The rules governing inherited retirement accounts changed beginning January 1, 2020, with the enactment of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), Pub. L. 116-94. Those rules were modified again by the SECURE 2.0 Act of 2022 and then clarified by final Treasury Regulations issued in July 2024 under Internal Revenue Code Section 401(a)(9).

Most estate plans in use today were drafted for a system that no longer exists. Before 2020, retirement accounts could often be distributed over a beneficiary’s life expectancy. That allowed income to be recognized gradually over decades. The SECURE Act largely eliminated that result and replaced it with a ten-year distribution rule for most beneficiaries. The tax treatment of retirement accounts did not change. Distributions are still taxed as ordinary income under Internal Revenue Code Section 61 and treated as income in respect of a decedent under Internal Revenue Code Section 691. What changed is timing, and timing is what creates the problem.

If your plan has not been reviewed since 2020, it may now do the opposite of what it was intended to do. Instead of preserving tax deferral and control, it may force larger distributions over a shorter period, increase the total tax burden, and deliver substantial sums outright to beneficiaries at exactly the wrong time.

Pre-SECURE Planning: What Changed

Before 2020, a designated beneficiary could generally take required minimum distributions over life expectancy. That “stretch” approach kept annual distributions relatively small and allowed the inherited retirement account to continue growing on a tax-deferred basis over many years.

The SECURE Act added Internal Revenue Code Section 401(a)(9)(H), which now requires that, for most beneficiaries, the entire account be distributed by the end of the tenth year following the account owner’s death. If the account owner dies before the required beginning date, the beneficiary may not have to take annual distributions in years one through nine, but the entire balance still must come out by the end of year ten. If the account owner dies after the required beginning date, the final regulations confirmed that annual required minimum distributions may still be required during years one through nine, with the balance distributed by the end of year ten.

That is not a minor drafting issue. It is a complete change in the distribution regime.

Who Can Still Use the Stretch

Life expectancy distributions still exist, but only for a narrow class of beneficiaries known as Eligible Designated Beneficiaries.

A surviving spouse still has broad flexibility and may be able to roll the account into the spouse’s own IRA or take distributions over life expectancy.

A minor child of the account owner can use life expectancy distributions, but only until the child reaches the age of majority. At that point, the ten-year rule begins. This is a temporary exception, not a permanent solution.

A disabled beneficiary must satisfy a much narrower definition than most people expect. The statute uses the definition under Internal Revenue Code Section 72(m)(7), which requires that the person be unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment expected to result in death or to be of long-continued and indefinite duration. Many people who are described as disabled in ordinary conversation do not meet this standard.

A chronically ill beneficiary also must satisfy a technical definition. The beneficiary generally must be unable to perform at least two activities of daily living for an extended period, or require substantial supervision due to severe cognitive impairment. Again, this is narrower than many families assume.

An individual who is not more than ten years younger than the account owner may also qualify. That exception can apply in limited cases, such as siblings or partners close in age, but it does not help most children.

If the beneficiary does not clearly fall into one of these categories, the ten-year rule applies.

How the 10-Year Rule Actually Works

In practice, many beneficiaries do not take much out in the early years. They leave the account alone, allow it to grow, and assume they will deal with it later. That works until year ten arrives and a large balance has to come out.

That is where the tax bomb happens.

The Tax Bomb

Assume a $1,000,000 retirement account growing at 6% annually. If no distributions are taken during the ten-year period, the account grows to approximately $1,790,848 by year ten.

If that amount is distributed in one year to a beneficiary earning $120,000, the result is:

$120,000 salary
$1,790,848 IRA distribution
$1,910,848 total income

The direct income tax cost is severe:

$1,790,848 × 37% federal rate = $662,614
$1,790,848 × 5% state rate = $89,542
Total direct income tax = $752,156

That is before the income spike triggers other tax costs in the same year.

Additional Tax Costs Triggered by the Same Income

Assume the beneficiary also has $50,000 of dividends and capital gains. At this income level, that investment income becomes subject to the 3.8% Net Investment Income Tax under Internal Revenue Code Section 1411.

$50,000 × 3.8% = $1,900 additional tax

Now add Medicare premium surcharges. At this level of income, a married couple generally reaches the highest IRMAA tiers. If the surcharge produces roughly $9,600 of additional annual premiums and the lookback causes it to apply for two years, the total additional Medicare cost is approximately:

$9,600 × 2 = $19,200

Now add the loss of deductions. Assume $20,000 of state tax is paid. If that deduction is effectively lost under AMT-style adjustment principles, the additional tax cost is approximately:

$20,000 × 28% = $5,600

Medical expenses are also effectively wiped out. At total income of $1,910,848, the 10% threshold is:

$1,910,848 × 10% = $191,085

If the taxpayer has $20,000 of medical expenses, none of it is deductible because the threshold exceeds the expenses.

The total damage looks like this:

$752,156 direct income tax
$1,900 NIIT
$19,200 Medicare premium increases
$5,600 lost deduction impact
$778,856 total cost

Net amount remaining from the $1,790,848 retirement account:

$1,790,848 − $778,856 = $1,011,992

That is the tax bomb. The problem is not merely that the beneficiary pays tax. The problem is that the timing of the distribution forces the beneficiary into a much worse overall tax result than the plan was designed to create.

Conduit Trust Result — Why It was Fine Before SECURE and Why It Fails Now

Many pre-2020 estate plans used conduit trusts, and before the SECURE Act that often worked just fine. Under the old stretch rules, the retirement account paid out only relatively small required minimum distributions each year. The conduit trust simply passed those annual distributions through to the beneficiary. Because the annual amounts were smaller and spread over life expectancy, the income tax cost was manageable and the trust could still provide a level of structure.

The SECURE Act changed that. A conduit trust usually requires the trustee to distribute to the beneficiary whatever the trustee receives from the retirement account. The trustee does not have discretion to retain the retirement distribution inside the trust. If the retirement account distribution comes in, the trust language typically requires that it go back out.

That is exactly why conduit trusts now create problems. If little or nothing is distributed in years one through nine and the account is withdrawn in year ten, the conduit provision forces that entire year-ten withdrawal out to the beneficiary immediately. The trustee cannot hold it, stage it, or smooth the tax impact. The trust becomes a delivery mechanism for the worst possible tax result.

Before the SECURE Act, the conduit trust was receiving and distributing small annual stretch distributions. After the SECURE Act, the same drafting can force a large year-ten income spike.

‘Just Leave It to the Children’ — Easy, No

A common reaction is to remove the trust and name the children directly. That does not solve the problem. It just removes the structure.

Assume the same $1,000,000 account is distributed evenly over ten years and earns 6% during the payout period. The annual distribution is approximately $135,868.

For a single beneficiary earning $120,000, the annual income becomes:

$120,000 salary
$135,868 IRA distribution
$255,868 total income

For a married beneficiary with $220,000 of household income, the annual income becomes:

$220,000 household income
$135,868 IRA distribution
$355,868 total income

That still creates tax consequences every year.

Assume the beneficiary has $50,000 of dividends and capital gains. The annual Net Investment Income Tax cost is:

$50,000 × 3.8% = $1,900 per year

Assume the Medicare surcharge ranges from $3,600 to $9,600 per year. That is a recurring annual cost, not a one-time event.

Assume $20,000 of state tax is effectively nondeductible, producing:

$20,000 × 28% = $5,600 additional tax impact per year

So even without the single year-ten blowup, the annual tax drag can still be substantial. Naming the children directly does not fix the rule. It just leaves the beneficiary to deal with the tax burden personally and without protection.

Minor Children — A Common Misunderstanding

Families often assume that a child beneficiary avoids the SECURE Act problem. That is not correct.

A minor child of the account owner qualifies as an Eligible Designated Beneficiary only until reaching the age of majority. At that point, the ten-year rule begins. The temporary stretch does not eliminate the problem. In many cases, it makes the problem bigger because the account has more time to grow before the ten-year clock starts.

Assume the parent dies when the child is 13 and the account is worth $1,000,000. If the account grows at 6% and is largely preserved, it will be worth approximately $1,338,000 at age 18. The ten-year rule then begins.

If that $1,338,000 continues to grow at 6% and is distributed over ten years, the annual distribution is approximately $181,800.

If the child later has earned income of $120,000, the annual income becomes:

$120,000 salary
$181,800 IRA distribution
$301,800 total income

The delay did not solve the tax problem. It increased the size of the account subject to the ten-year rule.

Unrestricted Money at Age 18

There is also a control problem, and it is not a small one.

If the account passes outright, an 18-year-old can end up receiving approximately $181,800 per year for ten years with no restrictions. There is no trustee, no distribution standard, no asset protection, and no ability to control use of the funds. Once distributed, the money is no longer protected by trust structure or fiduciary oversight.

That is not careful planning. That is an uncontrolled payout at the earliest possible age.

What Can Be Done

The solution is not to hope the rules work themselves out. Retirement assets must be planned for intentionally.

An accumulation trust works differently from a conduit trust. Instead of requiring the trustee to pass every retirement account withdrawal directly to the beneficiary, an accumulation trust allows the trustee to retain distributions inside the trust and distribute them later under the standards set out in the trust agreement. That restores control. It prevents the automatic pass-through problem that conduit trusts create under the SECURE Act.

An accumulation trust does not make income tax disappear. If income is retained in the trust, the trust may pay tax at compressed trust brackets. But that can still be the better result when the alternative is forcing a very large distribution onto a beneficiary in a high-income year or sending substantial sums outright to a young or financially immature beneficiary. The point of the accumulation trust is not magic tax elimination. The point is controlled timing and preserved structure.

A Charitable Remainder Trust, or CRT, is a different strategy altogether. A CRT is a split-interest trust governed by Internal Revenue Code Section 664. At death, the retirement account is made payable to the CRT instead of to the child or to a conduit trust. Because the CRT is exempt from income tax, the trustee can liquidate the retirement account inside the CRT without immediate tax at that time. The trust then pays an annual amount to the noncharitable beneficiary either for life or for a term of years not exceeding 20 years. At the end of that period, whatever remains in the trust must pass to charity.

That charitable component is not optional. To qualify as a CRT, the actuarial value of the remainder passing to charity must be at least 10% of the initial value contributed to the trust. In other words, the family does not keep all of the retirement account. The tradeoff is that the CRT can convert a forced ten-year payout into a controlled stream of income over a longer period.

CRT Example — How It Changes the Result

Assume a $1,000,000 retirement account is made payable to a CRT, the trust earns 6%, and the annual payment to the beneficiary is approximately $84,466.

If the beneficiary earns $120,000, the annual income becomes:

$120,000 salary
$84,466 CRT distribution
$204,466 total income

Now assume the charitable remainder interest generates a $120,000 charitable deduction, with $34,000 usable in the first year. Taxable income becomes:

$204,466 total income
$34,000 current deduction
$170,466 taxable income

That materially changes the result.

At $170,466, the beneficiary remains below the $200,000 threshold that would otherwise trigger the Net Investment Income Tax on other investment income. That avoids the additional $1,900 NIIT cost on $50,000 of dividends and capital gains.

At that income level, the beneficiary also avoids the higher Medicare premium tiers that would have applied at the larger income levels, avoiding thousands of dollars of annual premium increases.

The lower income level also preserves deductions that would otherwise be lost or reduced at higher income levels.

The CRT does not eliminate tax. It changes when the income is recognized, spreads it out over time, and reduces the stacked effect of ordinary income tax, NIIT, Medicare surcharges, and lost deductions. The tradeoff is that at least 10% must ultimately pass to charity and the beneficiary receives a controlled annual payment rather than unrestricted access to the full account.

The Point

The SECURE Act changed inherited retirement account planning in a way that many older estate plans do not reflect. A plan drafted before 2020 may still look perfectly fine on paper and still produce a very bad tax result in practice.

That is the real risk. The trust may still exist. The beneficiary designation may still be in place. The documents may still look complete. But the tax outcome may now be materially worse than the client ever intended.

If your estate plan has not been reviewed since the SECURE Act, SECURE 2.0, and the 2024 final regulations, it may no longer work the way you think it does. And with inherited retirement accounts, the cost of finding that out too late can be enormous.