi-generational wealth transfer. We work alongside your CPA, financial advisor, and investment team - not in a silo - to ensure every element of the plan is coordinated and technically sound.

What We Do for Clients

• Design Conduit Trusts that satisfy all four requirements of Treas. Reg. § 1.401(a)(9)-4(f) and are drafted to work within the SECURE Act's 10-year framework
• Review and update beneficiary designations across all retirement accounts to ensure coordination with the trust structure
• Analyze whether a conduit trust, accumulation trust, or hybrid approach is most appropriate for the client's specific family and tax circumstances
• Structure trusts for eligible designated beneficiaries - including disabled and chronically ill individuals - to preserve the life-expectancy stretch where available
• Coordinate trust design with the client's business succession plan, corporate structure, and insurance arrangements
• Model distribution scenarios with the client's CPA and financial advisor to optimize after-tax outcomes across a range of assumptions
• Update and modernize estate plans drafted before the SECURE Act that may no longer achieve the client's goals under current law