Should Your Trust Inherit Your IRA?
Overview
A Revocable Living Trust can help you distribute assets and avoid probate. But if most of your savings are in tax-deferred retirement accounts like IRAs or 401(k)s, making your trust the beneficiary can add unnecessary complications. Here are some important things to think about.
Retirement Accounts Don't Work Like Other Assets
Most assets are passed on after death through a Will, a Trust, or by state law if there is no Will or Trust. Retirement accounts work differently. They go straight to the people you name as beneficiaries, skipping Wills, probate, and Trusts, even if those documents mention the accounts.
Your IRA or 401(k) is already set up to avoid probate. Unless your beneficiaries need a Trust for a specific reason, such as being minors or receiving needs-based government benefits, you can name them directly on the account. In most cases, using a Revocable Living Trust here is not helpful.
What Happens When You Name Your Trust as Beneficiary
Some people name their Revocable Living Trust as the beneficiary because they believe it will simplify things. It might seem like a tidy solution, but this choice can actually create complicated tax issues.
The 10-Year Rule (Thanks to the SECURE Act)
Before 2020, people who inherited an IRA could spread withdrawals over their lifetimes, resulting in smaller, more manageable taxable amounts each year. The SECURE Act of 2019 changed this for most non-spouse beneficiaries. Now, most heirs must withdraw the entire account within 10 years of the original owner's death, except for surviving spouses, minor children, and a few other groups. (The SECURE 2.0 Act of 2022 made some changes, but the 10-year rule still applies to most heirs.) This rule not only shortens the withdrawal period but also brings tax consequences that many people do not expect.
The Trust Income Tax Problem
If your Trust does not meet certain IRS requirements called "see-through" or "look-through" rules (Treasury Regulation §1.401(a)(9)-4), the IRS may require faster withdrawals, sometimes within five years. A "see-through" Trust lets the IRS look past the Trust and focus on the individual beneficiaries named in it. You can read more about “see-through” trusts here. If your Trust is set up correctly and meets these rules, each beneficiary can be treated as if they had inherited the account directly, with the same withdrawal options. If not, stricter rules apply, and withdrawals may need to happen much sooner.
Even if your Trust meets the rules, taxes can still be a problem if IRA funds remain in the Trust rather than being distributed to the beneficiaries. Money kept in the Trust is taxed at the fiduciary income tax rate, which is 37% on taxable income of about $15,650 for 2025. By comparison, joint filers only pay this rate if their income is over $600,000. Qualified Trusts can avoid this problem if the rules for distributing money are clear and the Trustee makes payments on time.
Is Naming the Trust as the Beneficiary Ever a Good Idea?
If your biggest asset is a tax-deferred retirement account, it is usually best to name individual beneficiaries rather than your Trust. This makes things easier and gives your heirs better tax benefits. Still, there are a few exceptions to remember:
People under age 21 cannot inherit retirement account money directly (under NC’s Uniform Transfers to Minors Act). They must have a Trust or a court-appointed custodian or guardian to manage the money. Often, a Trust is the easier choice, since custodial arrangements can be expensive and complicated.
Beneficiaries who get SSI or Medicaid benefits (or may qualify in the future) might need a special type of Trust, called a Supplemental Needs Trust or Special Needs Trust. This helps them keep their government benefits after receiving an inheritance.
If a beneficiary struggles with addiction or managing money, a Trust with spendthrift rules or discretionary payments can help. In these situations, protecting their inheritance from misuse or creditors is often more important than possible tax issues.
If any of these exceptions fit your situation, speak with an experienced estate planning attorney about your Revocable Living Trust. Each case requires specialized trust language to comply with federal and state laws, and these details are not part of a standard trust.
The Bottom Line
A Revocable Living Trust is a useful estate planning tool, but it is usually not wise to name it as the beneficiary of tax-deferred retirement accounts due to potential tax issues and limited benefits. It is better to keep trust and beneficiary choices separate, unless you have a special situation that is an exception.
Keep your retirement account beneficiaries and trusts separate in your estate plan. They work independently, but should still be coordinated.
Estate planning is personal, and there is no single solution for everyone. Contact us if you need help. We will work with you to reach your goals and connect you with helpful resources. Planning ahead can give you peace of mind.
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Disclaimer: This article provides general information and is not legal advice. Laws may vary and change over time. Content was drafted with AI assistance and finalized by Attorney Heather Hazelwood.