When it comes to transferring wealth to future generations, one of the most effective and secure options is a See Through Trust.
A See Through Trust, also known as a pass-through trust, is a valuable estate planning tool that allows the assets held within it to pass directly to the beneficiaries without being subject to estate taxes. This can be a valuable tool for individuals looking to preserve and transfer their wealth to their heirs in a tax efficient manner.
When deciding whether a See Through Trust is most beneficial for your financial situation and long-term planning goals, it’s important to understand the basic concepts of this type of trust. Below, we outline the key advantages and limitations of See Through Trusts and how to get started by synching up with the right team members.
One of the key advantages of a See Through Trust is its ability to minimize estate taxes. By passing assets directly to beneficiaries, rather than through the grantor’s estate, the assets held within the trust are not subject to estate taxes. This can result in significant tax savings for both the grantor and the beneficiaries, allowing more wealth to be passed onto future generations.
Another aspect of a See Through Trust is their flexibility. These trusts can be structured in various ways to meet the specific needs and goals of the grantor. For example, let’s say the grantor has a substantial IRA and wants to ensure their children inherit the retirement account efficiently and with minimal tax burden. Instead of directly naming their children as beneficiaries of the IRA, the grantor establishes a See Through Trust and designates the trust as the beneficiary.
By doing so, the grantor can specify how the IRA assets are distributed among their children after passing. Additionally, because the See Through Trust is structured to pass the IRA income directly to the beneficiaries, they can potentially stretch out the distributions over their lifetime, taking advantage of tax-deferred growth and minimizing the immediate tax liabilities.
See Through Trusts can also help protect assets against creditors since the trustee has discretion over when and how to distribute assets to beneficiaries. Spendthrift provisions, which are common within See Through Trusts, restrict a beneficiary’s ability to assign or transfer their interest in the trust to creditors. This means that even if a beneficiary owes money to creditors, those creditors cannot access the assets held within the trust until they are distributed to the beneficiary according to the terms of the trust.
While a See Through Trust offers numerous benefits in generational wealth planning, it also comes with certain limitations and considerations. For instance, a grantor must adhere to strict guidelines when setting up the trust to ensure that it qualifies as a pass-through trust for tax purposes.
Arguably the biggest drawback to this type of trust is the relinquishing of control over assets. Once assets are transferred into the See Through Trust, the assets become irrevocable. This means the grantor relinquishes direct control over the assets and a trustee takes over total control. This is why See Through Trusts are typically made the beneficiary of a grantor’s IRA, as revocability is irrelevant once the grantor passes away.
Another limitation with See Through Trusts is that the trust can only have individuals as beneficiaries. This means that the See Through Trust cannot have charities or non-profits as a beneficiary of the trust.
The IRS also requires that for See Through Trusts all trust beneficiaries must be identified by September 30 of the year following the account owner’s death. Additionally, a copy of the trust must be provided to the custodian by October 31 of the year following the account owner’s death.
Finally one other tidbit, which is not unique to See Through Trusts, but to trusts in general. A trustee who has oversight of the investments in a trust must comply with relevant laws and regulations, like the Uniform Prudent Investor Act.
As stated above, See Through Trusts may be used for the purpose of controlling distributions from an IRA. See Through Trust’s that are the beneficiary of an IRA must begin taking Required Minimum Distributions (RMDs). However when RMDs are taken, the trust itself is not taxed, rather the RMDs are taxed at trust beneficiary level, and the trust beneficiaries must report the RMD as income on their individual tax return.
See Through Trusts are used to plan around the requirements of when RMDs must be taken. Based on Secure Act 2.0 rules, the IRS allows eligible beneficiaries to take distributions according to their life expectancy. Non-eligible beneficiaries must take distributions and deplete the inherited IRA account within 10 years.
What constitutes eligible vs non-eligible beneficiaries?
Where See Through Trusts are helpful is when the grantor has beneficiaries that qualify for a lifetime stretch provision (e.g. children with special needs or a surviving spouse). By setting up a See Through Trust, the grantor can extend the IRA distributions over the lifetime of the beneficiary and also specify requirements for making those distributions such as a spendthrift provision or health, education, maintenance, and support requirements (HEMS).
See Through Trusts can also be helpful in order to split an IRA into separate inheritable IRAs if there are some beneficiaries that are eligible designated beneficiaries that would qualify for the stretch provisions (e.g. a grandchild with a lifetime disability) and other beneficiaries that would not be considered eligible (e.g. grandchildren without a disability).
A See Through Trust can be a valuable estate planning tool for individuals looking to transfer wealth to future generations while minimizing tax liability. By understanding the ins and outs of this estate planning option, individuals can make more informed decisions around whether a See Through Trust is right for their financial needs.
However, establishing and administering a See Through Trust can also be complex and potentially costly. The creation of the trust requires careful legal drafting to ensure it aligns with the grantor’s intentions and complies with relevant state laws. If you are considering setting up a See Through Trust, we recommend consulting with a knowledgeable estate planning attorney to ensure that the trust is structured properly and effectively achieves your goals.
Once a See Through Trust has been established, a financial advisor can provide investment management services tailored to the objectives and constraints of the trust. Prudent Investors can help you design an investment approach that generates income, preserves capital, and achieves long-term growth. When you’re ready to take the next steps for your See Through Trust, we invite you to connect with our team.
Investment advice through Prudent Investors, an SEC-registered investment advisor. This blog is general communication being provided for informational purposes only. This information is in no way a solicitation or offer to sell securities or investment advisory services. It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy. This does not contain sufficient information to support an investment decision. Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest. Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved. No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prudent Investors. Prudent Investors does not provide legal or tax advice. Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.
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