Naming a Trust as an IRA Beneficiary

/

Trusts are widely used in estate planning to provide control, protection, and flexibility over how assets are managed and distributed. They can help ensure that assets are directed according to your wishes, protect beneficiaries who may not be able to manage an inheritance on their own, and offer privacy and efficiency in settling your estate. While it is more common to name individuals as beneficiaries of IRAs and retirement plans, there are situations where naming a trust as the beneficiary makes sense—such as when you want to control distributions for minors, beneficiaries with special needs, or to coordinate complex family or tax planning goals. However, the regulations for trusts as IRA beneficiaries are intricate and have become even more so following recent legislative changes. If you are considering naming a trust as your IRA beneficiary, it is important to understand the key rules and potential tax consequences. This article outlines what you need to know to make informed decisions and avoid costly mistakes.

Naming a trust as your IRA beneficiary can give you greater control over how and when your retirement assets are distributed after your death. For example, you may want to stagger payments to a young or financially inexperienced heir, protect a beneficiary who relies on means-tested public benefits, or ensure that assets are managed for a loved one with special needs. Trusts also make it easier to update your estate plan, since you can change instructions in one trust document rather than updating multiple beneficiary forms. However, the SECURE Act (2019) and SECURE 2.0 (2022) have introduced complex rules for trust beneficiaries, making careful planning essential to avoid unnecessary taxes and ensure your wishes are carried out.

 Understanding Beneficiary Categories

To understand how trusts are treated, it’s important to know the three main types of beneficiaries under the SECURE Act:

  • Eligible Designated Beneficiaries (EDBs):

    • Can stretch distributions over their life expectancy, maximizing tax deferral. Includes:

      • Surviving spouses

      • Minor children of the account owner (until age 21, then the 10-year rule applies)

      • Disabled or chronically ill individuals

      • Individuals not more than 10 years younger than the account owner

  • Non-Eligible Designated Beneficiaries (Non-EDBs):

    • Most other individuals, such as adult children or grandchildren, must withdraw the entire account within 10 years of the owner’s death. This can accelerate taxable income for traditional IRAs.

  • Non-Designated Beneficiaries:

    • Entities like estates or trusts that do not meet specific IRS criteria (for example, a trust with non-individual beneficiaries or unclear terms) face stricter rules. Typically, the account must be emptied within 5 years if the owner died before their RBD, or over the owner’s remaining life expectancy if death occurred after the RBD.

    • The required beginning date (RBD) is April 1 of the year following the year the owner reaches age 73 (or 75 for those turning 74 after December 31, 2032, per SECURE 2.0).

Examples:

  • A 15-year-old minor child (EDB) inheriting an IRA can stretch distributions until age 21, then must empty the account by age 31, spreading taxes over 16 years.

  • A 45-year-old adult child (non-EDB) must withdraw all funds within 10 years, potentially resulting in higher taxes.

  • A trust that fails to meet see-through requirements (non-designated beneficiary) inherits a $500,000 IRA. If the owner died before their RBD, the trust must withdraw all funds within 5 years, which can result in large, rapid distributions taxed at trust rates (37% federal at $15,200 in 2025) if retained by the trust or not passed to beneficiaries.

 Trusts as Beneficiaries: A Complex Framework

Naming a trust as an IRA beneficiary subjects the account to intricate IRS rules, primarily based on whether the trust qualifies as a "see-through" trust and the status of its beneficiaries. The SECURE Act and the IRS Final RMD Regulations (July 2024) provide a framework for trust distributions, balancing control with tax implications.

 Non-See-Through Trusts: Non-Designated Beneficiary Rules

A non-see-through trust does not meet the IRS criteria for see-through status. This may be due to having non-individual beneficiaries, failing to provide required documentation, or other reasons. Non-see-through trusts are treated as non-designated beneficiaries for IRA purposes, which means they are subject to more accelerated distribution schedules:

  • Owner Died Before RBD: The account must be fully distributed by the end of the 5th year after the owner’s death.

  • Owner Died On or After RBD: Distributions follow the owner’s remaining life expectancy.

Example:

  • A non-see-through trust inherits a $500,000 IRA in 2025. Distribution requirements depend on whether the owner died before or after their required beginning date (RBD):

    • Owner died before RBD: The trust must withdraw all funds by December 31, 2030, potentially distributing about $100,000 annually.

    • Owner died on or after RBD: The trust follows the owner’s remaining life expectancy.

      • These distributions, taxed at trust rates (37% federal at $15,200 in 2025) if retained by the trust, can significantly reduce the inheritance’s value.

 See-Through Trusts: Designated Beneficiary Treatment

A see-through trust is a trust that meets specific IRS requirements, including having only identifiable individual beneficiaries, being valid under state law, and providing required documentation to the IRA custodian. When a trust qualifies as a see-through trust, the IRS looks through the trust to the underlying beneficiaries to determine the applicable distribution rules, allowing for more favorable tax treatment based on the beneficiaries’ status (such as EDB or non-EDB):

  • All EDBs: If all beneficiaries are EDBs (e.g., a spouse and minor child), the trust can stretch distributions over the life expectancy of the oldest beneficiary.

  • Any Non-EDB: If even one beneficiary is a non-EDB (e.g., an adult child), the entire trust is subject to the 10-year rule, requiring full distribution by the end of year 10. For owners dying on or after their RBD, annual withdrawals based on the oldest beneficiary’s life expectancy are required in years 1–9.

Example:

A see-through trust names a 65-year-old spouse (EDB) and a 30-year-old adult child (non-EDB) as beneficiaries of a $1,000,000 IRA, inherited in 2025. Without special provisions, the trust follows the 10-year rule, distributing about $100,000 annually (if split evenly) by December 31, 2034, limiting the spouse’s ability to stretch distributions over their life expectancy.

 Separate Accounting: A New Opportunity

The IRS Final RMD Regulations (July 2024) introduced a carve-out allowing separate accounting for see-through trusts split into subtrusts immediately after the owner’s death. If the trust document mandates division into separate subtrusts before the owner’s death and specifies IRA allocations (without trustee discretion), each subtrust follows its beneficiary’s distribution schedule:

  • EDB Subtrusts: Beneficiaries like spouses or minor children can stretch distributions over their life expectancy.

  • Non-EDB Subtrusts: Beneficiaries like adult children follow the 10-year rule, with annual withdrawals if the owner died on or after their RBD.

Example:

A see-through trust with separate accounting names a 65-year-old spouse and a 30-year-old adult child as beneficiaries of a $1,000,000 IRA, split equally in 2025. The spouse’s subtrust stretches distributions over their 23.7-year life expectancy (about $21,000/year initially), taxed at individual rates. The child’s subtrust withdraws $500,000 over 10 years ($50,000/year), taxed as ordinary income. This preserves tax deferral for the spouse while complying with the 10-year rule for the child.

 Strategic Tax Planning for Trust Beneficiaries

If you are thinking of naming a trust as your IRA beneficiary, consider these strategies:

  • Incorporate separate accounting: Ensure your trust document mandates division into subtrusts with pre-specified allocations to leverage EDB stretch benefits, as permitted by the 2024 regulations.

  • Choose see-through status: Structure the trust to meet IRS criteria, avoiding non-designated beneficiary rules that limit deferral to 5 years.

  • Balance control and taxes: Conduit trusts, which distribute all IRA withdrawals directly to beneficiaries, may suit EDBs, while accumulation trusts, which allow trustees to retain funds, offer control but risk higher trust tax rates (37% at $15,200 vs. 37% at $609,350 for individuals, 2025).

  • Consult an attorney: Ensure your trust aligns with your intentions and is structured correctly.

  • Review regularly: Update trust provisions and beneficiary designations after life events or regulatory changes such as SECURE 2.0’s RMD age adjustments.

 Take Action: Plan Your Trust with Precision

The most important step you can take today is to review your IRA beneficiary designations with a trusted advisor to ensure your trust is structured for maximum tax efficiency and control. The SECURE Act and the 2024 IRS regulations offer new opportunities, like separate accounting, but require proactive trust drafting. Regularly revisiting your trust and designations can prevent costly tax burdens and protect your legacy for future generations.




Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or investment advice. Individual circumstances vary, and tax laws are subject to change. Please consult with a qualified financial, tax, or legal advisor before making decisions regarding your IRA or beneficiary planning.