JOURNAL OF RETIREMENT PLANNING 31

May June 2007

2007 E.P. Morrow
Edwin P. Morrow III, J.D., LL.M., is VP, Regional Trust
and Estate Planning Consultant of Key Private Bank, for Day-
ton, Cincinnati and Columbus, Ohio. He can be reached at
Edwin_P_Morrow@keybank.com or 937-422-8330.
Contrasting Conduit Trusts,
Accumulation Trusts and
Trusteed IRAs

By Edwin P. Morrow, III

Ed Morrow contrasts conduit trusts, accumulation trusts
and trusteed IRAs emphasizing the advantages of each
planning method and explaining that one solution cannot be
assumed to be the best strategy for every situation.
E
xperienced estate planning practitioners know
that the stretch IRA promise is often decep-
tive, if not an outright lie. Beneciaries of IRA
or retirement plan assets can and do withdraw more
than the minimum required distribution (MRD).
Experienced practitioners have traditionally used
separate trusts as a beneciary to alleviate this con-
cernto keep funds in the family bloodline, ensure
maximum tax deferral and provide asset protection
benets to the heirs.
However, the federal tax rules regarding such
use are often unclear and, when clear, can still be
problematic. This paper will compare and contrast
the three main trust options available when protec-
tion of the IRA and retirement assets is paramount:
drafting a trust as a conduit trust, drafting a trust as
an accumulation trust, or drafting a trusteed IRA
beneciary designation that has many traditional trust
features built into it.
This article assumes the practitioner has a good
working knowledge of IRA minimum distribution
rules, understands the reality of beneciary with-
drawal habits, the advantage of tax deferral and the
importance of asset protection. In addition, this paper
assumes the practitioner knows the basic differences
between a conduit trust and an accumulation trust
1

and when it matters. It also assumes an IRA large
enough to justify such planning.
First there will be a brief introduction to the trusteed
IRA, which may not be well known to many practi-
tioners. Second, the article will compare and discuss
the advantages and disadvantages of this method
versus a conduit trust. The third section will compare
and discuss the advantages and disadvantages of this
method contrasted with an accumulation trust. Much
of this section will simultaneously compare conduit
and accumulation trusts.
Some points in this article will assume that there is a
master testamentary or living trust named as opposed
to a specially drafted trust designed to hold only retire-
ment benets. The pros and cons of this latter practice
will be the subject of a subsequent article.
The Trusteed IRA
(IRT) Alternative
What is a trusteed IRA?
Many people are unaware that there are two legal
forms of Individual Retirement Accounts (IRAs): a
custodial IRA under Code Sec. 408(h) (more com-
mon) or a trusteed IRA under Code Sec. 408(a)
(rarer). Natalie Choate, probably the nations pre-
eminent author in this area, refers to these as IRCAs
(custodial IRAs) and IRTs (trusteed IRAs) when dif-
ferentiation is needed
2
. This outline will use IRT/IRCA
32

2007 CCH. All Rights Reserved.

Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
when differentiation is needed, even though both
are equally IRAs.
For the beginning investor, the IRCA is usually the
cheaper and better choice. Historically most IRAs
have been opened as custodial accounts because
companies do not want greater legal duties or the ad-
ditional burden of qualication under state or federal
law as a trust company and the attendant additional
regulatory scrutiny that this brings.
Difference between a custodial IRA
(IRCA) and trusteed IRA (IRT)
Under Code Sec. 408, there is no income tax dif-
ference whatsoever between the two forms of IRA.
While an IRA owner is living, the minor state law
differences in the form are unlikely to ever surface,
since most litigation surrounding IRAs pertains to the
tax treatment and not the form of the agreement
3
.
Even after an IRA owners
death, many banks and
trust companies simply
copy the beneciary des-
ignation forms and options
available to custodial IRAs
for their IRT, offering no
advantages whatsoever.
However, with a more advanced IRA provider,
there can be tremendous estate planning advantages
to a trusteed IRA after the owners death if the IRA
trustee is exible and the owner opts for more robust
beneciary designation planning. A trusteed IRA can
combine many of the estate and asset protection
planning advantages of a trust while ensuring the
simplicity, compliance and income tax benets of an
ordinary IRA. In essence, it can create a conduit trust
without the complexities of a separate instrument.
Flexibility of Trusteed IRAs
How much exibility you have depends on the IRA
provider. Some companies have long, complicated
forms with a few boxes to check for different options.
Others may expect an attorney to draft one from
scratch. KeyBanks forms strike a balance by having a
simple Beneciary Designation Form with a separate
Attorney Forms Disk given to counsel for examples
of additional options for exibility.
In theory, payout options for a trusteed IRA can be
customized in ways similar to a conduit trust, provided
that the strictures of the IRA rules are complied with.
Obviously some customizations would be inappropri-
ate and rejected by the trustee, such as provisions for
an individual co-trustee or investment in insurance.
But the most common distribution provisions are prob-
ably acceptable: an owner can mandate that only the
MRDs be paid to a beneciary until they reach age 40,
after which point there are no longer any restrictions,
or that only the MRDs be paid out unless additional
distributions are needed for the ubiquitous health,
education and support. An owner may also limit the
ability of a beneciary to name another beneciary,
thus keeping funds in the family bloodline. The rest of
this article will focus on the planning opportunities,
advantages and limitations of this and other IRA and
trust planning strategies.
Advantages of an IRT over a
Separate Conduit Trust
In many ways, a well-drafted IRT beneciary des-
ignation can offer the exact same advantages of a
conduit trust as a ben-
eficiary of an IRA, but
with less complexity and
uncertainty. An IRT offers
these advantages over a
conduit trust:
1. Easier and less-expen-
sive tax accounting. There
is not a separate 1099-R going to a trust (and/or
subtrusts) and then Forms 1041 led and K-1s
going out to the beneciary. There is much less
accounting complexity.
2. Less chance that a pecuniary share division in a
master living trust will inadvertently trigger the
entire IRD built up in the IRA upon funding the
subtrust or terminating the trust. This is a clear
and present danger for many trusts
4
.
3. Less chance of a negligent trustee improperly
administering the income distributions from the
conduit trust and botching the qualication as
a designated beneciary. Prior tax court cases
have disqualied charitable trusts ab initio where
the trustee later failed to properly administer the
trust (e.g. failing to timely pay the income)
5
. One
recent tax court case disregarded an improperly
administered bypass trust
6
. It would not be far-
fetched to imagine the same disqualication as
a designated beneciary if the trustee failed to
properly administer a conduit trust by immedi-
ately distributing all IRA distributions, especially
if the trustee and beneciary were one and the
same. This is no small danger. Many attorneys
do not have ongoing contact with trustees after
Under Code Sec. 408, there is no
income tax difference whatsoever
between the two forms of IRA.
JOURNAL OF RETIREMENT PLANNING 33
May June 2007
the initial administration of the estate and many
tax preparers do not read the ne print of the
trust (honestly, how likely is it that a tax preparer
knows what a conduit trust is?). Thus, nonprofes-
sional trustees are very likely to overlook this
requirement, especially if the trustee and ben-
eciaries are one and the same.
4. Less chance of a trapping distribution where the
funds are inadvertently left in the trust or the 65
day election is not properly made so that funds
are left taxable in the trust reaching the maximum
tax rate after only $10k or so of income.
5. Easier for beneciary to understand common,
standard 1099-R versus 1041 and K-1.
6. Easier for attorney to draft or amend other wills/
trusts without having to worry about all of the
changing designated beneciary rules and veri-
fying their effect on spendthrift clauses, powers
of appointment, GST and marital divisions, tax
clauses, etc.
7. Less chance for the trustee to botch see-through
trust status by failing the documentation require-
ment.
7
A trustee must timely provide a copy of
the trust or qualifying documentation to the IRA
custodian/trustee. With a trusteed IRA, the trustee
already has the IRA trust document. A conduit
trust trustee would be wise to comply with this
well ahead of time in case the IRA custodian/
trustee rejects the attempted documentation
(especially when the entire trust is not sent).
8. Danger that the IRA provider may reject an
incomplete summary description. When the
entire conduit trust document is not sent to
the IRA custodian/trustee, a trustee may try to
send appropriate certication allowed under
the Regs. A conduit trust trustee would be
wise to comply with this well ahead of time
in case the IRA custodian/trustee rejects the
initial attempted documentation. Better yet
they should have their tax counsel do so. Some
CPAs/attorneys may also worry about Circular
230 and whether their certication of the trust
as compliant with the see through trust rules is
now a covered legal opinion.
9. Danger that the IRA custodian/trustee does not
want the full trust. When the entire conduit trust
document is sent to the IRA custodian/trustee, the
custodian may still want the summary (so that it
does not have the burden of interpretation). Or,
it may come to a different conclusion as to des-
ignated beneciary see-through trust status than
the conduit trustee and beneciaries. If they see
the law as unclear, might they require a PLR or
indemnication from the conduit trustee to cover
their liability?
10. Easier (and less risky) for trustee to administer
after death because of fewer chances to com-
mit IRA titling gaffes. This is no small risk. A
non-professional trustee dealing with an outside,
high-volume discount IRA provider may very
well mistitle such an account. Form, to the IRS
in this instance, often outweighs good intentions.
See LTR 200513032 (Jan. 4, 2005) where the
trustee of the trust that was beneciary of the
IRA was one of the IRA owners children. The
child, with incompetent help from the investment
rm, subsequently botched the titling. The IRS
denied relief and the entire income in the IRA
was triggered. Code Sec. 408(d)(3)(C) prohibits
rollover of any distributions from an inherited
IRA. Innocent mistakes are not tolerated. See
also LTR 200228023.
11. Easier and quicker for beneciaries to get initial
and subsequent MRDs etc after death, due to less
onerous titling and conduit go-between.
12. Less risky for grantor/attorney to use easier-
to-administer pecuniary share formulae in the
master trust as opposed to fractional share for-
mulae needed whenever IRD is payable to such
a separate trust.
13. Easier for executor/trustee to make/determine
QTIP election.
14. Easier to interpret allocation of income/principal
under either the trust instrument or the Uniform
Principal and Income Act (UPIA) when IRAs
are not payable to separate trusts. This includes
confusion and problems allocating trustee fees
between income and principal. Non-professional
trustees hiring inexperienced tax preparers can
easily botch trust accounting with IRAs, leading
to litigation from beneciaries as well as tax
problems. An IRT might eliminate much of this
danger and make tax reporting and explanation
easier to beneciaries.
15. A conduit trust provision might inadvertently
cover qualied retirement plans or even de-
ferred compensation plans and pass those out to
beneciaries as well. This is probably not what
the grantor/owner would want. Thus, a conduit
clause is probably unnecessary or possibly ill-
advised to apply to such assets. It remains to be
seen whether retirement plan administrators will
34

2007 CCH. All Rights Reserved.

take permit application of the non-spousal roll-
over opportunity of the Pension Protection Act
8
,
but it would be wise to make application of such
a clause dependent on the plan administrators
allowance of rollover to an inherited IRA, other-
wise the conduit clause could force out an entire
retirement plan in one year.
16. May allow estate/living trust to be settled or even
terminated sooner if the bulk of the estate is in
the IRA. This may save signicant accounting and
trustee fees.
17. Easier to plan for other, non-stretchable IRD such
as installment sale receipts or deferred compen-
sation that is not eligible for stretch out but that
might easily be caught in a trusts overreaching
clause regarding IRD/IRA assets.
18. Easier for attorneys not to redo/rethink/amend
provisions that may disqualify a trust as a
conduit trust. These
may include spend-
thrift clauses that may
cause forfeiture of
interest
9
, hold-back
clauses, lifetime pow-
ers of appointment,
spray provisions, trust
protector provision, in
terrorem clauses etc. These are all very common
trust provisions.
19. Easier to qualify to use the life expectancy of
each beneciary of the IRT, as opposed to using
the life expectancy of the oldest beneciary of
the conduit trust. Conduit subtrusts will have to
use the life expectancy of the oldest beneciary of
the trust, unless the division is made at the level
of the retirement plan/IRA beneciary designation
form. For example, if the trust splits into three
shares for age 25, 27, 35 year old beneciaries,
the life expectancy of the 35 year old may have
to be used. If there is a 1 percent share for a 75
year old, that beneciarys life expectancy may
have to be used for the entire conduit trust)
10
.
20. Less need to worry about the conduit trust pro-
viding for payment of administrative expenses
and taxes from the trust. A typical living trust
provides for payment of administrative expenses
and taxes from the trust, including a decedents
nal income taxes as well as estate taxes. This
jeopardizes qualifying the trust as a designated
beneciary because the IRS may consider the
estate as a beneciary. One commonly cited
solution is to insert a provision that prohibits the
use of retirement assets for such administrative
expenses and taxes after September 30 of the year
following the year of death (the cut-off date for
determining designated beneciary status). This
is great for qualifying the trust as a designated
beneciary, but not so great for other trust issues
and trustee liability, especially where the bene-
ciaries of the IRA funds are not the same as the
residuary beneciaries of the trust in general. For
example, will beneciaries sue the trustee for not
getting expenses paid from IRAs before that time?
(wouldnt you?). What if litigation or tax disputes
hold up such payment? How would that clause
mesh with the tax apportionment clauses?
21. Less chance that a conduit trust that denes
trust accounting income to include distributions
from retirement plans and then mandates all
net income to be paid
annually may not be
sufcient to qualify as a
Designated Beneficiary
because net income
may be less than the full
amount of distribution
from the IRA (e.g. trust
receives $50,000 MRD,
after expenses determines net income is $48,000
and pays that out pursuant to the trustthe IRS
may not consider this to be a conduit trust be-
cause the full MRD does not go to the individual
purported to be the Designated Beneciary the
K-1 shows only $48,000). Under a strict inter-
pretation of the example in the regulations this
would be the case, but the IRS may not be as ag-
gressive in making such an argument since there
is no dreaded accumulation of IRA assets in the
trust under such a clause.
22. Less need to worry about a legitimate or even
frivolous will or trust contest disqualifying a
conduit trust as beneciary because the bene-
ciary is not identied by September 30 of the
year after death. This is even more problematic
with a testamentary conduit trust created by Will.
It would not be uncommon for such litigation to
extend past this date, and, while a disgruntled
party can also contest an IRA beneciary desig-
nation, such litigation is generally less common
than will or trust contests.
23. Less need to worry about a Code Sec. 645 scal
year election (Form 8855) with the estate affect-
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
Conduit trusts named as a
beneciary still have to use the
life expectancy of the oldest
beneciary as the measuring life.
JOURNAL OF RETIREMENT PLANNING 35
May June 2007
ing or somehow disqualifying a separate conduit
trust. While the IRS has ruled that such an elec-
tion does not make a trust an estate for purposes
of designated beneciary
11
, it has not ruled on its
effect on accounting for conduit trusts. Ideally, the
conduit trust should be a subtrust with a separate
EIN from the administrative trust combined with
the estate and not be eligible to use a scal year.
However, it would not be odd or unusual for an
inexperienced trustee/tax preparer to think dif-
ferently and use a scal year with such election
for an attempted conduit trust in order to defer
the taxes another year.
24. Less need to worry about what the IRS means
by immediate distribution (the language from
the example in the Reg) of IRA funds from the
conduit trust. Is 30 days fast enough? 180 days?
Within the year? With all deliberate speed? Can
a trustee wait until February of the following
year and make the 65 day election? No one
really knows.
25. Less chance at double dipping for trustee and
investment fee expenses. For instance, a con-
duit trust may be paying load fees or wrap fees
for the IRA investment management of 1 percent
or more, plus the trustees fee of 1 percent or
more. The IRT would only have one fee, which
may be less than half the fees for a conduit trust
and IRA.
26. Less chance that a client can amend the trust
pro se and disqualify the trust for DB status.
Every attorney has run across a client that tried
to do a simple trust amendment themselves.
Conduit trust changes typically require a signa-
ture, perhaps witnesses, but very rarely require
review of any professional counsel. IRT changes
would at least have to be approved by the bank
or trust company.
27. Less chance for taxes to inadvertently be ap-
portioned to the IRA.
28. Less chance of an individual conduit trust
trustee changing citizenship or residence to
another country, which may cause the trust to
be treated as a foreign trust under Code Sec.
7701(a)(31)(B) and Code Sec. 679. This would
dramatically complicate trust compliance and
could even trigger additional income taxation
under Code Sec. 684. An individual who is
trustee and resident of another country may also
subject the conduit trust to that foreign countrys
income taxes. This is not possible with an IRT.
29. Less chance of an individual conduit trust trustee
(or a spouse, friend, employee, etc) embezzling
money from the IRA. Since most trusts do not
require a bond to be posted, this generally means
that beneciaries often have no practical recourse
against embezzling individual trustees. Such
is not the case for an IRT trustee with multiple
levels of internal and OCC oversight worth tens
or hundreds of billions of dollars.
30. Less chance for a joint trust between husband
and wife being considered revocable by the sur-
viving spouse after the rst spouses death and
thus disqualifying as a Designated Beneciary un-
der the minimum see through trust requirements
of Reg. 1.401(a)(9)-4, A-5. The IRS has allowed
fully revocable grantor trusts to be considered as
beneciaries, so this is probably not a big issue,
but joint trusts can still be confusing to administer
post-mortem, especially where the schedules are
never lled out.
31. Less chance of an inadvertent assignment of
IRA to IRA owners trust. An IRA owner might
mistakenly ll out the Schedule A of their trust
or otherwise notify an IRA provider of a change
in ownership as opposed to beneciary status.
Although all IRAs probably prohibit such as-
signment, it may yet affect ownership and have
potentially devastating results. See the Stephen-
son case discussed in endnote 3.
32. Easier to execute and qualify disclaimers with
an IRT. Using a conduit trust as primary ben-
eciary complicates disclaimers in that it may
not be legal under state law or the trust instru-
ment for a trustee to make a disclaimer. Even
if it is permitted, it may be dangerous to do
so because of duciary duties to both primary
and remainder or more remote beneciaries.
Disclaimers are also complicated in that the
disclaimant cannot have accepted any benets,
and, other than spouses, the disclaimant cannot
retain any benets afterwards. Thus, if a conduit
trustee disclaims in favor of say, the children as
contingent beneciaries, the disclaimer may not
be qualied because the children, through the
trust as equitable owners, may be deemed to be
de facto disclaimants yet are still attempting to
accept benetsa denite prohibition for non-
spousal beneciaries. Note that this may not be
just a gift tax problem; if the disclaimer is not
qualied, the IRS may also see this as a transfer
that triggers IRD for income tax purposes. For
36

2007 CCH. All Rights Reserved.

many families, this would be a much worse tax
disaster than imputation of a gift.
33. Easier to draft limited/general powers of ap-
pointment. Also, it is easier and more certain for
a beneciary to execute/trigger, since it can be
done through simple beneciary designation in
an IRT rather than through a probated will as is
often required for trust POAs.
34. A conduit clause that appears to qualify, such
as pay at least the required minimum distribu-
tions to the beneciary, may not, because the
trustee can accumulate greater than the MRDs
in the trust, which may disqualify the trust as a
designated beneciary.
35. Having the IRT as a body of assets separate from
other non-IRD trust assets makes the allocation
of GST exemption much easier. In small estates,
the IRT will have GST allocated, but for larger
estates it is usually more advantageous to have
GST allocated to non-IRD, non-wasting assets.
Thus, with the exception of Roth IRTs, GST should
usually be allocated to non-IRA assets. This be-
comes more complicated, if not impossible, to
accomplish with a conduit trust holding IRA and
non-IRA assets both, which may lead to wasted
GST exemption or even GST taxation.
36. Easier to make amendments/restatements.
When you revisit a 30 page conduit trust many
years after the drafting, there is a strong likeli-
hood that 1) you or your rm did not draft the
original trust; 2) your templates have changed
so that you barely recognize the trust or 3) you
do not remember all the client-specic clauses
and provisions that are buried in the trust. This
often requires a more extensive reading of the
trust and often a full restatement. By contrast, an
attorney will often draft the IRT with as little as
a one page of customization, since many of the
important clauses are either in the IRT prototype
or the beneciary designation form. This allows
for a much quicker assessment and change of the
clients wishes within the IRT.
37. An IRA custodian may not agree to make in-kind
transfers of inherited IRAs. Therefore in an IRT
it is easier to deal with the situation when the
rst beneciary dies and secondary beneciaries
inherit. An example is when the IRA goes to the
spouse with restrictions, then to the two children
equally outright. The spouse dies 2 years later.
With an IRT, the two children step in without
delay. With a Conduit Trust, the trustee would
have to take an extra step of making an in-kind
transfer of the IRA to the children (or possibly to
subtrusts for the children). Many custodians are
very difcult and unreasonable to deal with in
making such transfers, even to the point of requir-
ing opinion of counsel or private letter rulings or
unnecessarily issuing 1099-Rs that may lead to
more income tax compliance hassles with the
IRS. While one can get around this by making a
plan-to-plan transfer to a more reasonable IRA
provider, it can still be a hassle and expense
12
.
38. Similar to the point above, an IRT increases the
likelihood that the planning will survive later
actions by another attorney or advisor who does
not understand or appreciate the complexities
of estate planning with IRAs. Despite what one
hopes, clients move or think they can nd a
cheaper attorney to do a simple amendment and
do not always go back to the original drafter (who
may even be retired). Attorneys routinely revoke,
restate or amend old trusts, but would take more
care in doing so with an IRT, and many non-spe-
cialist attorneys forego responsibility for funding
of the trust anyway.
39. An IRT allows the Will and/or Living Trust to be
simpler and less confusing to the client. Explain-
ing the documents is easier. This is especially true
for the engineers and other clients who insist on
understanding every word and paragraph of a
trust. While it may not seem logical, every attor-
ney has had clients (OKIll pick on engineers
again) who will go through every last clause of
a trust but would never think of reading through
their IRA prototype, term insurance contract or
other nancial documents.
40. An IRT will never have tracing issues. It may
very well be that the IRS does not care that funds
from a conduit trust come from other sources
than the IRA and are yet counted as IRA distri-
butions. Generally, duciary accounting under
trust income tax rules under Subchapter J and
concepts of DNI do not trace where assets come
from. However, a strict reading of the Conduit
trust regulation example may easily be construed
to require this for purposes of the designated
beneciary safe harbor. For example, conduit
trust trustee gets $50,000 in income from other
sources, pays out $30,000 to the beneciary, and
then gets a $40,000 MRD IRA distribution. Does
the conduit trust trustee have to strictly follow
the safe harbor by immediately distributing the
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
JOURNAL OF RETIREMENT PLANNING 37
May June 2007
$40,000 MRD, or can he satisfy the requirement
with only $10,000? It may depend on the nature
of the $30,000. Following general Subchapter J
principles, the latter should be acceptable as long
as the K-1 indicates at least $40,000 of ordinary
income passing to the beneciary. But IRA DB
rules need not follow Subchapter J or any other
income tax principles (or common sense). At the
very least, this is yet another question mark that
makes the IRT a cleaner choice.
41. An IRT may provide better asset protection to
a beneciary than a conduit trust (note that if
the IRT has an ordinary beneciary designa-
tion like an IRCA the opposite would be true).
One would instinctively think they would be
identical. Take, for example, a beneciary who
inherits $1 million, causes an accident, and has
a $1 million judgment
entered against him,
which is not covered
by insurance. A judg-
ment creditor will
seek to attach the 1
million dollar IRA.
Both the conduit trust
and the IRT have one level of identical protec-
tion in that the spendthrift clause under most
state laws should protect the corpus. In many
states, such as those passing the Uniform Trust
Code, even the mandatory income stream can-
not be attached
13
, which allows a trustee to pay
bills and expenses for the benet of the ben-
eciary to keep it from creditors. However, the
IRT may also be additionally protected under
the beneciarys state IRA creditor protection
exemption. This is probably not true for the
conduit trust itself, which would probably not
qualify for such exemptions. This may make a
difference in states that do allow attachment of
a mandatory payment or if the judgment creditor
has preferential status that can in some states get
around the traditional spendthrift protections.
Such may be the case for spousal, child support
or intentional tort claims.
42. Planning with signicant Roth IRAs is easier, in
that there is a danger in one common conduit
trust of having completely inappropriate language
and administration for the two completely dif-
ferent tax animals. Having an IRT and Roth IRT
separate from the master trust makes it easier to
use differing powers of appointment, GST and
discretionary distribution language that is clearly
called for in such situations.
43. An IRT may have less chance of spousal elective
shares or community property rights negatively
affecting the designated beneciary status when
non-spousal beneciaries are named primary
beneciaries. Generally, an IRT beneciary des-
ignation form will provide a chance for a spouse
to waive any such rights. However, in some
circumstances a spouse may have rights against
a conduit or accumulation trust still outstand-
ing as of September 30 of the year after death.
If the estate is settled reasonably quickly, this is
not an issue. But what if such rights are still in
play as of that date? Is the trust to be considered
irrevocable? Are the beneciaries truly identi-
able as required by Reg. 1.401(a)(9)-4? If they
are identiable, must the
spouses life expectancy
also be considered? Either
way would be a tax disas-
ter. No cases address these
possibilities. But some in-
dication as to how the IRS
sees this may be seen at
Rev. Proc. 2005-24, which purports to disqualify
charitable deductions when such elective shares
are in play.
14

44. An IRT is unlikely to have trust protector clauses,
incentive/disincentive clauses, in terrorem
clauses, etc. that may call into question whether
the beneciaries are truly identiable accord-
ing to the regulation discussed above.
45. A current rollover from qualied plan to IRT is
less likely to lead to misplaced reliance on the
Pension Protection Acts non-spousal inherited
IRA rollover provision. Under Notice 2007-7, the
IRS has ruled that plan administrators do NOT
have to allow such rollovers, despite the popular
press to the contrary.
46. An IRT has less chance of prohibited transactions
disqualifying the IRA and therefore triggering
the income tax. This is more of a danger when
a sibling, spouse, ancestor or descendant is a
trustee and takes compensation for their services
to a conduit trust. But this is not uncommon. Of
course, an individual conduit trust trustee who is
also an investment advisor getting commissions
would clearly be self-dealing and breaching
duciary duties to the trust, and this may be a
prohibited transaction endangering the IRA. It is
Prohibited transaction risks,
when related parties are trustees,
are often overlooked.
38

2007 CCH. All Rights Reserved.

also unclear whether, if a trustee simply takes a
trustee fee from the trust funded indirectly from
IRA assets, say 1 percent of the IRA assets, this
is also a prohibited transaction. These rules,
enforced by both the IRS and the Department of
Labor, are often confusing and unclear. While
there is no applicable case law and this issue
appears well below the radar screen, one distin-
guished author recently opined It is not certain
if that [IRC 4975(f)(6)] exemption applies to
trustee fees where the trust is the beneciary of an
IRA and the trustee is a relative of the IRA creator
and also a relative of the trust beneciary, but
that also might be a prohibited transaction.
15
If
the IRS or DOL ever pursued this aggressively it
could mean serious problems for many conduit
and accumulation trusts with family members as
paid duciaries.
47. Should the beneciary designation form need
to be court reformed in the event of incapacity
or post-mortem, it would probably be easier and
quicker to do so with a trusteed IRA than with
a custodial IRA or qualied plan payable to a
separate conduit or accumulation trust. The IRS
has approved this concept in LTR 200616039.
In many states a reformation of a custodial IRA
contract would come under the jurisdiction of the
common pleas rather than the probate court. By
contrast, reforming a trusteed IRA beneciary des-
ignation form would likely come under the dual
jurisdiction of the probate court and common
pleas. This allows a practitioner to use the probate
court, which is more familiar with trusts and is
probably much quicker to reach a decisionan
important factor with disclaimer, estate tax and
IRA beneciary designation date deadlines.
48. Using a master conduit or accumulation trust
may lead to trapped distributions taxed at the
highest brackets when pecuniary gifts are made
from the trust. Assume, for example, that John
Doe has a 2 million dollar estate consisting of
a 1million dollar IRA and 1 million dollars in
real estate and other assets, all funded and pay-
able to the John Doe Trust. The trust makes ve
payments of $100,000 each to several friends,
and the rest in trust for nieces and nephews.
The trustee takes out $500,000 from the IRA to
pay expenses and the pecuniary bequests. The
trust may yet qualify as a designated beneciary
and even as a conduit trust if such payments
are made and settled before the September 30
beneciary designation date, but the trust just
incurred $500,000 of ordinary income, about
$490,000 of which is taxed at the highest pos-
sible income tax rate. There is no DNI deduction
for payments of pecuniary bequests
16
.
49. Possibility of a beneciary making qualied
charitable distributions straight from the IRA.
Currently only for 2007, an IRA owner over 70
can make contributions up to $100,000 directly
to charity from an IRA and have such distributions
count towards their MRD and not be counted as
income. This option is available to inherited IRA
beneciaries as well
17
. Presumably if the see-
through designated beneciary of a trust is over
70 this would also be available. However, this
option is not exactly clear and even though the
IRS should logically permit this, it becomes more
confusing in a conduit trust scenario due to an
additional party involved and possible confusion
on the part of the IRA custodian.
50. Possibility of a hammer clause eviscerating
the IRA. Some conduit trusts may contain what
is called a hammer provision that requires a
trustee to accelerate and gross up distributions
in order to pay the IRAs share of estate and in-
come taxes due when an estate is illiquid
18
. As an
example, assume the estate owes 750 thousand
dollars of estate taxes on illiquid IRA and non-IRA
assets. Such a clause would force the trustee to
withdrawal over 1million dollars of the 1.5 mil-
lion IRA to pay estate taxes and income taxes on
the withdrawal. While this may in some rare cases
be necessary, such a provision does not take into
account an executor/trustees ability to use Code
Sec. 6166, Graegin loans, ILIT loans, or even the
beneciaries ability to pay or loan funds from
their own pockets.
Disadvantages of a Trusteed IRA
versus a Conduit Trust
An IRT does not t every situation. There are many
instances when a separate trust should be named as
beneciary. A conduit trust provides a safe harbor
solution. Here are some factors arguing for a conduit
trust over an IRT:
1. Few banks, trust or investment management
companies currently provide them. These are
typically limited to higher end wealth man-
agement firms. Wealth management trust
departments from the brokerage world often do
not have the years of trust experience to manage
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
JOURNAL OF RETIREMENT PLANNING 39
May June 2007
such a program that requires more due diligence
than a traditional IRA.
2. IRTs have larger minimum account sizes (typi-
cally over 1 million dollars, but some offer them
for as low as $50,000 for qualifying customers).
3. Fees. Do-it-yourself investors picking their own
stocks, bonds and no-load mutual funds may not
see the value in paying for the wrap-like invest-
ment management fee typically associated with
such accounts.
4. Beneciaries after death may have limited op-
portunities for trustee to trustee rollovers and
choosing their own rms for custodial or invest-
ment management of the IRA. Because an IRT
may limit the beneciaries rights in order to
protect the contingent beneciary, only other
sophisticated bank and trust companies will be
willing to take on such an account. While an
IRT can be structured to be self-directed or use
outside nancial advisors, there would still be a
minimum fee for a directed IRT that makes bun-
dling the services together the greater bargain.
5. With an IRT, the bank or trust company could go
out of business. While the assets would probably
still be protected, this would force a client to
nd another rm with similar exibility or use a
conduit trust.
6. Deathbed changes may be more problematic in
that changing a conduit trust at the last minute
can be done easily. Many states even recognize
oral trusts and amendments do not generally
need witnesses, notary or special ling (although
a prudently drafted trust should probably require
more formality). An IRT beneciary designation
form, like most such forms, must comply with
the companys policies and procedures, which
may require receipt and acceptance of the ben-
eciary designation form before death. This is
less of a concern with modern email, internet,
and fax capabilities.
7. A client who is still working may not be able to
rollover qualied plans at his current employer
into an IRT. But sometimes plans will allow in
service distributions for those over 59 . Review
a copy of the Summary Plan Document or Plan
itself to see if this is possible.
8. A client rolling over 403(b) annuity or IRA an-
nuities may face surrender charges and give up
any incidental death benet of the annuity. One
should be careful in drafting the conduit trust
clause regarding non-qualied annuities payable
to a trust, since most companies and practitioners
believe Code Sec. 72 forces such payments to be
paid out within ve years of death (not December
31 of the fth anniversary of death).
9. A conduit trust is much easier to use in consoli-
dating estate planning for various accounts for
those still working and funding employer plans,
due to the restrictions on rollover for currently
funding retirement plans.
10. Even for retirees, there is sometimes an asset
protection reason not to rollover to an IRA during
lifetime and have retirement plans payable to a
conduit trust. For instance, although most states
have state law exemptions for IRAs, the client may
live in a state without comprehensive state law
creditor protection for IRAs. Some states have a
dollar limit, others limit to amounts reasonably
necessary. This rationale for not rolling over
has been obviated somewhat by the recent 2005
Bankruptcy Act (BAPCPA), P.L. 109-8 that grants
unlimited protection in bankruptcy despite state
law exemptions to the contrary for rollover IRAs
and up to 1 million dollars for non-rollover IRAs.
However, invoking this protection for clients in
a minority of states that have restrictive state law
would require ling for bankruptcy.
11. If the client has asset management with one
rm and the IRT through another, there may be
higher investment management fees than if they
were aggregated together at one rm. Wealth
management providers typically have a declining
scale so that the average cost to manage larger
sums is smaller than the cost to manage smaller
accounts. One solution would be to have the
wealth management team for the IRT manage a
clients other investments as well.
12. A conduit trust may have a trust protector clause
that, properly limited in scope, may allow a
conduit trust to convert to an accumulation trust
after death (LTR 200537044). This might provide
some exibility should a drastic situation arise
post mortem. Although a similar clause could
probably be inserted in an IRT to allow decant-
ing MRDs to an accumulation trust in such a
situation, this would be slightly different and
may entail more issues than the aforementioned
private letter ruling. Although the IRS might
ultimately allow such post-mortem planning pro-
viding it is locked down by September 30 of the
year after death, there is not really much authority
for such planning other than LTRs, and with an
40

2007 CCH. All Rights Reserved.

IRT you have the additional hurdle of convincing
the IRA trustee to accept the beneciary designa-
tion form.
Advantages of Trusteed IRAs
over Accumulation Trusts
One should quickly realize that most of the pros and
cons of an IRT versus a conduit trust apply equally to
accumulation trusts as well. Here are some additional
and contrasting features of an IRT (and in most cases,
a conduit trust) to an accumulation trust:
1. More certain tax treatment. Although many
practitioners feel comfortable using accumula-
tion trusts, in many instances they are relying
on private letter rulings to guide them, which
as practitioners are aware, are not citable as
precedent. A recent award-winning article in the
ABAs Probate and Property magazine warned:
Because of the uncertainty in this area of the law,
a private letter ruling should be obtained before
naming such a trust [an accumulation trust] as a
beneciary.
19
Over caut i ous ? As k
whether the attorney has
notied the client about
the dangers of relying on
such rulings and if such
warnings comply with the
requirements of Circular 230? Many attorneys are
afraid to state in writing whether the accumulation
trust they drafted will qualify as a designated ben-
eciary. This in itself should make any reasonable
client nervous.
2. Ability to use standard powers of appoint-
mentthese are very important tools for increased
exibility in trust planning. The most exible
- general powers of appointment, are prohibited.
While accumulation trusts can perhaps use a
carefully drawn limited testamentary power of
appointment, such clauses have to be artfully
drafted and the limitations caused thereby may
contradict the exible provisions the client wants.
For instance, a common limitation for accumula-
tion trusts is to prohibit appointment to anyone
older than the powerholder. Is it fair to allow
daughter #1 to appoint to her husband because he
is younger but not daughter #2 to appoint to her
husband who is older? What if the favorite aunt
happens to be the favored alternate beneciary?
What if the charity is a favored alternate bene-
ciary? Should you have differing limited powers
of appointment clauses over different assets in the
trust? Does your clause apply to qualied retire-
ment plans that may not be permitted by the plan
to rollover into an inherited IRA?
3. Uncertainty of future Private Letter Rulings. Ar-
ticles regarding new accumulation trust private
letter rulings will invariably state that this is-
sue is now resolved, the IRS now allows
It is tempting to conclude so for an issue such
as spousal rollovers that have garnered literally
dozens of favorable rulings. But private letter rul-
ings resolve nothing (except for the taxpayer who
received it, and even then rulings often leave out
many issues)
20
. Private letter rulings can always
be reversed, but more importantly, there is not
even a binding ruling to reverse. Attorneys who
routinely warn taxpayers not to rely on private
letter rulings in other tax areas inexplicably throw
caution to the wind in this area.
4. An IRT or conduit trust allows use of optimal
tax table when the spouse, who is more than 10
years younger, is primary
beneciary. This provision
requires the spouse to be
the sole beneficiary, a
requirement for which an
accumulation trust would
not qualify. Although this
may not be common, when it does occur it not
only affects post-mortem distributions, but it is
one of the few occasions where naming a ben-
eciary affects pre-mortem distributions after the
required beginning date. It is the authors general
nding that clients care more about their taxation
than their childrens, so, even if this is a minor
difference, it is not to be underestimated as to its
importance to a client.
5. An IRT or conduit trust for a spouse ironically may
lead to longer tax deferral and smaller distribu-
tions from the IRA than naming an accumulation
trust for the spouse. This is because of an IRT/con-
duit trust for spouse need not take distributions
until the deceased would have reached 70
and even when MRDs do commence the more
advantageous recalculation tables are used. Thus,
at least for spousal trusts, IRT/conduit trusts are
better for tax deferral of the IRA (though as dis-
cussed below, there are other tax aspects arguing
against this view).
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
Accumulation trusts are
inherently adverse to a clients
charitable inclinations.
JOURNAL OF RETIREMENT PLANNING 41
May June 2007
6. Less expensive attorney fees for drafting and
periodic maintenance through estate planning
reviews necessary to keep up with DB cases
and rulings. Nearly all of the LTRs and cases on
planning with IRAs and trusts since the 2002
regulations have to do with accumulation trusts
rather than conduit trusts or IRTs.
7. Less liability for attorneys and other advisors
due to the fact that the IRT/conduit trust is a
safe harbor. Of course, the accumulation trust
is also nominally supported by a regulation, but
the real parameters are outlined by private letter
rulings that come out several times a year. Does
the attorney incur liability for not informing the
client of the change (or potential change) in law
regarding accumulation trusts and drafting a new
amendment accordingly?
8. Less chance of disgruntled beneciaries suing
the attorney or trustee over the denition and
administration of principal and income distri-
butions. There is little chance for such disputes
and misunderstandings in an IRT/conduit trust.
However, how do you explain to beneciaries
(not to mention their advisors or trustee) the dif-
ferences in denitions of income that become
so complicated in accumulation trusts? Fiduciary
accounting income may have little relation to
MRDs or IRA distributions that beneciaries
commonly understand.
9. IRTs and conduit trusts are much friendlier to
charitable intentions. Accumulation trusts are
inherently adverse to a clients charitable incli-
nations. It is quite common for a client to have
a clause in a trust whereby if no descendants
survive, funds go to a favorite charity. Such a
clause, applied to an accumulation trust, may
destroy the designated beneciary status of a
trust. Because such accumulations could go to
a charity, it must be considered in determining
DB status. An IRT/conduit trust naming a charity
as contingent beneciary comes within the safe
harbor because the contingent beneciaries are
not considered when MRDs cannot be accumu-
lated for their benet.
10. Accumulation trusts may in rare circumstances
incur multiple states income taxation, and can
incur state taxation of the IRA distributions even
where the beneciary lives in a state without
income tax. Assume, for example that a Califor-
nia resident leaves his 2 million dollar IRA in an
accumulation trust. The trust beneciaries are in
Texas and Florida. However, the trust may still be
taxed under California state income tax law. Any
income trapped in the trust is taxed at both federal
and state rates even though the beneciaries are
all living in states without a state income tax. This
may lead to a signicant additional tax that could
easily negate any tax deferral advantages.
11. Accumulation trust trustees can more easily be
confused as to the MRD requirements and this
may lead to substantial income tax penalties
and interest.
12. Accumulation trust trustees can easily miss get-
ting a DNI deduction and incur high income tax
rates through delay in distributing MRDs. They
can easily miss or be confused by the 65-day
election under Code Sec. 663(b).
Disadvantages of IRTs
compared to Accumulation Trusts
Most of the disadvantages of an IRT as compared
to a conduit trust apply equally when contrasted
with an accumulation trust as well. Here are some
that additional and contrasting features of an IRT
(and probably Conduit Trust) compared to an ac-
cumulation trust:
1. Asset protection from creditors. An accumulation
trust can offer better protection over not only the
principal but the MRDs as well. IRTs and conduit
trusts must pay at least the MRD to or for the
benet of the beneciary regardless of creditors,
lawsuit, divorce or other risks. In most states, a
purely discretionary trust with no ascertainable
standards provides the highest asset protection
available. An accumulation trust with such a
standard may even provide protections against
preferred creditors that receive exceptions to the
general spendthrift protections (spouse, children).
This assumes, of course, that the accumulation
trust is purely discretionarymany are not. This
is more of an issue when the beneciary lives in
a state that does not have a broad creditor pro-
tection IRA exemption for inherited IRAs and the
beneciary is not in bankruptcy (which affords
fairly broad IRA protections). All accumulation
trusts are not equalones that establish manda-
tory income payouts, ve and ve powers or
ascertainable standards may have even weaker
asset protection than an IRT in some instances.
2. Asset Protection for beneciaries from themselves.
IRTs and conduit trusts have less protection for
spendthrifts, substance abusers, or other bene-
42

2007 CCH. All Rights Reserved.

ciaries from themselves, even aside from creditor
issues. Beneciaries and their circumstances
change. While pay to or for the benet of
language might give some exibility to manda-
tory MRD payouts in an IRT or conduit trust, an
accumulation trust (properly worded) clearly has
the greatest exibility in this regard.
3. Accumulation trusts can be (but more often are
not) structured to allow spray income or princi-
pal distributions to the next generation. Assuming
that GST is allocated to such a trust, it can have
a primary beneciary (son, for example), with
allowances to spray to others (sons children, for
example). This allows income tax planning and
it also allows gifting without resort to annual
exclusion limitations.
4. Where GST is allocated to the IRA assets, an accu-
mulation trust affords greater GST leverage because
GST exempt funds can be accumulated for the next
generation. An IRT or conduit trust is less advanta-
geous as a GST exempt trust because it is a leaky
trust that may not accumulate beyond the primary
beneciarys lifetime (except in the case of an IRT
or conduit trust with a spouse as sole beneciary
which may use more optimal tables).
5. Where the IRA is allocated to and is a substantial
portion of the B trust, an accumulation trust af-
fords greater leverage. Again, an IRT or a conduit
trust is a leaky trust that is not designed to ac-
cumulate (although a spouse as sole beneciary
can use more optimal tables). It becomes more
porous as the beneciary gets older. The accumu-
lation trust can lead to greater accumulation in
the bypass trust once the spouse is older because
the MRD increases. This is less of a problem or
difference in states such as Ohio that encourage
QTIPable bypass trusts for state estate tax reasons.
It is also less of a difference where the IRA is a
small portion of the bypass.
6. Accumulation trusts have more exibility in tax
and investment planning. For instance, an ac-
cumulation trust trustee might purposely trigger
more income earlier by early IRA withdrawal
for fear of future tax increases or for use in other
investments not permitted in an IRA, such as
insurance or the family business.
7. Accumulation trusts can get a run up in brackets
to soak up the rst $10k or so of income in lower
tax brackets than might be taxed to high income
beneciaries at the maximum rate. This cannot
happen in IRTs or conduit trusts.
8. An accumulation trust ling a Form 1041 may
be able to get an above the line deduction not
subject to the 2 percent haircut for trustee and
investment management fees. This may depend
on the jurisdiction and circuit
22
.
9. Accumulation trusts can be used to keep assets
in trust to help high income beneciaries who
do not need the cash and want to lower their
adjusted gross income (AGI). Keeping it taxed
in trust lowers the beneciaries AGI for AMT,
charitable AGI limitations, itemized deduction
phase-outs, student loan interest deduction phase
outs, oors, Roth conversion limits, or any other
reason whereby a taxpayer wants to keep his AGI
below a certain amount. Conduit trusts and IRTs
cannot help stave off this income.
10. Accumulation trusts are clearly preferred for third-
party created supplemental or special needs trust
situations. Standard conduit trusts and IRTs would
make the MRDs an available resource under Medic-
aid or similar law (although perhaps a conduit trust
that allowed MRDs to be sprayed to beneciaries
at the discretion of the trustee might not cause such
disqualication, but that would force the oldest
beneciarys life expectancy to be used).
11. An accumulation trust may be able to use a situs
to avoid state taxation of the IRA distributions
that are accumulated in the trust. Conduit trusts
and IRTs can never get around state income
taxation if the beneciary resides in a state with
an income tax. An example of this would be an
accumulation trust that uses Delaware, Florida or
another no-income tax state as situs for the trust,
but beneciaries are in California and New York,
states with an income tax. Any income trapped in
the trust may escape state income taxation even
though the beneciaries are all living in states
with an income tax.
12. If the IRS were to change the tax tables to force
accelerated withdrawals in the future, the dis-
tributions to a beneciary of an accumulation
trust would not be affected (although there may
be higher taxation inside the trust). However, if
the IRS changed the rules to force out distribu-
tions faster, IRTs and conduit trusts would have
no recourse but to distribute the required funds
to the beneciary, perhaps faster than a grantor
had intended. Of course, Congress could also
increase the tax rates for non-grantor trusts.
13. In rare instances an individual beneciary of an
IRT/conduit trust may be entitled to a deduction
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
JOURNAL OF RETIREMENT PLANNING 43
May June 2007
Table 1 Comparison of IRA and Trust Estate Planning Options
Obviously individual situations of products/services below will vary widely: for instance, some custodial IRAs do not permit full
stretch out, some trusteed IRAs are so inexible as to be no different than custodial IRAs, some annuity companies do not offer
restricted beneciary options, and, of course, individual trusts vary widely as well and scant guidance is available for qualifying
accumulation trusts. And many clients may opt not to use the maximum protections below. These are generalizations based
on using the maximum capability and exibility of the services. State law and individual plans differ.
(N.B. N. Choate uses IRCA/IRTA abbrev.)
Characteristics:
IRCA Cust. IRA
w/ indiv. as bene
IRTA
Trusteed IRA
indiv. as bene
IRA payable to
Conduit Trust
trust as bene
IRA payable to
Accumul. Trust
trust as bene
During Owners Lifetime
1 Income Tax Deferral During Owners Life yes yes yes yes
2 Optimal Tax Table if Spouse >10 yrs younger yes yes yes no
3 Ability to Customize Bene. Design. Form very limited yes NA NA
4 Ability to pay MRD in incapacity situation no yes NA NA
5 Any IRA permitted Investment Choices yes yes NA NA
6 Steep Surrender Charges to Owner no no NA NA
7 Appropriate for small Asset Level yes no no no
8 High Internal Investment Fees/Expenses no no no no
9 Attorney fees for drafting/review/updating
(of course, depends on amt of customization)
low low medium high
10 Appropriate for QRP while owner working
(unless or until IRA rollover is available)
no no yes yes
After Owners Death
11 Allows Beneciaries to Stretch Out MRDs yes yes yes probably
12 Allows Owner to Restrict Bene to MRDs no yes yes yes
13 Can Restrict Bene to MRDs, but more w Disc no yes yes yes
14 Can Restrict trust so that not even MRDs pd no no no yes
15 Allows Owner to Mandate Contingent Benef
(keep IRA in the bloodline)
no yes yes yes
16 Allows longer inherited spousal tables recalc yes yes yes no
17 Allows special spousal delayed RBD yes yes yes no
18 Uncertainty as to D.B. status of Trust/Bene no no probably not yes
19 Trapping Distribution at highest bracket >10k no no no yes
20 IRA exemptions protect IRA from benes cred
(see state statute, assume not in bankruptcy)
maybe
(not in OH)
maybe
(not in OH)
NA NA
21 Spendthrift protection for IRA from bene cred no yes yes yes
22 Discretionary trust (optimum) protection no no no yes
23 To or for the benet of protection for MRDs?
under UTC, creditors generally cannot attach
no maybe maybe NA
24 Asset Protection Level for Beneciaries low medium-high medium-high maximum
25 Ability to grant LPOA equivalent no yes yes limited
26 Ability to grant GPOA equivalent default yes yes no
27 Ability to Remove IRA from Benef.s Estate no yes yes yes
28 Can name charitable contingent & stretch yes yes yes maybe
29 Can ensure charitable remainder & stretch no yes yes no
30 Ability to separately pay investment mgt
expenses from outside IRA accounts so as to
better grow the IRA
yes yes yes yes
31 Ability to take above the line deduction for
inv. mgt fees, not subject to 67, 68, 2% oor,
no no maybe maybe
32 Possibility of multiple states taxation of IRA
distributions or state taxation even when the
beneciary lives in a state w/o income tax
no no no yes
33 Appropriate for GST non-exempt planning maybe yes yes no
34 Possible Pecuniary funding IRD disaster no no yes yes
Author: Ed Morrow, J.D., LL.M. edwin_p_morrow@keybank.com
44

2007 CCH. All Rights Reserved.

Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs
for federal estate taxes paid under Code Sec.
691(c), yet not be able to take advantage of it
(e.g., those taking standard rather than itemizing
deductions, those affected by Code Sec. 68). In
an accumulation trust, if a beneciary cannot take
the deduction, the IRD can stay in the trust and
the accumulation trust can take the deduction.
Of course, the beneciary may not be too happy
about not getting any money but they still receive
the deduction. Of course, the beneciary may not
be too happy about not getting any income distri-
bution, but the trust can use the deduction and the
beneciary can get the funds in a later year.
Conclusion
Cookie cutter estate planning can easily create di-
sasters for IRA planning. In addition to the above
pros and cons, a practitioner should consider the
following more subjective factors:
the size of the IRA
whether it is ordinary, Roth, or whether conver-
sion is advantageous
the size of the overall estate and whether estate
tax and GST is an issue
the liquidity of the estate (or, rarely, even the
liquidity of the IRA itself)
the age, health, maturity and nancial condition
of the beneciaries
citizenship/residency of proposed successor
trustee
a clients charitable intentions and inclinations
whether there are special needs beneciaries
whether generation skipping is desired
the clients overall distribution scheme
importance of asset protection from outside
creditors
importance of asset protection in light of the
incidence of divorce in families
importance of asset protection from beneciaries
themselves
tax audit risk tolerance
the clients desire for simplicity
Large IRAs require educated counsel, competent
investment advice and competent and exible IRA
providers. This article focuses more on Trusteed IRAs
simply because they are underused and underappre-
ciated (if not completely unknown) by the planning
community. All of the three solutions discussed have
a place and none will t every situation. Planners
lacking vision and energy see this complexity and
throw up their hands in favor of always advising
outright IRA bequests. This author has been to several
meetings with accredited estate planning specialists
who always so advise. But well-advised professionals
will not so easily abandon the tremendous tax and
asset protection benets of trusts simply because it
is complicated.
ENDNOTES
*
Opinions expressed herein those of the
author and not Key Private Bank or CCH a
Wolters Kluwer business.
1
See examples in Reg. 1.401(a)(9)-5 A-7 or
consult the many ne articles on naming
a trust as a beneciary in previous issues
of this Journal. Conduit and accumula-
tion are not terms used by the IRS, but are
nicknames resulting from the two examples
in the Regs that are commonly used in the
estate planning community.
2
Natalie Choate, LIFE AND DEATH PLANNING FOR
RETIREMENT BENEFITS, 6th Ed. (2006), p 288-289,
and THE 170 BEST AND WORST PLANNING IDEAS FOR
YOUR CLIENTS RETIRMENET BENEFITS (6th Ed #2
(2006), p 70.
3
Although, see the strange case in Ohio of
Stephenson v. Stephenson, 163 Ohio App.
109, 2005-Ohio-4358, where a court held
that a custodial IRA owners changed owner-
ship (whether purposefully or inadvertently)
to a living trust by listing it on the Schedule A
of his living trust purporting to transfer assets.
Changing ownership on an IRA may trigger
signicant taxes and penalties. Whether the
IRA in the form of a trust would make a dif-
ference was not addressed by the court, but it
is likely that a trusteed IRAs ownership could
not be changed in such a manner, because
the legal (as opposed to equitable) owner is
not the IRA owner, but the bank as trustee.
Using a trusteed IRA (IRT) might be a protec-
tion against inadvertent changes in ownership
as occurred in the Stephenson case.
4
See the recent IRS Chief Counsel Memo-
randum (CCM) 200644020 (Dec. 15,
2005)though highly respected attorneys
question its broad reasoning, do you want
to be the test case?
5
M.B. Atkinson Est.,CA-11, 2002-2 USTC
60,449, 309 F3d 1290. affing, 115 TC
26, Dec. 53,962, and subsequent enforce-
ment action at Dec. 56,900(M), TC Memo
2007-89 (April 18, 2007). A charitable
remainder trust was held invalid from its
inception because the trustee failed to make
the annuity payments within 105 days from
the end of the term and corpus was later
improperly invaded to pay estate taxes. See
also CCA 2006268026.
6
W. Hester Est., DC WVa., 2007-1 USTC
60,537, Docket No. 5:06-cv-0041 (March
2, 2007)
7
Reg. 1.401(a)(9)-4, A-6
8
Pension Protection Act of 2006, P.L. 109-
280, 824,Code Sec. 402(c)(11); Notice
2007-7, IRB 2007-5, Jan. 10, 2007.
9
There is certainly no problem with a spend-
thrift clause per seall IRAs have them and
it is even a requirement for retirement plans
under Code Sec. 401(a)(13). However, these
merely prohibit assignment and alienation
and do not, as many other trust spendthrift
clauses do, potentially cause a withholding
or even forfeiture of a partys interest more
analogous to an in terrorem clause. All
spendthrift clauses are not the same.
10
Reg. 1.401(a)(9)-4, A-5(c).
11
T.D. 8987, 2002-1 CB 852, 857, May 13,
2002 (Trust as Beneciary).
12
See, Michael Jones, Transferring IRAs, 145
Trusts and Estates No. 4 (April 2006).
13
See Ohio R.C. 5805.05 or UTC 506,
protecting from attachment except when the
trustee has not made the distribution to the
JOURNAL OF RETIREMENT PLANNING 45
May June 2007
beneciary within a reasonable time after
the designated distribution date. Again,
a delay of distribution is generally not a
concern with an IRT, but with a Conduit
Trust (especially an inexperienced trustee),
the issue becomes again, what is immedi-
ate under the Regs, or within a reasonable
time for asset protection purposes?
14
Rev. Proc. 2006-15, 2006-8 IRB 1.
15
See, Seymour Goldberg, THE ADVISORS
GUIDE TO THE RETIREMENT DISTRIBUTION RULES,
Oct. 2006,quoted in Ed Slotts IRA Advisor
Newsletter, April 2007, page 7. See also a
brief discussion in LIFE AND DEATH PLANNING FOR
RETIREMENT BENEFITS, supra note 2 at 434-435.
16
Code Sec. 663(a)
17
Pension Protection Act of 2006, P.L. 109-280,
1201, Code Sec. 408(d)(8). Also see Notice
2007-7, IRB 2007-5, Jan. 10, 2007. at A-37
18
See, Seymour Goldberg Avoid these Major
IRA Trust Mistakes, Ed Slotts IRA Advisor,
June 2006.
19
Keith A. Herman, Coordinating Retirement
Accounts with Estate Planning 101 (What
Every Estate Planner Needs to Know), ABA,
Probate and Property Magazine, January-
February 2006 at 56 ,winner of Best Overall
Article of 2006.
20
Though a LTR might help for purposes of
avoiding negligence or other penalties. Reg.
6662-4(d)(3)
21
See Code Sec. 67(e). Most cases and circuits
have ruled against trustees on this issue, but
see W. J. ONeill Testamentary Trust, CA-6, 994
F2d 302. The U.S. Supreme Court has recently
granted cert in a case in order to resolve the
circuit split: W.L. Rudkin Testamentary Trust,
CA-2, 2006-2 USTC 50,569, 467 F3d 149.
ENDNOTES
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