When a Trust Inherits an IRA: What Families Should Know

At first glance, naming a beneficiary for an IRA may seem straightforward. But when a trust is named as beneficiary, the result can depend on specific language in the trust agreement. That language can affect how quickly the IRA must be withdrawn, who reports the taxable income and whether the trustee can keep IRA funds under trust control. Because inherited IRAs have their own tax and timing rules, both the IRA beneficiary designation and the trust document should be reviewed.

Why Someone Might Name a Trust as IRA Beneficiary

Families are sometimes surprised to learn that a trust, rather than an individual, is named as beneficiary of an IRA.

Depending on the family’s goals, a trust may help:

• Manage how and when beneficiaries receive funds;
• Protect younger or financially inexperienced beneficiaries;
• Provide oversight for beneficiaries with creditor concerns, disability, addiction or other special circumstances;
• Coordinate retirement assets with the rest of the estate plan;
• Reduce the risk of unintended results in blended-family situations; and
• Keep assets under trustee management instead of distributing them outright.

The tradeoff is that inherited IRAs follow special tax and withdrawal rules that do not apply to many other trust assets.

Why the Trust Language Matters

Some trusts are written so that IRA withdrawals received by the trustee must be paid out to the named beneficiary. These are often called conduit trusts. Other trusts allow the trustee to keep IRA withdrawals inside the trust and decide when, or whether, to distribute them. These are often called accumulation trusts.

Trust structure	What it generally means	Why it matters
Conduit trust	IRA withdrawals received by the trustee must be paid out to the specified trust beneficiary.	This may simplify the beneficiary analysis, but the beneficiary receives the IRA withdrawals as they are paid from the IRA. Taxable income generally passes out to the beneficiary and is reported on Schedule K-1.
Accumulation trust	The trustee may keep IRA withdrawals in the trust instead of paying them out immediately.	This may preserve trustee control, but more beneficiaries may need to be considered. Taxable income retained in the trust is generally reported by the trust, and the trust pays any resulting tax.

Because trust income tax brackets are compressed, trustees should review the tax impact before taking large withdrawals.

Roth IRAs are different. Although Roth IRA distributions are often income-tax free, a trust named as beneficiary still needs careful review because Roth IRAs do not have lifetime required minimum distributions and the inherited IRA withdrawal rules may differ from those that apply to a traditional IRA.

What Is a “See-Through” Trust?

A trust may qualify for what is commonly called “see-through” treatment if it satisfies certain IRS requirements. When that happens, the inherited IRA rules generally look through the trust and focus on certain trust beneficiaries, rather than treating only the trust itself as the beneficiary.

A trust does not automatically qualify for see-through treatment. In general, the trust must satisfy the following requirements:

1. The trust must be valid under state law. Most properly drafted trusts satisfy this, but it is still part of the review.
2. The trust must be irrevocable or become irrevocable at death. Many revocable living trusts become irrevocable when the person who created the trust passes away.
3. The trust beneficiaries must be identifiable. The trust must make it possible to determine who may ultimately benefit from the IRA.
4. Custodian paperwork should be addressed early. IRA custodians commonly request trust documents, certifications or other paperwork before processing inherited IRA accounts.

The review should not stop with the first-named beneficiaries. Backup beneficiaries, remainder beneficiaries, charities, estates or powers allowing someone to redirect trust assets may also affect the analysis. The key question is whether the relevant beneficiaries can be determined with reasonable certainty.

If not, the trust may fail to qualify for see-through treatment, which can result in less favorable inherited IRA distribution rules. Do not assume the trust qualifies without a document review.

The SECURE Act Changed the Rules

The SECURE Act changed the rules for many inherited retirement accounts. In many situations, inherited IRAs must now be fully distributed by the end of the calendar year that includes the 10th anniversary of the IRA owner’s death. This is commonly called the “10-year rule.”

The 10-year rule does not apply the same way in every case. The result depends on whether the beneficiary is an individual, a qualifying trust or a non-individual beneficiary such as an estate or charity. Special rules may apply to a surviving spouse, the IRA owner’s minor child, a disabled or chronically ill beneficiary and an individual who is not more than 10 years younger than the IRA owner.

Trustees should not assume withdrawals can wait until year 10. If the IRA owner had already started required minimum distributions before death, annual withdrawals may be required during the 10-year period, with the remaining balance distributed by the final deadline.

In some cases, a 5-year distribution rule may apply, especially where no designated beneficiary is recognized and the IRA owner died before required distributions began. Because the correct rule depends on the IRA owner’s age, the beneficiary designation and the trust terms, trustees should review inherited IRA deadlines early.

Common Issues We See

When a trust is named as beneficiary of an IRA, several issues frequently arise.

Trust qualification issues

• The trust was drafted years ago and has not been updated.
• Family members assume every trust automatically qualifies for see-through treatment.
• The trust names a charity, estate or broad class of beneficiaries as a possible backup beneficiary.
• The trust gives someone broad authority to redirect trust assets.

Distribution rule issues

• The trustee is unsure which inherited IRA deadline applies.
• The year-of-death required minimum distribution is overlooked.

If the IRA owner had not taken the full required minimum distribution for the year of death, the remaining amount may still need to be withdrawn.

Administrative and tax issues

• The IRA beneficiary designation does not match the overall estate plan.
• The trustee is unsure whether IRA withdrawals should remain in trust or be distributed to beneficiaries.
• The income tax consequences of withdrawals are not reviewed before distributions are made.

What Families Should Do Next

If a trust is named as beneficiary of an IRA, the trustee should review the account early. Key questions include:

• Was the full year-of-death required minimum distribution already taken?
• What documents does the IRA custodian need?
• Does the trust qualify for see-through treatment?
• Which beneficiaries are counted under the inherited IRA rules?
• What withdrawal rule applies, and are annual withdrawals required before the final deadline?
• Should withdrawals remain in trust or be distributed to beneficiaries?
• What are the income tax reporting consequences?

If your family is administering a trust that inherited an IRA, contact us early in the process. We can help review tax reporting issues, required distribution rules and timing considerations. We can also coordinate with the IRA custodian and estate planning attorney.

Because trust documents and beneficiary designations are legal documents, trust interpretation questions should be reviewed with the estate planning attorney. Early tax review can help prevent missed deadlines, unexpected tax and administrative delays.

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