A conduit trust is a provision written into a trust that forces the trustee to pass every distribution from an inherited IRA or 401(k) straight through to the named individual beneficiary, with no authority to hold the money inside the trust. It is not a separate kind of trust; it is a set of terms inside a revocable living trust or testamentary trust that turns the trust into a pipeline for retirement account distributions. Before 2020 this was the standard way to leave an IRA to a trust while still stretching payouts over the beneficiary’s lifetime. The SECURE Act’s 10-year distribution rule changed that calculation sharply, and a conduit trust now works well for some beneficiaries and badly for others.
How the Pass-Through Mechanic Works
When the account owner dies, the inherited IRA names the trust as beneficiary. Every dollar the IRA sends to the trust must leave the trust the same way it came in: paid out to the individual beneficiary. If the IRA distributes a required minimum, the trustee writes a check for that amount to the beneficiary. If the whole balance comes out at once, the whole balance passes through.
The trustee can still make decisions on the IRA side: when to take distributions within the rules, how the inherited IRA is invested, which investment options to use. Once the money crosses into the trust, discretion ends. The IRS defines a conduit trust as a see-through trust whose terms require that “all plan distributions will, upon receipt by the trustee, be paid directly to, or for the benefit of, primary beneficiaries during their lifetimes.”1Internal Revenue Service. Internal Revenue Bulletin: 2024-33
Why Passing Money Through Saves Tax
Trusts reach the top federal income tax bracket at very low income levels. In 2026, a trust hits the 37% rate at $16,000 of taxable income. A single filer does not hit that same 37% rate until income exceeds $640,600.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A $50,000 IRA distribution retained inside a trust would be taxed mostly at 37%. The same $50,000 in the hands of a beneficiary earning a moderate salary is likely taxed at 22% or 24%.
Because a conduit trust must distribute everything it receives, the trust generally reports little or no taxable income itself. It takes a deduction for the distribution and the beneficiary reports the income on a personal return.3Fidelity. Trusts and Taxes: What You Need to Know Getting money out of the compressed trust brackets and onto an individual return is the point.
How the 10-Year Rule Changed the Math
The SECURE Act, signed in December 2019, eliminated lifetime stretch treatment for most non-spouse beneficiaries. For deaths on or after January 1, 2020, the inherited account must be fully emptied by December 31 of the year containing the 10th anniversary of the owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary
Whether annual distributions are required during those ten years depends on when the owner died. If the owner died on or after the required beginning date (generally age 73), annual RMDs must continue during the 10-year window, with the remaining balance due by the end of year 10.5Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions If the owner died before the required beginning date, no annual RMD is required, and the account can sit until year 10.
The Year-10 Tax Trap
A conduit trust drafted the old way, to distribute “only the required minimum distribution,” can produce the worst possible outcome for a beneficiary subject to the 10-year rule. If no annual RMD is required, nothing flows through the trust for nine years. In year 10, the entire balance must come out. A $500,000 IRA that grows to $700,000 over ten years generates a $700,000 taxable distribution in a single year, which pushes the beneficiary into the top bracket regardless of their other income.
Even when annual RMDs do apply during the 10-year window, the final year still forces out whatever remains. The old stretch benefit that made these trusts attractive is gone for anyone subject to the 10-year rule, and the compressed timeline weakens the asset-protection rationale too: a conduit trust can shield IRA assets only until they pass through, and under the 10-year rule that window is at most a decade.
When a Conduit Trust Still Makes Sense
The SECURE Act carved out a category of eligible designated beneficiaries who are exempt from the 10-year rule and can still take distributions over life expectancy. A conduit trust remains a strong tool for these people:
- Surviving spouses of the account owner
- Minor children of the account owner (not grandchildren) who have not yet reached age 21
- Disabled individuals as defined under the tax code
- Chronically ill individuals
- Individuals not more than 10 years younger than the deceased account owner4Internal Revenue Service. Retirement Topics – Beneficiary
For a surviving spouse, distributions stretch over the spouse’s own life expectancy, keeping annual payouts small and taxed at individual rates. SECURE 2.0 added an election allowing a surviving spouse to be treated as the original owner for RMD purposes, which can delay distributions further, though the election requires timely notice to the plan administrator and cannot be revoked without IRS consent.
For a minor child of the account owner, life-expectancy distributions run until the child turns 21. The 10-year rule then kicks in, requiring the balance to be paid out by the time the child reaches 31.6ACTEC Foundation. Planning for the Young Under SECURE – Minor Inherited IRA The trustee keeps control of the IRA during the younger years and directs payouts toward the child’s needs rather than handing over a lump sum.
For disabled and chronically ill beneficiaries, life-expectancy distributions remain available indefinitely, so the trust can provide steady income taxed at individual rates for as long as the beneficiary lives. One caution: if that beneficiary relies on means-tested benefits like Medicaid or Supplemental Security Income, conduit distributions count as the beneficiary’s income and can disqualify them. A special needs trust with accumulation provisions is usually the better fit there.
Conduit Trust vs. Accumulation Trust
The other kind of see-through trust is the accumulation trust. It gives the trustee discretion to distribute retirement account funds or hold them inside the trust. That single difference drives the trade-offs:
- Tax: conduit distributions are taxed at the beneficiary’s individual rate; funds an accumulation trust retains are taxed at compressed trust rates, hitting 37% at $16,000.
- Asset protection: money that has passed through a conduit trust is the beneficiary’s property, reachable by creditors, divorce, and lawsuits; an accumulation trust can hold funds inside indefinitely.
- Control: a conduit trustee cannot decide whether or when to distribute; an accumulation trustee can, which matters for beneficiaries who are minors, spendthrift, or exposed to creditors.
Since the SECURE Act, estate planners have shifted toward accumulation trusts for non-eligible designated beneficiaries because those trusts can at least keep assets inside the trust rather than dump the entire balance on the beneficiary within a decade.7ACTEC Foundation. Designing and Drafting Trusts in Light of the SECURE Act The cost is higher tax on anything retained.
Getting the IRS to Look Through the Trust
For the IRS to treat the human beneficiaries as the designated beneficiaries of the IRA, the trust has to qualify as a see-through trust. It must be valid under state law, become irrevocable no later than the account owner’s death, name only identifiable individual beneficiaries in the document itself, and its documentation must reach the plan administrator or IRA custodian by October 31 of the year after the year of death.8eCFR. 26 CFR 1.401(a)(9)-4 – Determination of the Designated Beneficiary
Missing the October 31 deadline can knock the trust out of see-through treatment entirely, in which case the IRS treats the account as having no designated beneficiary and applies a compressed distribution schedule. For a conduit trust specifically, only the first-tier beneficiaries who actually receive pass-through distributions are counted for the identifiable-beneficiary test. Remainder beneficiaries named to receive whatever is left after the primary beneficiary’s death are disregarded, which gives conduit trusts more flexibility in naming backup recipients than accumulation trusts have.
Penalty for Missed Distributions
If the trust fails to take a required distribution from the inherited IRA, or takes it but does not pass it through as required, the IRS imposes a 25% excise tax on the amount that should have been distributed.9Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Correcting the shortfall within two years drops the penalty to 10%.10Internal Revenue Service. Publication 590-B (2025) – Distributions from Individual Retirement Arrangements (IRAs) The penalty is reported on Form 5329 and applies per year of the missed distribution, so several missed years compound quickly. Because a conduit trust leaves the trustee no discretion, picking a trustee who will actually make the distributions on time matters more here than in a discretionary trust.