If you named a trust as your IRA’s beneficiary, it’s time to revisit—and perhaps revise—that plan. Under the terms of the SECURE Act of 2020 and subsequent IRS regulations, this arrangement may have lost its appeal.

Naming a trust as an IRA beneficiary was long considered a prudent way to protect assets. These trusts could distribute IRA assets to heirs slowly over years, preventing heirs from burning through the money and missing out on decades of tax-deferred investment growth that their inherited IRAs could have provided. And as long as IRA assets remained in these trusts, they were safe from heirs’ creditors and their spouses if they divorced. Unfortunately, thanks to the SECURE Act, leaving IRAs to trusts now might mean leaving heirs with big tax bills.

Prior to the SECURE Act, nonspouse IRA beneficiaries often had the option of removing assets from inherited IRAs over a period of many decades—a strategy called a “stretch IRA.” Under the new rules: Nonspouse beneficiaries typically must remove all of the assets from these IRAs within 10 years of the inheritance, and in some cases, withdrawals are required in years one through nine as well. This creates a quandary…

If the assets are distributed to heirs as soon as they’re removed from these IRAs, the protections provided by these trusts expire in a decade.

If the assets are kept in the trusts after they’re removed from the IRAs, they’re subject to unfavorable trust tax brackets. As of 2022, the top 37% bracket kicks in at $647,850 for married couples filing jointly, for example, versus $13,450 for trusts.

What to do: If you named a trust as your IRA’s beneficiary, review the decision with your estate-planning attorney. If you don’t want to lose the control and protection provided by an IRA trust, one option is to convert your IRA to a Roth and set up a trust that doesn’t distribute assets to heirs as soon as they’re withdrawn from the IRA. This could be costly in the short term—you’ll have to pay income taxes on the IRA assets converted—but because qualified distributions from Roth IRAs are not taxed, the unfavorable trust tax brackets are rendered moot.

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