A conduit trust is a provision written into a broader trust that requires the trustee to pass any retirement account distribution straight through to the named beneficiary the moment it arrives. The trust acts as a pipeline, not a holding tank. It was one of the most common inherited IRA planning tools before 2020, and the SECURE Act has made it a strong fit for some beneficiaries and a serious tax trap for others.
How the Pass-Through Works
When an IRA or 401(k) owner dies and leaves the account to a trust containing conduit language, every dollar the trust receives from that account has to be paid out to the individual beneficiary right away. The trustee has no discretion to hold the money inside the trust. If the inherited IRA sends a required minimum distribution to the trust, the trustee writes a check to the beneficiary. If the entire balance comes out in a lump sum, the trustee passes that through too.
The trustee still controls what happens inside the IRA, including the timing of distributions above the required minimum and the investment choices within the inherited account. The mandatory pass-through only kicks in once money leaves the IRA and enters the trust. 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 the Pass-Through Saves Tax
Trusts hit the top federal income tax bracket at income levels that would barely register for an individual filer. In 2026, a trust reaches the 37% top rate at just $16,000 of taxable income. A single individual does not reach that same bracket 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 face a marginal rate of 37% on most of the money. The same $50,000 distributed to a beneficiary earning a moderate salary would likely be taxed at 22% or 24%.
Because a conduit trust has to distribute everything it receives, the trust itself typically reports little or no taxable income. The trust takes a deduction for the distribution, and the beneficiary reports it on their personal return.3Fidelity. Trusts and Taxes: What You Need to Know That is the point of the structure, not a loophole.
What the SECURE Act Changed
The SECURE Act, signed in December 2019, eliminated the lifetime stretch for most non-spouse beneficiaries of inherited retirement accounts. For deaths on or after January 1, 2020, most beneficiaries have to empty the account by December 31 of the year containing the 10th anniversary of the original owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary
Final IRS regulations divide the 10-year window into two scenarios. When the original account owner died on or after their required beginning date (generally age 73), annual required minimum distributions have to continue during the 10-year window, with the full remaining balance due by the end of year 10.5Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions When the owner died before their required beginning date, no annual RMDs are required during the window, and only the year-10 liquidation applies.
The Year-10 Trap
This is where a conduit trust can go badly wrong for a non-eligible designated beneficiary. A conduit trust passes through only what the IRA actually distributes to it. If the trust is drafted to take out only what the IRA requires, and the IRA requires nothing until year 10, the beneficiary receives nothing for nine years and then gets hit with the entire balance in a single tax year. An inherited IRA worth $500,000 that grows to $700,000 over ten years would generate a $700,000 taxable distribution in one year, pushing the beneficiary into the top bracket regardless of their other income.
Even in the scenario where annual RMDs are required during the window, the conduit trust forces each one out to the beneficiary with no ability to smooth or redirect the money. The protection rationale weakens as well. Under the old stretch rules, a conduit trust sheltered IRA assets inside the trust for decades. Under the 10-year rule, the shelter lasts at most a decade before everything leaves.
When a Conduit Trust Still Fits
The SECURE Act preserved life-expectancy distributions for a category called “eligible designated beneficiaries.” For those individuals, the conduit trust’s original logic still holds. Eligible designated beneficiaries include:
- 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, a conduit trust can stretch distributions over the spouse’s own life expectancy, keeping annual payouts small and tax-efficient. SECURE 2.0, passed in 2022, added an election allowing a surviving spouse to be treated as the original account owner for RMD purposes, which can further delay and reduce required distributions. That election requires timely notice to the plan administrator and cannot be revoked without IRS consent.
For a minor child of the account owner, a conduit trust allows life-expectancy-based distributions until the child turns 21. At that point the 10-year rule kicks in, requiring the remaining balance to be distributed by the time the child reaches age 31.6ACTEC Foundation. Planning for the Young Under SECURE – Minor Inherited IRA The trustee controls IRA distributions during the child’s younger years and can direct the pass-through toward the child’s actual needs rather than handing over a lump sum.
For disabled and chronically ill beneficiaries, life-expectancy distributions remain available indefinitely, which makes a conduit trust an efficient way to produce ongoing income taxed at individual rates. One important boundary: conduit trust distributions count as the beneficiary’s income and can disqualify someone from means-tested benefits like Medicaid or Supplemental Security Income. For a beneficiary who relies on those programs, a special needs trust with accumulation provisions is usually the better tool.
When an Accumulation Trust Is the Better Call
An accumulation trust is the other main variety of see-through trust. The trustee has discretion to either distribute retirement account funds to the beneficiary or retain them inside the trust. That single difference changes the planning math.
Funds retained inside an accumulation trust are taxed at the compressed trust rates, hitting 37% at $16,000 of income. In exchange, the trustee can hold money back from a beneficiary who is a minor, has spending problems, faces creditors, or is going through a divorce. Once a conduit trust passes money to the beneficiary, that money becomes the beneficiary’s personal asset, reachable by creditors, divorce proceedings, and lawsuits like any other property. An accumulation trust can keep IRA proceeds shielded indefinitely at the cost of higher income tax on retained amounts.7ACTEC Foundation. Designing and Drafting Trusts in Light of the SECURE Act
For non-eligible designated beneficiaries subject to the 10-year rule, the accumulation structure has become the more common choice because it at least preserves the trustee’s ability to control what happens after year 10.
IRS Requirements the Trust Has to Meet
A conduit trust only works if it qualifies as a see-through trust under Treasury regulations. The trust has to be valid under state law, has to be irrevocable at the account owner’s death, has to have beneficiaries identifiable from the trust document, and the required trust documentation has to reach the plan administrator or IRA custodian by October 31 of the year after the account owner’s death.8eCFR. 26 CFR 1.401(a)(9)-4 – Determination of the Designated Beneficiary Missing that deadline can disqualify the trust from see-through treatment, which means the IRS treats the account as having no designated beneficiary and applies a compressed distribution schedule.
Non-individuals, including charities and estates, cannot be beneficiaries of a see-through trust. For a conduit trust specifically, only the first-tier beneficiaries who actually receive pass-through distributions count toward the identifiable-beneficiary test. Remainder beneficiaries named to take whatever is left after the primary beneficiary dies are disregarded, which gives conduit trusts more flexibility in naming backups than accumulation trusts have.
The Penalty for Missing a Distribution
If the trustee fails to take a required distribution from the inherited IRA, or takes it but does not pass it through as the trust requires, 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 Correct the shortfall within two years and the penalty drops 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 consecutive misses can stack. Because a conduit trust leaves the trustee no discretion to skip or defer, trustee selection and oversight matter more than they would with a more flexible structure.