Trust + IRA Planning After the SECURE Act: What Changed and What to Do About It

The rules for inherited IRAs changed in 2020. If your estate plan includes a trust as an IRA beneficiary, this article explains exactly what broke — and two strategies to fix it.

What Is the SECURE Act and Why Does It Matter for Trusts?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law on January 1, 2020. Among several provisions, it eliminated the single most valuable tax-planning tool for inherited IRAs: the lifetime stretch.

Before 2020, a non-spouse beneficiary — your child, a trust, a grandchild — could inherit your IRA and stretch required minimum distributions (RMDs) over their own life expectancy. A 40-year-old inheriting a $1 million IRA might take small distributions over 40+ years, letting the bulk of the account continue growing tax-deferred.

The SECURE Act replaced the lifetime stretch with a 10-year rule. Now, most non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner’s death. No exceptions for trusts. No exceptions for large accounts.

That single change created a tax problem hiding inside thousands of estate plans across the country — including many in Arkansas.

What Is the 10-Year Rule for Inherited IRAs?

Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries must withdraw the entire balance of an inherited IRA by December 31 of the 10th year following the original account holder’s death.

There are limited exceptions. Eligible designated beneficiaries — surviving spouses, minor children (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased — can still use the stretch. Everyone else falls under the 10-year rule.

For individuals inheriting directly, this is manageable. You have flexibility in how much you withdraw each year, and distributions are taxed at your personal rate.

For trusts inheriting an IRA, the math gets ugly fast.

Why Do Trust Tax Brackets Create a Problem?

Here is the core issue most estate plans miss:

A trust hits the top federal income tax bracket of 37% at roughly $16,000 of taxable income.

An individual does not reach the 37% bracket until their taxable income exceeds approximately $609,000.

Read that again. A trust pays the highest federal tax rate on income above $16,000. An individual does not pay that rate until $609,000.

When a trust is named as the IRA beneficiary and that trust is an accumulation trust — meaning it holds distributions inside the trust rather than passing them through to beneficiaries — every dollar of IRA income above that $16,000 threshold gets taxed at the maximum rate.

Under the old stretch rules, this was less painful. Small RMDs spread over decades might stay below the compressed bracket thresholds.

Under the 10-year rule, even a modest inherited IRA generates distributions well above $16,000 per year when the account must be emptied in a decade.

What Is an Accumulation Trust vs. a Conduit Trust?

Two types of trusts commonly receive inherited IRAs:

Accumulation trust: The trustee has discretion over whether to distribute IRA withdrawals to the beneficiary or keep them inside the trust. This provides asset protection, creditor protection, and spending control. The tradeoff: any income retained inside the trust is taxed at the trust’s compressed rates.

Conduit trust: The trustee is required to pass all IRA distributions through to the beneficiary in the year they are received. Because the income flows to the individual beneficiary, it is taxed at the beneficiary’s individual rate — not the trust’s compressed rate. The tradeoff: you lose control. The money reaches the beneficiary directly.

Before 2020, accumulation trusts made sense for IRA planning because stretch distributions kept annual income modest. After the SECURE Act, accumulation trusts holding large inherited IRAs can generate significant income trapped at the 37% rate.

Who Has This Problem?

Here is the irony: the clients most affected by this change are the ones who planned most carefully.

They have the largest IRAs — often $500,000 to $2 million or more. They created trusts specifically to protect beneficiaries from spending problems, divorce exposure, creditor claims, or poor financial decision-making. They hired attorneys, paid for documents, and built an estate plan around rules that no longer exist.

If your trust was drafted before 2020, it was written for a stretch IRA world. That world ended.

How Much More Tax Does a Trust Pay? Case Studies

Let’s compare the tax impact of an individual inheriting an IRA directly versus an accumulation trust inheriting the same IRA, both under the 10-year rule.

For simplicity, we will assume level distributions over 10 years with no growth, and we will use 2024 federal brackets. State taxes would add to the burden. These are illustrative examples, not projections.

Example 1: $500,000 Inherited IRA

Individual inheriting directly: $50,000 per year in distributions. Assuming this is the beneficiary’s only income and they take the standard deduction, effective federal tax rate is approximately 10-12%. Estimated annual federal tax: roughly $4,000-$5,500.

Accumulation trust: $50,000 per year retained inside the trust. The first ~$16,000 is taxed at lower rates. Everything above that hits 37%. Estimated annual federal tax: roughly $15,000-$16,000.

Difference over 10 years: approximately $100,000 in additional federal taxes paid by the trust.

Example 2: $1,000,000 Inherited IRA

Individual inheriting directly: $100,000 per year. Effective federal tax rate approximately 15-18%. Estimated annual federal tax: roughly $15,000-$17,000.

Accumulation trust: $100,000 per year retained inside the trust. Vast majority taxed at 37%. Estimated annual federal tax: roughly $33,000-$35,000.

Difference over 10 years: approximately $170,000-$180,000 in additional federal taxes.

Example 3: $2,000,000 Inherited IRA

Individual inheriting directly: $200,000 per year. Effective federal tax rate approximately 24-28%. Estimated annual federal tax: roughly $40,000-$45,000.

Accumulation trust: $200,000 per year retained inside the trust. Nearly all income above $16,000 taxed at 37%. Estimated annual federal tax: roughly $70,000-$72,000.

Difference over 10 years: approximately $260,000-$270,000 in additional federal taxes.

These numbers represent federal income tax only. Add Arkansas state income tax and the gap widen further.

What Are the Two Main Strategies to Fix This?

If you have a trust named as an IRA beneficiary and you are still alive, you have options. Two strategies stand out.

Strategy 1: Roth Conversions During Your Lifetime

A Roth conversion moves money from a traditional IRA to a Roth IRA. You pay income tax on the converted amount in the year of conversion. After that, the money grows tax-free and comes out tax-free — for you and for your beneficiaries.

Here is why this matters for trust planning:

When a trust inherits a Roth IRA, the 10-year rule still applies. The trust must still empty the account within 10 years. But because Roth distributions are not taxable income, the trust’s compressed brackets are irrelevant.

No taxable income means no tax at 37%. The trust receives the distributions, controls them according to your wishes, and owes nothing to the IRS on those dollars.

The key is doing the conversions during your lifetime, ideally between ages 59½ and 72 (before RMDs begin). This is the window where many retirees and business owners have the most control over their taxable income. The sweet spot for conversions is filling up lower tax brackets — converting enough each year to stay below the 24% or 32% bracket rather than letting the trust pay 37% later.

For a business owner approaching retirement, this can be combined with other planning: timing the sale of a business, managing cash balance plan distributions, or coordinating with capital gains from investment accounts.

Strategy 2: Permanent Life Insurance Inside an Irrevocable Life Insurance Trust (ILIT)

If Roth conversions alone cannot solve the problem — because the IRA is too large, the owner’s current income is too high, or the timeline is too short — permanent life insurance inside an ILIT is the second tool.

Here is how it works:

An irrevocable life insurance trust (ILIT) owns a permanent life insurance policy on the IRA owner’s life. The IRA owner makes gifts to the ILIT, which uses those gifts to pay premiums. When the owner dies, the death benefit pays to the ILIT income-tax-free.

The ILIT provides the same control features the original trust was designed for: spending protection, creditor protection, divorce protection. But because a life insurance death benefit is not taxable income, the trust’s compressed tax brackets do not apply.

This strategy effectively replaces some or all of the IRA with a vehicle that delivers dollars to your beneficiaries through a trust structure without triggering the 37% bracket.

The IRA still passes to beneficiaries — potentially directly, where the individual tax rates apply — while the ILIT handles the asset protection and control functions the trust was originally designed for.

What Should You Do If Your Trust Was Drafted Before 2020?

If your estate plan was created before the SECURE Act, start here:

1. Review your IRA beneficiary designations. Confirm who (or what trust) is listed as the beneficiary on every retirement account. Your will does not control your IRA. The beneficiary designation form does.

2. Ask your attorney whether your trust is an accumulation trust or a conduit trust. This determines how inherited IRA distributions will be taxed.

3. Model the 10-year distribution schedule. Have your financial advisor run the numbers on what the trust will owe in taxes under the 10-year rule at current IRA balances. Use the worked examples above as a starting framework.

4. Evaluate Roth conversions. Determine how much you can convert each year without pushing into a bracket higher than what the trust would pay. In most cases, converting at 24% or even 32% is better than letting the trust pay 37%.

5. Assess whether life insurance fills a gap. If the IRA is large enough that Roth conversions alone will not fully address the problem, explore whether a permanent policy inside an ILIT makes sense.

6. Update your trust document. Even if the strategy does not change, the trust language may need to be revised to reflect the 10-year rule. Trusts drafted for the stretch world may contain provisions that no longer function as intended.

The Bottom Line

The SECURE Act did not eliminate trusts from IRA planning. It changed the math.

If you built your estate plan before 2020, the trust provisions you paid for were designed around a tax law that no longer exists. That does not mean your plan is broken. It means it needs to be re-examined in light of new rules.

The clients who feel this most are the ones who planned most carefully — the largest IRAs, the most protective trust language, the most thoughtful estate plans. Those are the plans worth updating.

You still have time to act. Roth conversions, life insurance, updated trust language — these are available tools.

The key is modeling the numbers before a death forces your beneficiaries into a 10-year window they did not plan for.

See you next time, cheers!

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