You created your trust because you wanted to make things easier for your family. You wanted to protect what you worked hard to build and make sure it reached the people you love in the right way.
But there is one piece of your estate plan that is easy to overlook: the beneficiary designation on your retirement accounts.
If your trust is named as the beneficiary of your IRA, that may have made perfect sense when your estate plan was created. The problem is that the rules have changed.
Before 2020, many children who inherited an IRA from a parent could spread withdrawals over their lifetime. The SECURE Act changed that. Today, most adult children who inherit an IRA must withdraw all of the money within 10 years. In some circumstances, they must also take distributions along the way. If it is a traditional IRA, those withdrawals are generally taxable income.
That is where your trust becomes important. Let’s say your trust is the beneficiary of your IRA. After your death, the trustee withdraws $50,000 from the IRA.
If the trustee keeps that money in the trust to protect it for your child, the trust may have to pay the income tax. And here is the surprising part: Trusts reach the highest federal income-tax bracket very quickly. In 2026, once a trust has more than $16,000 of taxable income, additional income can fall into the 37 percent federal tax bracket.
That does not mean the entire amount is taxed at 37 percent. Think of it as climbing a staircase. The first dollars are taxed at lower rates. Once the trust climbs past $16,000 of taxable income, additional dollars can be taxed at 37 percent.
Individuals have a much longer staircase. A single person does not reach the 37 percent federal bracket in 2026 until taxable income exceeds $640,600.
So why not simply give the IRA money directly to your child? Sometimes that is the right answer. But sometimes it is exactly what you were trying to avoid when you created the trust.
Maybe your daughter is going through a divorce. Maybe your son owns a business and has creditor exposure. Perhaps a child is struggling with addiction, spending problems or simply isn’t ready to manage a large inheritance.
If the money remains in a properly designed trust, the trustee may be able to protect it and use it for your child’s benefit. If the money is distributed outright, some of that protection may be lost.
That is the real planning decision. Do we distribute the money and potentially pay less income tax? Or is there a reason to keep some of it protected in the trust, even if doing so could result in a higher tax bill?
There is no answer that works for every family.
And there is another important piece: Your IRA generally passes according to the beneficiary designation on the account, not according to your will. You can have a beautifully prepared estate plan sitting in a binder while an old beneficiary form creates a completely different result.
That is why I don’t look at your trust by itself. I want to see your retirement accounts, beneficiary designations, other assets and what has changed in your family since your plan was created.
Your estate plan should not simply answer who gets your money. It should also answer a much more important question: How can we get it to the people you love in a way that gives them the protection and opportunities you intended?
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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