What Is a Conduit Trust? and Why It Could Break or Protect Your Estate Plan
Why This Question Matters More Than Ever
If an IRA is the crown jewel of a retirement plan, then deciding who inherits it—and how—is one of the most overlooked and misunderstood aspects of estate planning. This is especially true for individuals with significant tax-deferred savings and complex family structures. For years, many were advised to name a conduit trust as the IRA beneficiary to provide structure and protect the next generation from poor financial choices. That advice made sense—until the rules changed.
With the passage of the SECURE Act and its follow-up, SECURE Act 2.0, the entire framework for inherited IRAs has shifted. Now, many conduit trusts that once provided decades of tax deferral and control instead force IRA distributions to be paid out in full within ten years, often with severe tax consequences. Worse yet, the trust may be barred from making distributions in the years leading up to that final lump sum.
This dilemma is especially urgent for families trying to strike the right balance between protecting a surviving spouse, shielding assets for children, and minimizing taxes. Understanding the differences between conduit trusts and accumulation trusts—and how each interacts with evolving retirement laws—is no longer optional. It’s the difference between a plan that preserves wealth and one that unintentionally squanders it.
The Core Problem: You Saved for Decades—Now What?
Decades of disciplined saving, investment returns, and employer contributions have built up a significant IRA or Roth IRA. These retirement assets often become one of the largest line items on a balance sheet—surpassing even taxable accounts or real estate. But when it’s time to build an estate plan, the very structure that helped grow wealth—tax-deferred status—can become a source of confusion and costly mistakes.
Unlike taxable assets like brokerage accounts or real estate, which receive a step-up in basis at death, IRAs and other tax-deferred assets come with embedded income tax obligations. The IRS eventually wants its share—and under current law, beneficiaries typically have only 10 years to distribute and pay tax on the entire account.
Here’s the real issue: most people’s estate plans are written for taxable assets, not retirement accounts. Advisors and attorneys may treat the IRA as just another number in the plan. But naming the wrong kind of trust—or skipping one altogether—can derail everything. A strategy that makes perfect sense for a brokerage account may create an unexpected tax cascade when applied to a traditional IRA.
And Roth IRAs, though tax-free on withdrawal, aren’t immune. The 10-year rule still applies to most non-spouse beneficiaries, limiting growth potential and increasing risk if the wrong structure is used.
This disconnect between how assets are saved and how they’re transferred is the core problem: without intentional planning, tax-deferred wealth may evaporate faster than anyone expected.
What Is a Conduit Trust?
A conduit trust is a specialized type of trust designed to receive retirement account distributions—typically from an IRA—and immediately pass those distributions to a named beneficiary. Unlike other types of trusts, a conduit trust cannot accumulate or retain IRA withdrawals. The trustee is required to distribute all Required Minimum Distributions (RMDs) to the beneficiary each year, without exception.
Think of the conduit trust as a financial pipeline. It doesn’t hold assets for future use. Instead, it channels the IRA distributions straight from the retirement account to the individual. This design used to offer the best of both worlds: some asset protection (since the IRA wasn’t left outright to the beneficiary) and long-term tax deferral, thanks to the ability to stretch RMDs over the beneficiary’s lifetime.
However, with the SECURE Act’s 10-year payout rule, this strategy has dramatically changed. If the IRA owner dies and the trust beneficiary isn’t an Eligible Designated Beneficiary (such as a spouse or disabled individual), there may be no annual RMDs at all—just a single requirement to empty the account by the end of year ten. That means a conduit trust might not distribute anything for nine years, then dump the entire account in year ten, creating massive tax exposure.
In contrast, an accumulation trust allows the trustee to retain distributions inside the trust, offering greater control and protection—but potentially triggering higher taxes at compressed trust tax rates.
This distinction has become increasingly important as planners navigate IRS rules for inherited IRAs and consider how to protect beneficiaries without sacrificing flexibility or triggering unintended tax consequences.
How the SECURE Act and SECURE Act 2.0 Changed the Game
For years, wealthy families and high-income professionals used the Stretch IRA strategy to build multigenerational wealth. By naming a trust or individual as the beneficiary of an IRA, distributions could be “stretched” over the beneficiary’s life expectancy, resulting in small Required Minimum Distributions (RMDs) and decades of tax-deferred or tax-free growth. This worked especially well when a conduit trust was used to ensure the inherited IRA remained under some form of control.
But that strategy was largely dismantled with the passage of the SECURE Act of 2019. The law replaced the lifetime stretch for most non-spouse beneficiaries with a 10-year rule: the entire inherited IRA must be distributed by the end of the 10th year following the account owner’s death. There’s no requirement for annual RMDs during those years—just a final deadline that can lead to a large taxable distribution if not planned carefully.
This change hit conduit trusts especially hard. If the IRA owner dies before their required beginning date (RBD), and the trust only allows distributions of RMDs, there may be no distributions allowed in years 1–9, followed by a mandatory full distribution in year 10. This turns a once-elegant estate planning tool into a tax trap.
SECURE Act 2.0, enacted in late 2022, introduced some helpful but narrow adjustments. Spouses can now elect to be treated as the deceased account owner for RMD purposes, potentially delaying withdrawals and reducing taxes. But for conduit trusts, the core issue remains, most are still subject to the 10-year rule and offer no flexibility to manage the timing or amount of distributions.
The IRS provides detailed guidance on inherited IRA distribution rules and exceptions in Publication 590-B, which confirms the 10-year deadline applies even to trusts that previously qualified for lifetime stretch under pre-2020 law.
Who Should (and Shouldn’t) Use a Conduit Trust
Not all beneficiaries are created equal—and neither are the trusts designed to protect them. In today’s post-SECURE environment, using a conduit trust as the beneficiary of a retirement account can still work, but only in very specific situations.
Who Should Consider a Conduit Trust
Conduit trusts are still a viable strategy for beneficiaries who qualify as Eligible Designated Beneficiaries (EDBs) under the SECURE Act, including:
- A surviving spouse who needs ongoing income and protection from remarriage complications.
- A minor child of the account owner, who can receive life-expectancy payouts until age 21 before the 10-year rule begins.
- A disabled or chronically ill beneficiary, as defined under IRC §401(a)(9)(E)(ii), who can still receive RMDs stretched over their lifetime.
When a conduit trust is drafted exclusively for an EDB, it can preserve the desired structure and stretch treatment while ensuring assets don’t pass outright to a vulnerable beneficiary.
Who Should Avoid a Conduit Trust
In most other cases, conduit trusts are now obsolete or risky. If the beneficiary is an adult child, grandchild, sibling, or other non-EDB, the 10-year rule applies. And if the trust is written to only allow RMDs, there may be no allowable distributions in years 1–9, followed by a tax-heavy lump sum in year 10.
In these situations, an accumulation trust is typically a better fit. Though it comes with more complex drafting requirements and potential tax inefficiencies, it gives trustees the flexibility to retain and manage IRA distributions, offering better protection for spendthrift heirs, blended families, or beneficiaries at risk of lawsuits, divorce, or financial exploitation.
Understanding the distinction in conduit vs. accumulation trust structures is essential for high-net-worth estate plans—especially when retirement accounts represent a large portion of family wealth.
Perfect Outcome: What a Well-Drafted Trust Achieves
The goal of every estate plan is the same: preserve what’s been built, protect who matters most, and pass it on wisely. When a retirement account like an IRA or Roth IRA is involved, that goal requires even more precision. A well-drafted trust—structured correctly for today’s SECURE Act rules—can unlock results that most beneficiaries can’t achieve on their own.
The ideal outcome begins with tax-smart distributions. A properly coordinated trust can take advantage of eligible stretch provisions, spread withdrawals to minimize tax bracket spikes, and, where necessary, delay full payouts until the beneficiary is better prepared. Especially in cases where large IRAs could otherwise cause sudden income tax exposure, trust-based strategies provide a vital layer of control.
But tax planning is just one piece. A sophisticated trust also protects retirement assets from creditors, divorce, and bad decisions. If a beneficiary remarries, files bankruptcy, or gets sued, inherited funds held in trust are often better protected than assets inherited outright.
Trusts also provide for special needs heirs without disrupting eligibility for Medicaid or Supplemental Security Income (SSI), thanks to accumulation strategies and careful language. These provisions preserve quality of life without risking vital public benefits (SSA Resource Rules).
Finally, a trust can resolve tension in blended families—ensuring a surviving spouse is supported, but that children from a previous marriage ultimately inherit. Without this structure, assets left outright to a spouse may never reach the children, especially if the spouse remarries or changes the plan.
In the hands of an experienced planner, a trust is more than a vehicle—it’s a strategic guardrail for keeping wealth where it belongs and relationships intact across generations.
Questions to Ask Before Naming a Trust on Your IRA
Naming a trust as the beneficiary of your IRA can be a smart move—but only if it’s done with precision and purpose. In today’s SECURE 2.0 landscape, the wrong decision can trigger unintended taxes, lost stretch benefits, or the outright failure of your estate plan. Before assigning a conduit trust or any other trust to inherit retirement assets, these key questions must be addressed:
- Is the primary trust beneficiary an EDB?
Under the SECURE Act, only certain individuals—such as spouses, disabled or chronically ill individuals, minor children, or those less than 10 years younger than the IRA owner—qualify as Eligible Designated Beneficiaries (EDBs). If not, the 10-year rule applies, often making a pure conduit trusts a poor fit.
- Does the trust allow flexibility beyond RMDs?
Many older trusts are drafted to permit only RMD distributions—a major problem if there are no RMDs in years 1–9, as is often the case post-SECURE. If the trustee lacks flexibility, a taxable lump sum may be required in year 10.
- Are there any charities, estates, or non-individuals listed as remainder beneficiaries?
If a trust includes non-individual beneficiaries—like a charity or estate—it may be disqualified from stretch treatment altogether, especially if structured as an accumulation trust.
- Would your beneficiary benefit more from asset protection or tax deferral?
If the heir is financially mature, tax deferral may be more valuable. But if the heir faces potential divorce, lawsuits, or instability, asset protection should take precedence—even if it comes at the cost of higher taxes.
- Can the plan administrator accommodate trust planning?
Some IRA custodians impose limits on naming trusts, accepting elections, or implementing SECURE 2.0’s spousal provisions. Coordination is key.
As retirement accounts become central to estate plans, asking these questions upfront ensures your legacy stays intact—and that your IRA works with, not against, your long-term goals.
Your IRA Deserves More Than a Guess
You’ve spent a lifetime building your IRA—one disciplined contribution at a time. But when it comes to naming a trust as the beneficiary, too many families are relying on outdated advice, blind assumptions, or worse—conflicting input from professionals who don’t fully understand each other’s domains.
The result? Misaligned estate plans. Massive tax bills. Children left unprotected. Spouses unintentionally disinherited. Trusts that once promised control now trigger a taxable avalanche in year 10, just when your family needs stability most.
This isn’t a guessing game. A conduit trust might still work in the right situation, but it’s no longer the “safe default.” SECURE Act and SECURE 2.0 changed the rules—permanently. If your estate plan hasn’t changed with them, your IRA could be vulnerable to exactly what you tried to prevent: unnecessary tax, family tension, and loss of legacy.
Your IRA deserves more than a guess. It deserves a plan.
📞 Schedule an initial consultation today to discuss your trust structure and retirement beneficiary designations. Together, we’ll ensure your wealth supports your vision—not just today, but for generations to come.
