For most people, naming a trust as an IRA beneficiary is the wrong choice. Since the SECURE Act took effect in 2020, the strategy costs more in taxes and administration than it delivers in benefits, and the estate planning advantage that once justified it — decades of stretched, tax-deferred growth — no longer exists for the vast majority of beneficiaries. A trust hits the top 37% federal tax bracket at just $16,000 of retained income, while a single individual filing on their own does not reach that rate until $640,600. Unless a specific circumstance calls for a trust, naming individuals directly leaves more money in your heirs’ hands.
The Ten-Year Rule Erased the Old Reason to Use a Trust
Before 2020, a non-spouse beneficiary could take small annual distributions from an inherited IRA over their own life expectancy. A young grandchild could stretch withdrawals across roughly 60 years, letting the account compound tax-deferred for decades. A trust could sit in the middle and control those distributions without cutting the growth short. That was the pitch.
The SECURE Act ended it. Most non-spouse beneficiaries now have to empty an inherited IRA by the end of the tenth year after the original owner’s death.1Internal Revenue Service. Retirement Topics – Beneficiary The ten-year clock runs the same whether the beneficiary is a person or a trust. The trust buys no additional time.
If the original owner died after reaching age 73 (the current required beginning date), the beneficiary also has to take annual minimum distributions during years one through nine, with the account fully drained by year ten.2Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) A trustee unfamiliar with the annual requirement can miss a deadline that an individual beneficiary would catch with a single call to the IRA custodian. Missed distributions trigger a 25% excise tax on the amount that should have come out, dropping to 10% if corrected within two years.3Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Trust Tax Brackets Are Brutally Compressed
The single biggest financial argument against a trust is how quickly retained income runs into the top rate. For 2026, the trust and estate brackets are:4Internal Revenue Service. Form 1041-ES Estimated Income Tax for Estates and Trusts (2026)
- 10% on taxable income from $0 to $3,300
- 24% from $3,300 to $11,700
- 35% from $11,700 to $16,000
- 37% above $16,000
A single individual does not reach that 37% bracket until taxable income exceeds $640,600.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A trust that keeps a $50,000 IRA distribution pays the top rate on $34,000 of it. That same $50,000 in the hands of a beneficiary earning a normal salary might be taxed almost entirely at 22% or 24%. Across ten years of forced distributions from a sizable IRA, the gap compounds into tens of thousands of dollars in avoidable tax.
Conduit and Accumulation Trusts Both Have a Catch
Trusts built to hold IRA assets fall into two designs, and each solves one problem by creating another.
A conduit trust requires the trustee to pass every IRA distribution straight through to the beneficiary. The money flows in and immediately flows out, so it gets taxed at the beneficiary’s personal rate rather than the trust’s compressed brackets. The tradeoff: the beneficiary receives the funds outright, which means the trust offers no meaningful asset protection. Under the ten-year rule the entire account ends up in the beneficiary’s hands anyway, so a conduit trust is doing administrative work for no protective benefit.
An accumulation trust lets the trustee hold distributions inside the trust instead of passing them through. This is where the asset-protection argument actually lives, and it matters if a beneficiary is a spendthrift or facing creditor problems. But every dollar the trustee retains is taxed at trust rates, so the trustee is stuck choosing between protecting the assets at a 37% rate or distributing them to save tax and giving up the protection. The ten-year window makes that choice sharper than it was under the old stretch rules.
See-Through Requirements Are Easy to Fail
Not every trust qualifies for the ten-year rule. To get it, the IRS must be able to “look through” the trust and identify the human beneficiaries. Treasury Regulation 1.401(a)(9)-4 lays out four conditions: the trust must be valid under state law, it must be irrevocable or become irrevocable at the owner’s death, every possible beneficiary must be identifiable from the document, and a copy of the trust or a certified beneficiary summary must reach the IRA custodian by October 31 of the year after the owner’s death.6eCFR. 26 CFR 1.401(a)(9)-4 – Determination of the Designated Beneficiary
Miss one and the IRS treats the IRA as having no designated beneficiary. If the owner died before reaching the required beginning date, the account must be emptied within five years. If the owner died after that date, distributions must go out over the deceased owner’s remaining life expectancy, which is often even shorter. The attorney who drafted the trust may have gotten every clause right, and the whole arrangement can still collapse because a family member missed an October deadline.
Administrative Costs Run Every Year the Trust Exists
Drafting a trust that meets the see-through requirements takes specialized legal work, typically $2,000 to $5,000 up front, and the document often needs review when tax law changes, as it did with the SECURE Act and SECURE 2.0.
Once the trust is receiving distributions, it has to file IRS Form 1041 in any year it has taxable income or gross income of $600 or more. The IRS’s own burden estimates put the average out-of-pocket cost at about $1,300 for a simple trust return and $2,000 for a complex one, and that covers accounting and filing only.7Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 A professional trustee typically adds 1% to 2% of trust assets per year. On a $500,000 inherited IRA, that is $5,000 to $10,000 annually going to the trustee.
Naming an individual directly costs nothing. The beneficiary opens an inherited IRA, takes distributions on the schedule the ten-year rule allows, and reports the income on a personal return. Over a full ten-year distribution window, the administrative savings alone can top $20,000.
Surviving Spouses Especially Should Not Route an IRA Through a Trust
Spouses have an option no other beneficiary gets. A surviving spouse can roll the inherited IRA into their own IRA and treat it as if it had always been theirs.1Internal Revenue Service. Retirement Topics – Beneficiary That resets the distribution clock completely. No distributions are required until the surviving spouse reaches age 73, and even then they come out over the spouse’s life expectancy.
A trust cannot perform a spousal rollover. Even if the surviving spouse is the sole beneficiary of the trust, the IRA has to move through the trust structure and gets stuck under either the ten-year rule (for a see-through trust) or the five-year rule (for one that fails). Decades of potential tax deferral vanish. Unless there is a real concern about the spouse’s ability to manage money, or a blended-family situation in which a surviving spouse might redirect assets away from children from a prior marriage, a direct beneficiary designation is almost always the stronger choice.
When a Trust Still Makes Sense
A few situations do justify the added cost and complexity, and getting this wrong in the other direction can be just as damaging.
The strongest case is a beneficiary who is disabled or chronically ill. These individuals qualify as “eligible designated beneficiaries” under the SECURE Act and are exempt from the ten-year rule, so they can still stretch distributions over their own life expectancy.1Internal Revenue Service. Retirement Topics – Beneficiary More importantly, a properly drafted special needs trust can receive IRA distributions without disqualifying the beneficiary from Supplemental Security Income, Medicaid, or other means-tested programs. Naming a disabled beneficiary directly can put a large sum in their hands and immediately end benefits they depend on. Here the trust is not optional.
Minor children of the IRA owner, biological or adopted, are also eligible designated beneficiaries. They can stretch distributions over their life expectancy until they turn 21, at which point the ten-year clock starts.8Charles Schwab. Inherited IRA Rules and SECURE Act 2.0 Changes A trust can put a responsible adult in charge during the minority years without compressing the distribution timeline.
Creditor protection is the other common reason. Federal bankruptcy law generally shields assets inside a spendthrift trust from a beneficiary’s creditors, while inherited IRAs held directly by a non-spouse beneficiary do not receive the same protection in every state. If a beneficiary faces serious lawsuit exposure, business liability, or a history of financial trouble, a trust might save more in protected assets than it costs in higher taxes and fees. That is a judgment call tied to the beneficiary’s circumstances and state law.
For everyone else, the math has pointed in the same direction since 2020. Name individuals directly, skip the trust, and let your heirs keep more of what you saved.