For many people, an IRA or other retirement account becomes one of the largest assets they will leave behind. It is also one of the assets most likely to create an unexpected problem when an estate plan has not been reviewed in several years.
I see this when someone comes in with a trust that was carefully prepared years ago and tells me that the trust is also named as beneficiary of a substantial IRA. At the time the plan was created, that may have been exactly the right decision. The trust may have been designed to protect a child’s inheritance from divorce, creditors, poor financial decisions, or other risks.
Then the SECURE Act changed the rules governing inherited retirement accounts.
That does not mean the trust is suddenly wrong. It does mean we need to look again at what the trust requires, who will inherit, how quickly the retirement account must be distributed, where the taxable income will land, and whether the protection the trust provides is still worth the tax consequences.
For 2026, that analysis is especially striking because a trust reaches the highest 37% federal income tax bracket once taxable income exceeds only $16,000. A single individual does not reach the 37% bracket until taxable income exceeds $640,600.
Those numbers deserve attention, but they do not tell us what your estate plan should do. The right question is how to preserve as much of your retirement wealth as reasonably possible while still protecting the people you accumulated that wealth for in the first place.
The SECURE Act Changed How Most Children Inherit Retirement Accounts
Before the SECURE Act took effect, many nonspouse beneficiaries could take required minimum distributions from an inherited IRA over their life expectancy. For a younger beneficiary, that could allow the account to remain tax-deferred for decades while withdrawals occurred gradually.
The SECURE Act substantially limited that strategy for deaths after 2019. Most nonspouse designated beneficiaries who are not considered “eligible designated beneficiaries” must now empty the inherited retirement account by the end of the tenth year following the account owner’s death.
There are important exceptions. Eligible designated beneficiaries include a surviving spouse, the account owner’s minor child, a disabled or chronically ill beneficiary, and an individual who is not more than ten years younger than the account owner. The rules applying to those beneficiaries can be very different, and a minor child of the account owner generally transitions into the 10-year rule after reaching the applicable age.
There is another distinction that matters. If a beneficiary subject to the 10-year rule inherits from an owner who died before the owner’s required beginning date, the current regulations generally do not require annual distributions during years one through nine solely because of the 10-year rule, provided the entire account is distributed by the end of year ten. If the account owner died on or after the required beginning date, annual required distributions generally must continue during the 10-year period, with the entire account still distributed by the end of the tenth year.
For a large traditional IRA, compressing what might once have been decades of distributions into ten years can create significant taxable income. If your child is already in the middle of high-earning years, those retirement distributions may arrive on top of salary, business income, investment income, and other taxable income.
That is the first tax issue. Naming a trust as beneficiary can create another.
Why the $16,000 Trust Tax Bracket Gets So Much Attention
Trust income-tax brackets are dramatically compressed compared with individual income-tax brackets.
For 2026, estates and trusts pay 10% on taxable income up to $3,300, 24% on taxable income above $3,300 through $11,700, 35% on taxable income above $11,700 through $16,000, and 37% on taxable income over $16,000. These are marginal tax brackets, which means exceeding $16,000 does not suddenly cause every dollar of trust income to be taxed at 37%. Only the income falling within the highest bracket is taxed at that rate.
Compare that with a single individual, who does not enter the 37% federal bracket in 2026 until taxable income exceeds $640,600. The difference explains why retaining large taxable retirement distributions inside a trust can become expensive very quickly.
That is particularly relevant with traditional IRAs and other pre-tax retirement accounts because distributions are generally taxable as ordinary income. The tax consequences of an inherited Roth account can be quite different, even though the post-death distribution rules still need to be considered.
There is an important qualification, however. A trust does not necessarily pay income tax on every dollar it receives. Depending on the terms of the trust, its distributions to beneficiaries, and the distributable net income rules, income distributed or required to be distributed may instead be carried out to the beneficiary and reported on the beneficiary’s individual income-tax return. The IRS Form 1041 rules specifically distinguish between income retained by a trust and income distributed to beneficiaries.
This is why “trusts pay 37% at $16,000” is an important warning but a terrible estate planning rule by itself.
A Conduit Trust and an Accumulation Trust Solve Different Problems
If a trust is going to be named as beneficiary of a retirement account, one of the most important distinctions is whether the trust operates as a conduit trust or an accumulation trust.
Under the current Treasury regulations, a conduit trust is structured so that retirement plan distributions received by the trustee must be paid directly to, or for the benefit of, the specified trust beneficiary. Because the retirement distributions do not remain accumulated inside the trust, the taxable income associated with those distributions will generally be carried out to the beneficiary under the applicable income-tax rules.
That can help avoid the trust’s compressed income-tax brackets, but it comes with a tradeoff. Once the money is required to leave the trust, the trustee can no longer keep that particular distribution protected inside the trust.
An accumulation trust gives the trustee greater ability to retain retirement account withdrawals inside the trust rather than immediately distributing them to the beneficiary. That may preserve protections the client considers very important, but taxable income retained by the trust can encounter those compressed trust income-tax brackets quickly.
Neither structure is universally better.
Suppose your daughter is financially responsible, has a stable marriage, has no unusual creditor exposure, and would be comfortable managing the inherited funds. Forcing taxable retirement distributions to remain inside a trust simply to create “protection” she does not particularly need may produce unnecessary tax cost.
Now suppose your son owns a business and has personally guaranteed substantial business debt, is going through a difficult divorce, or simply is not ready to receive a very large inheritance outright. In that situation, distributing every dollar from the trust simply to obtain a lower individual income-tax rate may expose the inheritance to the very risks you created the trust to protect against.
The tax analysis matters, but so does the beneficiary’s actual life.
The Trust Has to Qualify Under the Retirement Account Rules
There is another reason I do not recommend naming a trust as an IRA beneficiary without reviewing the trust itself.
A trust is not automatically treated as an individual designated beneficiary for required minimum distribution purposes simply because it is listed on the IRA beneficiary form. Instead, certain trusts can qualify as “see-through trusts,” allowing the retirement account rules to look through the trust and treat qualifying trust beneficiaries as the relevant beneficiaries.
Under current IRS rules, a see-through trust generally must be valid under state law, become irrevocable upon the account owner’s death, have identifiable beneficiaries with respect to the retirement benefit, and satisfy applicable documentation requirements. The identity and characteristics of the beneficiaries then affect which post-death distribution rules apply.
If the trust does not qualify for see-through treatment, the result can be very different. When there is no designated beneficiary and the IRA owner dies before the required beginning date, the five-year rule may apply. If the owner dies on or after the required beginning date, distributions generally are based on the owner’s remaining life expectancy under the applicable rules.
This is one of those areas where a beneficiary designation that looks perfectly reasonable on its face can have consequences no one intended.
The Beneficiary Designation and the Trust Have to Tell the Same Story
Your IRA generally passes according to the beneficiary designation on file with the financial institution. Changing your will or restating your revocable living trust does not automatically change that beneficiary form.
That sounds obvious, but it is one of the most common places I find disconnects when reviewing an existing estate plan. A beneficiary designation may still name a former spouse, name an adult child outright even though the current plan calls for the child’s inheritance to remain protected, or refer to a trust that has since been amended or completely restated.
Sometimes the names are correct but the strategy is no longer right.
Perhaps the trust was named as IRA beneficiary fifteen years ago because stretching the IRA over a beneficiary’s lifetime was central to the planning. The SECURE Act later eliminated that lifetime stretch for most beneficiaries, but no one ever went back to reconsider whether the same trust structure still made sense.
Perhaps the IRA has grown from $300,000 to $2 million. The income-tax consequences of retaining taxable distributions inside the trust are now very different simply because the size of the asset changed.
Or perhaps the beneficiary’s life has changed. A child who needed significant protection at 25 may be financially sophisticated and secure at 40. Another child who appeared financially stable years ago may now have significant creditor exposure or be going through a divorce.
Estate planning cannot account for changes no one ever goes back to review.
California Can Add Another Tax Layer
For California families, federal income tax is not necessarily the end of the analysis.
California also taxes trusts, and the amount of trust income subject to California tax can depend on several factors, including whether income is derived from California sources and the residency of trustees and noncontingent beneficiaries. California’s fiduciary income-tax rules can therefore add another layer when deciding whether income should remain inside a trust or be distributed to a beneficiary.
This is another reason I do not want clients making the conduit-versus-accumulation decision based solely on a federal tax-bracket chart. The CPA needs to look at the actual trust, beneficiaries, residency, retirement account, expected distributions, and other income before we know the real tax consequences.
My role as the estate planning attorney is to make sure the tax analysis is being applied to the planning objective rather than allowing the tax result to dictate the estate plan without regard to the family.
Sometimes Paying More Tax Can Still Be the Better Planning Decision
No one wants to pay more income tax than necessary, and tax efficiency should absolutely be part of retirement-account planning.
But there are situations where accepting some additional tax cost may be entirely rational if it preserves something the client values more.
If retaining a distribution inside a trust protects a substantial inheritance while a beneficiary is going through a divorce, facing a lawsuit, struggling to manage money, or receiving means-tested public benefits, the lowest possible tax bill may not be the most important objective.
There can also be ways to balance the competing concerns. Depending on the trust language and the circumstances, a trustee may have discretion to distribute some income while retaining other amounts. The family and advisors can evaluate distributions from year to year rather than assuming that every dollar must always remain in the trust or every dollar must always be distributed.
That flexibility can be extremely valuable, but it has to be built into the plan correctly.
This is why I do not start an IRA beneficiary conversation by asking whether we can minimize the trust’s income taxes. I start by asking what you are trying to protect and what you want this money to make possible for the person who receives it.
Once we know that, we can work with the CPA and financial advisor to determine the most tax-efficient way to accomplish the actual goal.
Your IRA May Need a Different Plan Than the Rest of Your Assets
One of the mistakes people make in estate planning is assuming that every asset should follow exactly the same path.
Retirement accounts are different because they carry their own beneficiary rules and income-tax consequences. A house, taxable investment account, life insurance policy, and traditional IRA may all ultimately benefit the same child, but that does not mean the same beneficiary structure is necessarily best for every asset.
For example, other assets may be available to fund a long-term protective trust while the retirement account uses a structure designed to manage the SECURE Act distribution rules more efficiently. In another family, the beneficiary’s circumstances may make the additional protection around the retirement assets essential.
The right answer depends on the size and type of assets, the beneficiaries, the trust terms, the family’s other resources, and the client’s priorities.
That is why I want to see the entire asset picture rather than making a beneficiary recommendation after looking at one IRA in isolation.
If Your Estate Plan Predates the SECURE Act, It Deserves Another Look
If your trust was created before 2020 and is named as beneficiary of a traditional IRA or other significant retirement account, I would not assume the planning is wrong. I would assume it is worth reviewing.
The same is true if the retirement account has grown substantially, your beneficiaries’ circumstances have changed, your trust has been amended or restated, or no one has looked at the beneficiary designation in several years.
During that review, I want the trust document and the actual beneficiary designation in front of me. I also want to understand the current value and type of retirement account, your age and required distribution status, the beneficiaries who may inherit, the protections you want for them, and the other assets that will be available.
From there, we can determine whether the existing beneficiary structure still accomplishes what you intended and bring the CPA and financial advisor into the conversation when we need to model the income-tax consequences.
Through the Life & Legacy Planning® process, I look at beneficiary designations as part of the estate plan rather than as separate forms sitting at different financial institutions. The goal is to make sure the legal documents, retirement accounts, tax planning, and the lives of the people who will inherit actually work together.
Your retirement account may represent decades of saving and investing. It deserves more than a beneficiary designation that was completed years ago and never looked at again.
If your trust is named as beneficiary of a significant IRA or retirement account and the planning has not been reviewed since the SECURE Act changed the rules, contact us or schedule a 15-minute introductory call. We can review the trust and beneficiary designations together and determine whether the plan still protects your family in the way you intended.