Trusts are legal entities and are subject to Required Minimum Distribution Rules if a non-human inherits the account. There are instances when naming a trust as the beneficiary of an IRA account works well, although there are significant pitfalls to avoid. When this works and when it doesn’t is the subject of a recent article, “Trust as IRA Beneficiary? Avoid These Mistakes” from Think Advisor.
The identity of a beneficiary has a significant impact on whether a trust is a good idea for a beneficiary. A trust as a beneficiary can make the complexities of inherited IRAs even more complicated and lead to higher future tax liabilities if the trust becomes subject to the highest federal income tax rate, for instance.
However, there are situations where naming a trust as the IRA’s beneficiary makes sense. This is something to discuss with your estate planning attorney, since it needs to work with the rest of your estate plan. Let’s start with the basics.
The taxation of inherited IRAs in a trust depends on the type of trust used. Distributions from an accumulation trust, where the funds go into the trust and remain within the trust, are taxed at the trust’s tax rate. In 2025, the 37% rate kicks in once the trust has income exceeding $15,650.
If the trust is a conduit trust, passing distributions directly to the trust’s beneficiary, then the beneficiary is taxed at their ordinary income tax rate. For 2025, the highest rate applies to income exceeding $626,350 for single filers and $751,600 for joint filers.
The tax liability could be far higher if the trust itself is the beneficiary. Except for a lump sum distribution, a trust or estate beneficiary has two options for distributing the account’s funds: a five-year distribution period or a life expectancy method.
If the trust beneficiary qualifies as a see-through trust, different RMD rules apply. The trust is “looked through,” and assets pass directly to the beneficiaries. If the trust qualifies, and this is a crucial “if,” the RMD rules applying to the inherited account will depend on the identity of the beneficiaries. The 10-year rule, also known as the life expectancy rule, may apply. Your estate planning attorney will know which applies to your unique situation.
Trusts as beneficiaries are a good tool for blended family situations. The original owner may want their surviving spouse to benefit from assets in the IRA but wants the remainder to be passed to children from a prior marriage. Properly structured, a trust can accomplish this.
The identity of the beneficiary will determine whether a trust is a good idea for a beneficiary. If the beneficiary is a minor child who can’t legally inherit or own the IRA, a trust beneficiary may allow the IRA to be managed while the child is a minor. This also applies if the IRA owner believes the heir may be vulnerable to scams targeting individuals with large inheritances or is unable to manage a substantial inheritance.
One thing to note: federal law doesn’t provide creditor protection for inherited IRAs. This may be another reason to name a trust as the beneficiary of your IRA.
Speak with your estate planning attorney to discuss whether creating a trust to be the beneficiary of your IRA makes sense for you and your loved ones.
Reference: Think Advisor (June 18, 2025) “Trust as IRA Beneficiary? Avoid These Mistakes”