Many young couples with a house, bank accounts and some retirement savings often assume all they need is "a super simple estate plan, nothing fancy."
If only! Unfortunately, most new parents fail to consider the complexities their young children introduce to seemingly simple assets. This is particularly true of retirement accounts.
Retirement Accounts Refresher
For a traditional retirement account (like an individual retirement account (IRA) or a 401(k) plan), an individual makes contributions to the account using pre-tax dollars, which are not taxed until withdrawn. For a Roth retirement account, an individual makes contributions to the account using dollars that have already been taxed. Roth accounts accumulate and are withdrawn tax-free.
Under the traditional account, once the owner attains age 73 (in 2025), the owner must begin taking Required Minimum Distributions (RMDs). These RMDs are included in the owner's gross income for the year and are taxed at ordinary federal income tax rates. Roth accounts do not have RMDs until after death.
Retirement Accounts Upon Death
The rules for determining RMDs after the owner's death are incredibly complex and depend on numerous factors including type of plan, whether the owner had begun receiving RMDs and importantly, the identity of the account beneficiary — that is, does the beneficiary qualify as a designated beneficiary, an eligible designated beneficiary or neither.
- Designated beneficiaries (DBs). A DB is an individual named by the owner (or if none, the individuals named as beneficiaries under the default rules of the plan). A DB generally must take RMDs over a 10-year period.
- Eligible designated beneficiaries (EDBs). An EDB is a limited subset of designated beneficiaries that includes the owner's surviving spouse, the owner's minor child (defined as under age 21), an individual who is disabled or chronically ill or an individual who is not more than 10 years younger than the owner. An EDB may generally take the RMDs over their life expectancy, maximizing tax deferral.
- Neither. Some beneficiaries, including estates, charities and some trusts, are neither a DB nor an EDB. A beneficiary who is neither generally must take RMDs over a five-year period.
Consequences of a Non-Qualified Trust
If a trust's beneficiaries qualify as neither DBs nor EDBs, what's the problem? Imagine a young couple dies and all their assets are funded to a family trust for their minor children's benefit:
- The retirement account must be distributed (and taxed) in full within five years of the account owner's death, or for many employer plans such as 401(k) or 403(b) plans, within a year or less of the owner's death.
- The distributions are taxable as ordinary income, not the lesser capital gains tax bracket.
- Unless the distributions are immediately passed through to the trust beneficiary, they will be taxed under the compressed trust income tax brackets (which reach the top marginal rate very quickly).
For adult beneficiaries, the simplest approach is to name the individuals as the beneficiaries, not the trust. Minor beneficiaries, however, legally cannot accept assets without a custodial account or, worse yet, a court-appointed conservator. Some beneficiaries may technically be adults but may not yet be mature enough to handle the funds responsibly, hence the need for a trust agreement.
See-Through Trusts
But there's hope! A properly structured see-through trust can "look through" the trust to its beneficiaries to determine the correct RMD calculations.
There are three basic types of "see-through" trusts:
- Conduit trusts require the trustee to immediately distribute any IRA withdrawal to the trust beneficiary. Where minor beneficiaries are involved, this can defeat the purpose of a trust if the amounts exceed the amounts paid directly to providers for the beneficiary's needs.
- Accumulation trusts permit the trustee to retain IRA distributions in the trust — for instance, to distribute when the beneficiary attains a certain age. This requires a more detailed analysis of potential future trust beneficiaries and can be less certain under current guidance.
- Age 31 Trusts: For beneficiaries under age 21, an Age 31 Trust structure would require all retirement accounts, including growth from previous IRA distributions, be withdrawn and distributed to the beneficiary by the end of the year in which the beneficiary reaches age 31. No retirement withdrawals prior to that date would have to be distributed to the beneficiary. The Trustee has discretion to keep those proceeds within the Trust until the beneficiary reaches age 31 if distribution is not desirable before then, an advantage over the conduit trust structure above.
The options may seem overwhelming, particularly given that a young family's situation can change significantly over a few short years: accounts grow as parents advance in their careers, and children mature (or not). For this reason, many Warner trust agreements contain language allowing the trustee to elect the trust structure after both parents' deaths. This allows the trustee to take into account the relevant factors at that time, which may not be the same as when the parents complete their estate planning a few years prior.
If your estate planning needs involve minor children and retirement accounts, contact your Warner estate planning attorney, Sara Nicholson at snicholson@wnj.com or Juliette Peterson at jpeterson@wnj.com.
This article is featured in Warner's Estate Planning Focus — Spring 2026 newsletter, which highlights key developments, planning strategies and insights for individuals, families and advisors.
Read the full newsletter to explore additional updates and practice guidance.
