§ 1.4 Estate Planning

IRA Inheritance Trusts After the SECURE Act

For many Texas families the retirement account is the largest single asset, and it is the one the will does not control. The rules governing what happens to it were rewritten in 2019, and a great many plans drafted before then no longer do what they were designed to do.

An IRA passes by beneficiary designation. The form on file at the custodian decides who inherits, and it overrides the will completely. That makes the designation one of the highest-stakes single pages in an estate plan — and one of the most frequently neglected, sitting unrevised through divorces, remarriages, births and deaths.

What changed in 2019

Before the SECURE Act, a designated beneficiary could generally take distributions from an inherited IRA over their own life expectancy. A grandchild inheriting at twenty could stretch withdrawals across six decades, and the account compounded, largely untaxed, the entire time. That planning device — the "stretch IRA" — is largely gone.

The Act, enacted in December 2019, replaced it for most beneficiaries with a ten-year rule: the account must be fully distributed by the end of the tenth calendar year after the year of death. The consequence is compression. A significant inheritance now lands as taxable income inside a decade, frequently during the beneficiary's peak earning years, and often pushes them into higher marginal brackets.

A narrow class of eligible designated beneficiaries may still use a life-expectancy payout: the surviving spouse; the account owner's minor child, until majority, after which the ten-year clock starts; a beneficiary who is disabled or chronically ill; and a beneficiary not more than ten years younger than the owner. The Internal Revenue Service's beneficiary guidance is the authoritative source, and the regulations in this area have moved more than once since 2019 — verify the current position before relying on any summary, including this one.

What the trust is still for

If the stretch is gone, why name a trust at all? Because tax deferral was never the only reason. The remaining reasons are about control and protection, and they have not gone anywhere.

• Protecting a beneficiary from themselves. An outright inherited IRA can be emptied on day one. A trust can meter distributions across the ten years, or hold what comes out.
• Protecting a beneficiary from others. Inherited IRAs are not shielded in bankruptcy the way a participant's own account is, following the Supreme Court's 2014 decision in Clark v. Rameker. A properly drafted trust supplies protection the account itself does not.
• Blended families. Naming a second spouse outright means the children of a first marriage receive whatever that spouse leaves. A trust can provide for the spouse and preserve the remainder.
• Beneficiaries with a disability. An outright inheritance can destroy SSI and Medicaid eligibility overnight. A properly drafted special needs trust — see the three trust types — remains an eligible designated beneficiary able to use a life-expectancy payout, which makes this one of the few places where the old stretch survives intact and matters enormously.
• Minor children. A custodian's authority typically ends at eighteen or twenty-one. Few parents want a seven-figure account handed over then.

Conduit versus accumulation

A see-through trust — one the tax rules will look through to its individual beneficiaries — comes in two designs, and choosing between them is the central drafting decision.

A conduit trust requires the trustee to pass every distribution received from the IRA directly out to the beneficiary. It is simpler and its qualification is well established. The cost is that nothing is retained: over ten years the entire account passes to the beneficiary anyway, so the trust's protective purpose is largely defeated by the end of the period.

An accumulation trust permits the trustee to retain distributions inside the trust. Protection is preserved, but retained income is taxed at compressed trust rates, which reach the top bracket at a very low threshold. The result is a genuine trade: keep the money protected and pay more tax, or release it and pay less.

Both designs must satisfy technical requirements — a valid trust under state law, irrevocable at death, identifiable beneficiaries, and documentation supplied to the custodian by the deadline. These are not places to improvise; the rules are unforgiving and the drafting is specialised.

Roth conversions and the ten-year window

One consequence of the ten-year rule is renewed attention to Roth conversions. Converting during the owner's lifetime pays the tax at the owner's rate rather than at the beneficiary's, and a beneficiary who inherits a Roth still has ten years — but takes the distributions tax free. Whether that is worthwhile depends on the relative brackets, the years available and whether the tax can be paid from outside the account. It is an arithmetic question, not a philosophical one, and it is worth running before assuming either answer.

The step to take first

Before considering a trust, retrieve the actual beneficiary forms from every custodian and read them. Confirm the primary and contingent beneficiaries, check that the names and relationships are current, and confirm that any trust named is drafted for the current rules rather than the pre-2019 ones. A plan built on an outdated designation form fails no matter how good the rest of it is — and this is the single cheapest defect to fix on the whole of the estate planning page.