The New Rules for Trusts as IRA Beneficiaries: A SECURE Act 2 Deep Dive
Inherited IRAs used to feel simple, then the SECURE Act and SECURE Act 2.0 changed the ground rules. If you name a trust on your IRA, the payout schedule and taxes can look very different from what you remember.
At Commonwealth Life and Legacy Counsel, a Central Virginia firm focused on estate planning, elder law, wills, trusts, powers of attorney, and long-term care planning, we see the ripple effects every week. Our goal here is to break down the updated rules for trusts as IRA beneficiaries under SECURE Act 2.0 in plain English.
Overview of the SECURE Act and SECURE 2.0 Act
The original SECURE Act ended the “stretch IRA” for many non-spouse beneficiaries and replaced it with a 10-year payout window. The SECURE 2.0 Act built on that framework, adjusting RMD ages, clarifying beneficiary categories, and refining trust treatment. For most accounts, the end of the stretch and the 10-year rule apply to deaths after December 31, 2019.
There is an important timing carve-out for public sector plans. For deaths after December 31, 2021, the effective date is extended two years for government plans, which can include certain 403(b) and 457 plans and the Thrift Savings Plan. Knowing which plan type you have matters before you set a payout strategy.
Beneficiary Categories: A Critical Distinction
SECURE Act rules turn on who inherits. The law sorts beneficiaries into three buckets, and each one has different payout paths. If you get the category wrong, taxes and penalties can pile up.
- Non-Designated Beneficiary: often an entity like an estate, charity, or a non-qualifying trust.
- Non-Eligible Designated Beneficiary: usually adult children, grandchildren, or other individuals who are not in the protected group.
- Eligible Designated Beneficiary: includes a surviving spouse, a minor child of the decedent, someone who is disabled or chronically ill, or a person not more than 10 years younger than the owner.
The rules also shift based on whether the IRA owner died before, on, or after their Required Beginning Date, often called the RBD. That timing point drives whether annual RMDs apply during the 10-year window.
In-Depth Look: Beneficiary Types and Distribution Rules
Let’s walk through each category with the most common scenarios. We will keep it short and practical so you can map your family’s facts to the right rule. If any of this looks fuzzy in your situation, reach out and we will help you sort it out.
Non-Designated Beneficiary (NDB)
An NDB is not a person. Common examples are an estate, a charity, or a trust that does not qualify as see-through under the tax rules.
If the owner died before the RBD, the five-year rule generally applies. This means the account must be fully withdrawn by the end of the fifth year after death, with no annual RMDs inside that period.
Missing the deadline can trigger an excise tax, which the IRS has historically set at 50 percent of the shortfall. That is a painful surprise, and it is avoidable with a calendar and a plan.
Non-Eligible Designated Beneficiary (NEDB)
A NEDB is a named individual who is not in the protected EDB group, like an adult child or grandchild. If the owner died before the RBD, the 10-year rule applies and there are no annual RMDs during those ten years.
If the owner died on or after the RBD, the 10-year rule still applies. In this case, annual life-expectancy RMDs are required for years one through nine, and the account must be emptied by the end of year ten.
The IRS has said missed annual RMDs inside the 10-year window would begin counting for many beneficiaries starting with 2025. That gives families a brief chance to catch up on planning.
Eligible Designated Beneficiary (EDB)
EDBs are exempt from the 10-year rule while they remain in that status. This group includes a surviving spouse, a minor child of the deceased, a disabled individual, a chronically ill individual, or a beneficiary not more than 10 years younger than the owner.
If the owner died before the RBD, an EDB can choose either life-expectancy payouts, often called a stretch, or the 10-year rule. For a minor child of the decedent, the protected status ends at age 21, then the 10-year rule takes over.
Plans can limit choices, so read the document and the custodian rules. If the plan forces one route, you need to know that before making an election.
Post-Death Distribution Matrix
| Beneficiary Type | Owner Died Before RBD | Owner Died On or After RBD | Annual RMDs Within Window | Final Deadline |
| NDB, like an estate or non-qualifying trust | 5-year rule | Life-expectancy method may apply under plan rules | No for 5-year rule | End of 5th year after death |
| NEDB, adult child or grandchild | 10-year rule | 10-year rule, plus annual RMDs in years 1 to 9 | Only when owner died on or after RBD | End of 10th year after death |
| EDB, spouse or other protected person | Stretch or 10-year rule | Stretch available | Yes for stretch | Varies by method |
This chart is a quick guide, not a verdict. Specific plan terms, Roth status, and beneficiary elections can shift the outcome.
Trusts as IRA Beneficiaries: The See-Through Trust
Trusts are still used, but as a planning tool, they often lose ground under the new rules. Most trust beneficiaries will have to drain an inherited IRA in 10 years, which can spike income taxes compared with the old stretch timeline.
A see-through trust is the only way a trust can be treated like individual beneficiaries. It must be valid under state law, become irrevocable upon the IRA owner’s death, have identifiable beneficiaries, and the trustee must provide required documentation by October 31 of the year after death.
- All trust beneficiaries counted for IRA purposes must be individuals, not charities or the estate.
- Trust terms should clearly identify who can receive retirement distributions and when.
- Provide the trust instrument or a compliant beneficiary list to the plan or custodian by the October 31 deadline.
These rules create real liability for trustees. A missed deadline or a charity lurking in the remainder class can blow see-through status and force a faster payout, which can become a tax event that beneficiaries might pin on the trustee.
Virginia-Specific Considerations for Estate Planning with Inherited IRAs
Virginia law interacts with these federal rules in a few ways. Virginia recognizes see-through trusts and allows trust modification tools, like decanting and nonjudicial settlement agreements, which sometimes help clean up trust terms after death, but timing is tight.
Review older plans that were built around stretch payouts. Update beneficiary forms to match your living trust, your goals for minors or blended families, and the new 10-year timing. If a trust will be beneficiary, make sure it reads as “see-through” under tax rules and still meets your Virginia fiduciary standards.
- Coordinate IRA forms with your will and trust, or you can end up with the wrong beneficiary category.
- Watch cross-border issues if you own property in other states, or your heirs live outside Virginia since local courts and tax filings can differ.
- Virginia currently has no state estate tax, but federal estate tax and beneficiary-level income tax may apply; families often use Roth conversions, lifetime charitable giving, or naming a charity directly on part of the IRA to manage taxes.
Also note that inherited IRAs may not get the same bankruptcy protection as your own retirement funds. Asset protection rules are tricky here, and a properly drafted trust can help.
Hypothetical Retroactive Spousal RMDs: A Trap for the Unwary
The IRS worries about an RMD workaround where a surviving spouse first uses the 10-year rule to avoid early withdrawals, then rolls to their own IRA late in the period. To shut that door, the Hypothetical Retroactive Spousal RMD rule can require the spouse to calculate and distribute the RMDs they would have taken if the account had been in their name earlier.
Here is how it bites. A spouse chooses the 10-year rule, waits past their RMD age, then decides to complete a spousal rollover. Before rolling, they must pull out the sum of the RMDs they should have taken for each missed year, using their own life-expectancy factors.
The math is fussy and easy to get wrong. If the rollover or the hypothetical RMD step is mishandled, the IRS can assess an excise tax that has historically been 50 percent on the shortfall.
Take Action: Secure Your Family’s Financial Future
The rules are technical, and they keep changing, which makes a quick check-in with your legal and tax team worth it. Trust wording, beneficiary choices, and RMD timing all need to line up, or you risk a compressed 10-year payout and higher taxes. Congress and the IRS continue to tinker with these rules, so staying current really does protect your family.
Let’s talk about your plan before a mistake turns into penalties or family conflict. Call us in Central Virginia at 434-589-2958 or in Powhatan at 804-598-1348, email info@winget-hernandez.com, or visit our Contact Us page. We welcome your questions and will walk through IRA and trust options that fit your goals. Our firm is dedicated to practical plans that work for Virginia families now and later.