"Standby" SNT vs. Conduit Trust?
Posted on Wed, Sep 03, 2008
Query:
Language in the "Administration of Trusts for Underage and Incapacitated Beneficiaries" Article says that the provisions of that article don't apply to conduit trusts. This means the conduit distributions are then paid out to the special needs beneficiary, disqualifying the beneficiary from benefits, correct?
"Further, the provisions of this Article shall not apply to distributions that are required to be made to a beneficiary pursuant to the provisions of [Cross reference to conduit provisions]."
Wouldn't it be better if the conduit language did not apply to the SNT article, thus making it an accumulation trust?
Response:
That's right. You'll have to choose between maintaining benefits or maintaining the stretch, because the standby SNT provisions are naturally at odds with the conduit trust provisions.
The language is there to allow the RLT to qualify as a designated beneficiary. If the trust is not a "conduit" trust, then we must consider all of the trust's beneficiaries and appointees to determine the applicable distribution period. Carving out a portion of the trust as an accumulation trust and saying that the conduit provisions don't apply to the SNT (instead of our current approach, which provides that the SNT provisions don't apply to a conduit trust) risks disqualifying the whole trust and jeopardizing the stretch for everyone.
Of course, the best approach would be to counsel clients often and make sure that if they have a beneficiary who develops "special needs," the clients come in for an SNT and not rely on the "standby" provisions in their RLT. But when that doesn't happen, or when the disabling event happens after the RLT has become irrevocable, the conduit/special needs benefits conundrum forces the drafting attorney's hand: it's either "preserve benefits" or "preserve the stretch." You typically include conduit provisions when you know you have IRAs; you include the standby SNT just in case a beneficiary becomes disabled.
Matthew T. McClintock, JD
WealthCounsel.com