Ask the Expert: When must we take RMDs from an inherited trust?

My brother left his 401(k) account to a trust, with my sister and I as the trust beneficiaries. She was older than he was, and I was two years younger. How quickly must we empty the trust?

When a trust inherits a retirement account, it must be emptied — paying taxes on the distributions — either within five years or over the remaining life expectancy of the deceased owner, depending on the circumstances.

y contrast, an individual who is a direct beneficiary of a retirement account generally gets 10 years to take taxable distributions. You and your sister would have qualified for even more favorable tax treatment because neither of you was more than a decade younger than your late brother, meaning you could have stretched required minimum distributions (RMDs) over your respective life expectancies.

The situation might be salvageable, depending on the type of trust you’re dealing with, said Ed Slott, a Rockville Centre tax accountant.

It must be both a “see-through” trust and a “conduit” trust.

A “see-through” trust must be valid under state law; irrevocable at death; have only human beneficiaries (not charities or institutions); and the trustee must provide a copy of the trust document to the retirement account custodian by Oct. 31 of the year following the account owner’s death. A “conduit” trust is required to pay all the distributions it receives to the trust beneficiaries.

If all these things are true, said Slott, the trust can take RMDs from the 401(k) based on the life expectancy of the oldest trust beneficiary (your sister), and RMDs promptly passed from the trust to you and your sister will be taxable at your respective rates. (A trust hits the top tax rate much faster than a person. In 2023, for example, an individual paid 37% on income above $578,125. A trust paid 37% when its income exceeded $14,451.) 

THE BOTTOM LINE:

Leaving your retirement account to a trust may prove costly to your heirs.  

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