If you have read any of Malcom Gladwell’s books, or listen to his podcasts, you are acquainted with various examples of the law of unintended consequences. Gladwell demonstrates how well-intentioned efforts to solve societal problem might actually prove to be an impediment to success. In the 1990’s, Australian lawmakers enacted legislation requiring Australian children to wear bike helmets whenever riding bicycles. As it turned out, the relatively low supply of helmets created such a high cost for helmets that overall bike ridership declined significantly. In that case, the unintended consequence of the legislation was a decrease in the overall health of children.
Along a similar vein, by reason of the recently enacted “SECURE ACT,” an oft-used trust planning structure called a “conduit trust” will have unintended consequences for unsuspecting clients if not properly addressed and corrected. Before the enactment of the SECURE Act, it was possible to name a trust as a beneficiary of a retirement account after the death of the account owner and still obtain the “stretch” typically associated with required minimum distributions (“RMDs”) based upon the life expectancy of the trust beneficiaries. Even though the trust was the legal owner of the inherited IRA, the IRS would “see through” the trust’s ownership and use the life expectancy of the trust beneficiary (or beneficiaries) to determine the RMDs. In this fashion, it was possible to both (1) achieve the sought-after protections of trust ownership, and (2) minimize the income tax implications by “stretching” the withdrawal period over the life expectancy of the trust beneficiary (or beneficiaries). In order to qualify for this preferred “see through trust” tax treatment, however, it was necessary for the trust to be characterized as either a “conduit trust” or as an “accumulation trust.”