Are there disadvantages to designing an IRA Trust as an accumulation trust from the start?

Q: Are there any disadvantages to designing an IRA trust as an “accumulation trust” from the “get-go” when we know we can always toggle to a conduit trust within 9 months after the IRA owner’s death?

A: Yes, there are several disadvantages.  First, in determining RMDs, an accumulation trust forces you to take into account numerous potentially older successor and contingent beneficiaries than just the primary beneficiary – – which could result in potential loss of stretchout. This includes beneficiaries under power of attorneys.  Also, there is the risk that RMDs will not be distributed timely to the primary beneficiary, resulting in taxation at higher tax brackets. Although the use of the toggle switch and trust protector provisions of the IRA Inheritance Trust® may avoid these issues, you are relying on the Trustee and Trust Protector to actually exercise these powers in a proper and timely fashion after the IRA owner’s death. I do not feel that it is worth this risk to “default” to an accumulation trust when drafting, unless the beneficiary has known existing (or likely to exist) asset protection issues.

I use a conduit trust as the default, knowing I can use the toggle switch and Trust Protector provisions after the IRA owner’s death, if asset protection is then warranted. If I am concerned about maximizing RMD stretchout, I can name someone other than the beneficiary as sole or co-trustee and can limit any distributions other than RMDs (e.g., delete discretionary distribution of IRA principal for health, support, maintenance and education).

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