What's the Process When a Trust (or Estate) is IRA Beneficiary?
What Happens When a Trust or Estate Inherits an IRA?
When a trust or estate becomes the beneficiary of an IRA, many questions arise: Who controls the account? What are the tax consequences? How do the payout rules work? These are valid concerns, and while the topic is complex, understanding the basics will help avoid costly mistakes.
How Ownership of the Inherited IRA Works
When a trust or estate is listed as the beneficiary on an IRA, the account does not pass directly to the individual heirs or trust beneficiaries. Instead, the IRA must be retitled to reflect the trust or estate as the new account owner. Control of the account rests with the executor (for an estate) or the trustee (for a trust).
For example, the title of a trust-owned inherited IRA might read: “William Smith, IRA (deceased June 1, 2021) F/B/O Adam Johnson, Trustee of The Smith Family Trust, beneficiary.”
This structure confirms that the account belongs to the trust—not directly to the individual named in the trust. Funds must be managed and distributed according to the trust document or estate instructions.
Understanding the RMD Rules for Estates and Trusts
Estates are considered non-designated beneficiaries—essentially “non-person” beneficiaries. When a non-person inherits an IRA, only two distribution rules apply: the 5-year rule or the ghost rule. Which one applies depends on whether the IRA owner died before or after their Required Beginning Date (RBD).
The RBD is April 1 of the year after the account holder turns 73 (or 70½ or 72 depending on the rules in effect at the time of death).
- If the IRA owner died before their RBD, the 5-year rule applies. There are no required distributions during this time, but the account must be fully emptied by December 31 of the fifth year following death.
- If the IRA owner died on or after their RBD, the ghost rule is used. Annual Required Minimum Distributions (RMDs) must be taken using the deceased’s remaining single life expectancy. Start with the decedent’s age in the year of death to find the initial factor, then reduce it by one each year thereafter.
If a trust is the beneficiary and meets the criteria to be treated as a “see-through” or “look-through” trust, then the rules shift. With a see-through trust, we can look through the trust to identify the underlying beneficiary and use their age or status to determine the appropriate payout structure.
For instance, if the trust beneficiary qualifies as an Eligible Designated Beneficiary (such as a disabled individual), then lifetime RMDs may apply. If not, then the 10-year rule will generally apply, requiring the account to be emptied within 10 years but without annual distribution requirements.
Tax Treatment of Trust-Owned IRAs
Many people assume that naming a trust or estate as IRA beneficiary automatically results in high tax liability. It’s true that trust tax brackets are compressed. In 2024, a trust reaches the top 37% federal tax bracket with just $15,200 of income. Compare that to a married couple filing jointly, who don't hit the 37% bracket until income exceeds $731,200.
However, those high rates only apply if the funds from the inherited IRA stay within the trust. If distributions are made to the trust but then passed through to individual beneficiaries, the income tax is often shifted to those individuals based on their personal tax brackets. That structure can significantly lower the overall tax burden if the beneficiaries are in lower brackets.
Avoid Mistakes When Setting Up Inherited Accounts
Administering a trust-owned or estate-owned inherited IRA incorrectly can trigger penalties, unexpected taxes, or even disqualify the trust from see-through treatment. Before opening new inherited accounts or making distributions, it’s important to confirm:
- How the account should be titled
- Which payout rules apply (5-year, ghost rule, 10-year, or lifetime stretch)
- Whether the trust qualifies as a see-through entity
- What tax consequences apply to the trust and the beneficiaries
Frequently Asked Questions
Who controls an inherited IRA when a trust is the beneficiary?
The trustee manages the account. For estates, the executor is responsible. Beneficiaries of the trust or estate do not control the account directly.
What is the ghost rule?
If the IRA owner died after their Required Beginning Date, annual RMDs must be calculated using the decedent’s remaining life expectancy.
Can beneficiaries of a trust take distributions directly?
Yes, if the trust allows pass-through distributions. This can help reduce taxes by shifting income to beneficiaries at their individual rates.
Is a trust always subject to higher taxes?
Only if distributions remain in the trust. Pass-through distributions shift income to the beneficiary’s personal tax return, often at a lower rate.
What is a see-through trust?
A see-through trust meets IRS requirements that allow the underlying beneficiary to determine the applicable payout structure.
Plan With Oversight
Estate and trust rules around inherited IRAs are complex. Work with a licensed advisor to ensure accounts are properly structured and taxes are minimized.
Schedule your complimentary consultation today.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.