Naming a Trust as IRA Beneficiary: Key Considerations

As the significance of IRAs has grown, it has become more common to name trusts as IRA beneficiaries. This article looks at key considerations for inherited IRAs and trusts.
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Trusts are terrific estate planning vehicles that allow individuals to protect and preserve wealth and to pass assets to the next generation. Individual retirement accounts (IRAs) are also useful vehicles that are often used to grow assets free from current income tax and to transfer those assets to the next generation. IRAs were introduced in the 1970s, and since that time have become an increasingly popular structure for accumulating wealth. These tax-advantaged accounts now collectively hold over $11 trillion of assets, which is more than a third of all retirement assets in the U.S.1 As the significance of IRAs has grown, it has become more common to name trusts as IRA beneficiaries, thus combining the tax-advantaged growth of an IRA with all of the advantages that trusts have to offer.

A Reminder of IRA Basics: How an IRA Can Be Inherited

An IRA is an investment account that you own. Each year, you can contribute income that you earn, subject to certain limits. For traditional IRAs, this contribution typically is deductible from your income, and then later withdrawals are subject to income taxation. For Roth IRAs, the contribution generally is not tax deductible, and later withdrawals are tax-free. If you withdraw assets from either type of IRA before age 59 ½, you generally will incur an early-withdrawal penalty of 10%.

When you reach age 72, you must start taking required minimum distributions (RMDs) each year from a traditional IRA. The RMDs are based on your age and a life expectancy factor listed in tables published by the IRS. Roth IRAs are not subject to RMDs during your life.

Given the way the IRS tables are structured, if you withdraw only the RMDs from your IRA, there will be assets left in the IRA at your death. And, if the IRA has a high rate of investment return, it is possible for your IRA to have greater value at your death than when you started taking RMDs.

The IRA with its remaining assets does not pass under the terms of your will or trust, but instead passes to whomever you have named in the IRA beneficiary designation. The most common designations are to individuals – for example, all to a spouse or in equal shares to children. However, a trust also can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual.

Reasons to Name a Trust

When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust. Some good reasons to consider naming a trust as an IRA beneficiary instead of an individual include:

  • Working around beneficiary ownership limitations. Perhaps the intended beneficiary is a minor who is legally unable to own the IRA. Or, perhaps the IRA owner wants to support an individual with special needs who will lose access to government benefits if he or she owns assets in his or her own name. A solution in both cases could be to name a trust as the IRA beneficiary, which will then become the legal owner in place of the minor or individual with special needs.
  • Solving for second marriage or other family structures. An IRA owner may wish for RMDs to benefit his second spouse during the spouse’s lifetime, and then have the remainder of the IRA pass to his own children. If the IRA owner leaves the IRA outright to his spouse, he can be certain that his spouse will benefit, but he can’t guarantee that his children will receive anything. If he instead leaves the IRA to a properly structured trust, his desire to benefit both sets of beneficiaries can be carried out.
  • Limiting a beneficiary’s access. We often think of IRA beneficiaries as taking only the required minimum distributions, but an individual who has inherited an IRA has the right to take larger distributions, or even withdraw the entire balance of the IRA. On the other hand, the access of a beneficiary of an inherited IRA owned by a trust will be subject to the terms of the trust.
  • Naming successive beneficiaries. When an individual IRA beneficiary inherits an IRA, she can name her own initial successor beneficiaries. If the IRA owner wishes to control the successor beneficiary beyond the initial beneficiary, the owner will need to set forth the succession terms in a trust and name the trust as the IRA beneficiary.
  • Providing creditor protection. A person’s own IRA has some level of protection from creditors, but this does not always carry through to the inherited IRA. The U.S. Supreme Court ruled in Clark v. Rameker (2014) that inherited IRAs do not qualify under the Federal Bankruptcy Code as exempt from the claims of creditors as “retirement funds.”
    An inherited IRA held instead in a properly structured trust will not be an asset of the beneficiary and will have some protection from creditors.
  • Funding estate plans structured to minimize estate tax. Most estate plans for wealthy individuals include trusts designed to minimize and postpone the payment of federal and state estate tax. For such estate plans to work as intended, the portion of these trusts that shelters an individual’s federal or state estate tax exemption amounts needs to be funded upon the individual’s death. Often, the only asset available to do this funding is an IRA.

Pulling Back on the Stretch IRA

Just as there are rules about RMDs during the IRA owner’s life, there also are rules about distributing an inherited IRA after the owner dies. The preferred payout has long been the “stretch IRA,” where the post-death RMDs are stretched out, with annual distributions, over the life expectancy of the new IRA beneficiary. In this case, the IRA could continue to grow tax-deferred, often for many decades after the owner’s death.

The SECURE Act,2 passed in December of 2019, has significantly reduced the ability to create a stretch IRA. The prior stretch rule has been replaced, for most beneficiaries, with a 10-year rule that requires the IRA to be distributed out completely by the end of the tenth year following the year of the IRA owner’s death. The 10-year rule does not require annual distributions, so long as the full amount is distributed by end of the tenth year. The new 10-year rule does not apply to the following beneficiaries (known as “eligible designated beneficiaries”): the IRA owner’s surviving spouse, the owner’s children while they are minors, certain individuals who are chronically ill or disabled, and any person who is not more than 10 years younger than the IRA owner. The stretch IRA is still available for these beneficiaries.

RMD Rules for Trusts Inheriting IRAs

The post-death RMDs for a trust named as an IRA beneficiary will be calculated under either the stretch payout rule, the 10-year rule, or the 5-year rule, depending on certain attributes of the trust and the trust beneficiaries. It matters whether the trust qualifies as a see-through trust, whether it is a conduit trust or an accumulation trust, and whether the trust beneficiaries are non-individuals, “regular” beneficiaries, or part of the new class of “eligible designated beneficiaries.” The application of the RMD rules to these different types of trusts and beneficiaries is outlined in Exhibit A.

The analysis of which RMD rule applies is not always clear, and there are aspects of the SECURE Act that will require clarification through IRS regulations. For these reasons, among others, it is important to involve your estate planning advisor in any decision to name a trust as an IRA beneficiary. You will want to confirm that your reasons for naming a trust as your IRA beneficiary are reflected in the trust terms and will not be negated by the RMD payout rules. It is also important to review beneficiary designations to be sure that any trust beneficiaries are appropriately named.

It is important to note that the RMD payout rules are different than the payout rules of the trust. Even if an IRA must pay out under the 5-year rule to a trust named as the IRA beneficiary, it does not necessarily mean that the IRA assets will distribute out to the trust beneficiaries within five years. Instead, the terms of the trust regarding distribution to trust beneficiaries will apply. For example, if the trust is completely discretionary, then once the IRA assets are distributed out of the IRA to the trust itself, the after-tax proceeds of the IRA will remain invested with other assets of the trust until the trustee exercises its discretion to make a distribution to one or more of the beneficiaries.


What Sets Fiduciary Trust Apart: We understand IRAs and Trusts

Fiduciary Trust has administered IRAs from the time the IRA rules were first established in the 1970s, and we have been administering trusts for more than 130 years. We offer a range of services to support both, from providing general advice and administrative services to managing investments and serving as a corporate trustee. We also are experienced at collaborating with outside counsel to help ensure that your IRA and IRA beneficiary designations are integrated into your estate plan.

Our expertise and comfort level in advising clients with trusts makes us an ideal partner for establishing IRAs that name trusts as beneficiaries. For example, we are experienced in managing the complexities of how IRA distributions to trusts are treated for income tax purposes versus trust accounting purposes.

In addition, unlike some firms that only function as IRA “custodians,” Fiduciary Trust provides “trusteed” IRAs. Under this arrangement, Fiduciary Trust not only performs traditional custodial services — such as tracking deposits and distributions and filing required tax reports — but we can also take on responsibility for investment management or decisions about RMD distributions in the event the IRA owner is incapacitated.

Due to our long history of working with high-net-worth families and individuals to serve as trustee and to invest, manage, and administer trusts and IRAs, we are uniquely qualified to advise you on all aspects of naming a trust as an IRA beneficiary.

Learn More: “Keys to Fulfilling your Trustee Duties

Learn More: Wealth Planning Checklist”

To learn more about our IRA, trust, and other services, please contact your Fiduciary Trust Officer, contact Rick Tyson at 617-292-6799 or, or contact us here if you would like to speak with us.

Published June 2020

Click here to view the pdf version of this article.

1 “Retirement Assets Total $32.3 Trillion in Fourth Quarter 2019,” Investment Company Institute. March 19, 2020.
2 Setting Every Community Up for Retirement Enhancement Act. Effective for IRA owners who die after December 31, 2019.
3 Beneficiaries must be individuals (not an entity, such as an estate or a charity) and must be “identifiable” (generally meaning that it must be possible to identify the oldest beneficiary the trust will have).
4 Includes IRA owner’s surviving spouse, the owner’s children while they are minors, certain individuals who are chronically ill or disabled, and any person who is not more than 10 years younger than the IRA owner.
5 Life expectancy payout available for trust beneficiaries who are chronically ill or disabled.


  • Thanda Fields Brassard, JDVice President & Trust Counsel; General Counsel, Fiduciary Trust of New England
    Thanda advises individuals and families on their estate and tax planning matters, and has significant experience in estate settlement and trust administration. In addition, she ser...
  • Kelly J. Guarino, JDVice President & Trust Counsel
    Kelly provides trust administration and estate planning advice for clients in collaboration with Fiduciary’s investment officers and clients’ outside estate planning counsel. ...

The opinions expressed in this publication are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute legal, tax or accounting advice and clients should discuss any proposed arrangement or transaction with their legal or tax advisors.

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