IRA Inheritance Planning

An IRA is considered “income in respect of a decedent,” which means withdrawals are taxable to the person who receives the funds. Without a strategy, beneficiaries may be forced to take large distributions in a short time and face steep tax bills. Planning gives you control over how the money flows and who receives it. It also helps you preserve as much value as possible for your loved ones.

The SECURE Act took effect in 2020 and eliminated the lifetime “stretch” option for most non-spouse beneficiaries. Before the law, many beneficiaries could take required minimum distributions (RMDs) over their life expectancy, spreading taxes over decades. The law replaced this with the 10-year rule. Most non-spouse beneficiaries must now withdraw the entire account within 10 years of the original owner’s death. Faster withdrawals mean higher taxable income and less long-term growth.

Only specific individuals qualify as “eligible designated beneficiaries.” This category includes:

• Surviving spouses
• Minor children of the account owner (until age 21)
• Beneficiaries who are disabled
• Individuals who are chronically ill
• Beneficiaries who are no more than 10 years younger than the account owner

Once a minor child turns 21, the 10-year rule starts. Other eligible beneficiaries can continue to take distributions based on life expectancy until the account passes to someone else.

SECURE Act 2.0 did not repeal the 10-year rule. Instead, it made adjustments to other retirement rules. The age for taking RMDs increased from 72 to 73, and it will eventually rise to 75. Penalties for failing to take RMDs were reduced. These changes help account owners manage withdrawals during life, but beneficiaries still face accelerated timelines after death. Inheritance planning remains essential.

The 10-year rule requires the beneficiary to withdraw the entire IRA by the end of the tenth year after the owner’s death. Some beneficiaries must also take annual RMDs during that period if the original owner had already begun RMDs. This rule gives flexibility in timing, but poor planning can result in large taxable withdrawals in high-income years. Strategic distribution scheduling can reduce the tax burden.

Spouses receive more flexibility than any other beneficiary. Options include rolling the IRA into their own account, keeping it as an inherited IRA, or treating it as their own for beneficiary designation purposes. Each option carries different rules for RMDs and taxes. The right decision depends on the spouse’s age, financial needs, and long-term goals. Legal guidance helps avoid costly mistakes.

A trust can receive IRA assets, but the trust must be drafted carefully. If done correctly, the trustee can manage distributions for the beneficiary’s benefit while protecting the account from misuse or creditors. Trusts are especially useful for minor children, beneficiaries with disabilities, or individuals who need oversight. The trustee manages assets under the trust terms. If the trust fails to meet IRS requirements, accelerated taxation may apply. Attorney involvement is essential.

IRA custodians follow default rules if no beneficiary is listed. The account may pass to the estate, which often forces faster withdrawals and higher taxes. Probate may also become necessary, which adds delays and costs. Naming individuals or properly structured trusts avoids these problems and allows for better tax treatment.

Several strategies help manage tax exposure:

• Spreading withdrawals across multiple years rather than waiting until year ten
• Coordinating IRA distributions with low-income years
• Using charitable planning in some situations
• Naming eligible beneficiaries who qualify for lifetime payouts when appropriate
• Placing the IRA in a trust designed with SECURE Act rules in mind

Each strategy must be tailored to the size of the account, the beneficiary’s needs, and overall estate goals.