• Skip to navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

American Academy of Estate Planning Attorneys

AAEPA, Inc

Find a Member Member's Login
Call Today (800) 846-1555
  • Membership
    • Membership Membership
    • submenu
      • Why Join?
      • Member Requirements
      • Become A Member
      • Meet the Team
  • Estate planning software
  • Education
  • Practice management
    • Practice management Practice Management
    • submenu
      • 11 Essential Systems
      • Coaching
      • Law Firm Marketing
  • Resources
    • Resources Resources
    • submenu
      • Live Training
      • Blog
  • Contact Us

Conduit Or Accumulation Trust

Home » Estate Planning » Conduit Or Accumulation Trust
Conduit

This week I’m sharing a blog on Medicaid from Dave Zumpano, who focuses in Medicaid planning. I’ll be sharing Medicaid blogs from Dave Zumpano monthly in this space.

Now, here’s Dave’s blog:

Blog Author: David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

The question of whether an attorney uses a conduit or accumulation trust in regards to an inherited IRA is a question of simplicity versus protection.  Recently, the U.S. Supreme Court in Clark v. Remeker, ruled an inherited IRA is not “protected” from the reach of creditors.

As practitioners, we can still protect an inherited IRA by ensuring the beneficiary is a trust, not an individual.  They key question when utilizing a trust is whether to make it a conduit trust or an accumulation trust.  What factors should you consider?  If the practitioner wants simple for both himself and the client, a conduit trust is the answer.  Conduit trusts provide that any and all distributions that come into the trust on an annual basis must be distributed out in the same year to the rightful beneficiary.

Therefore, the trust is merely a “conduit” to hold the IRA for the benefit of the beneficiary.  While this provides asset protection of the underlying principal of the IRA, it does not provide any protection of the required distributions from the trust to the beneficiary.

Alternatively, practitioners can elect to provide for an accumulation trust.  In an accumulation trust, the RMD (or other IRA distributions) is distributed from the IRA to the trust, but, the trustee has the option to “hold” the distribution and accumulate it with the principal of the trust.  The major downside to an accumulation trust is if the RMD is held and accumulated, the trust must pay the tax on the income from the IRA and trusts are traditionally taxed at a much higher rate than individuals.

Why would one do this?

If the beneficiary is in the middle of a lawsuit or becomes subject to alimony or other liabilities, any income distributed to the beneficiary would be lost.  So the question becomes what is the bigger loss, a potential twenty-five to forty percent income tax, or a 100 percent loss creditors or other legal obligation.  An accumulation trust can also serve to protect a beneficiary from themselves.  In addition to protecting the income and assets “for” the beneficiary.  A properly drawn accumulation trust also protects the IRA and distributions “from” the beneficiary.  Many of us are aware of individuals with children who inherit IRAs and their first item to purchase is a fancy new sports car that costs $50,000.00. To do this, requires the beneficiary has to withdraw $71,500.00 assuming a 30% tax rate which leaves $50,000.00 to purchase the car that’s worth $40,000.00 when they drive it off the lot.  Great way to turn $71,500.00 into $40,000.00 in a single act!  In cases of spendthrift or other concerns, an accumulation trust provides the greatest option.

Perhaps the greatest advantage of an accumulation trust is you can have the best of both worlds, that is if you choose to distribute all RMD out in the year received to have it operate like a conduit trust.  A conduit trust, however cannot hold money to be protected or distributed later like an accumulation trust.  Accumulation trust also is a better choice if the beneficiary is in the maximum tax bracket, so any accumulation would not create any additional tax loss.  When properly drawn both conduit and accumulation trusts can provide for all of the RMD be calculated on the age of one beneficiary, but the distributions of the RMD can be distributed out to other beneficiaries who are in a lower tax bracket (i.e. the children of the beneficiary).

So determining whether to use a conduit or accumulation trust is deciding whether simple is the goal or ultimate protection is the goal.  It is critical that you properly educate your client so they can advise you of what’s most important.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com

  • Author
  • Recent Posts
Steve Hartnett
Steve Hartnett
Director of Education, American Academy of Estate Planning Attorneys
Steve Hartnett
Latest posts by Steve Hartnett (see all)
  • Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
  • Tax Planning for 2022 - December 28, 2021
  • Donor Advised Funds: Too Good to Be True? - August 10, 2021
SHARE

About Steve Hartnett

Director of Education, American Academy of Estate Planning Attorneys

Primary Sidebar

Subscribe to our blog

Recent Posts

  • How Do I Title Thee…Part I
  • Turning Stalled Out Goals into Actions
  • What Makes a Will or Trust Invalid
  • Ultimate Social Media Cheat Sheet: Character Limits & Best Days/Times to Post
  • Understanding Tax Apportionment Clauses

Categories

  • Academy Girl Friday (33)
  • Client Services (238)
  • Coaching (33)
  • Consumer Advantage (3)
  • Counseling (21)
  • Elder Law (5)
  • Estate Planning (919)
  • Estate Planning Documents (5)
  • Estate Planning Education (199)
  • Financial Analysis (3)
  • Financial Services (1)
  • General (19)
  • Law Firm Marketing (281)
  • Law Firm Net Revenue (7)
  • Law Firm Staffing (99)
  • Law Firm Technology (45)
  • Law Firm Web Tips (185)
  • Leadership (191)
  • Legal Education (645)
  • Marketing Tools (2)
  • Medicaid (1)
  • Member Services (1)
  • Owners Compensation (1)
  • Peak Performer Focus (1)
  • Practice Building Calls (1)
  • Practice Management (495)
  • SEO/Social Media Support (3)
  • Software (6)
  • Strategic Planning (9)
  • Uncategorized (15)

Footer

logo of American Academy of Estate Planning Attorneys

About Us

  • Meet the Team
  • Site Map
  • Legal Notice
  • Privacy Policy

Explore Our Services

  • Coaching
  • Estate planning software
  • Events
  • Legal education
  • Marketing
  • Web and SEO

Keep in Touch

Mon-Fri

9444 Balboa Ave. Suite 300

San Diego

(800) 846-1555

info@aaepa.com

Take Back Control of Your Business and Your Life

+

footer section | American Academy of Estate Planning Attorneys

© 2022 American Academy of Estate Planning Attorneys, Inc All rights reserved.

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent. Don't sell my personal information.
Cookie Settings Accept All
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
Save & Accept