A client sat across from me last month with a trust drafted in 2017. Her attorney at the time named the trust as beneficiary of her IRA. Smart move in 2017. Terrible move in 2026.
The SECURE Act changed everything about inherited retirement accounts when it took effect in 2020. SECURE 2.0 refined it further. If your estate plan has not been updated since, your family could be paying thousands more in taxes than necessary.
Why Does the Trust Tax Bracket Matter So Much?
The math is the core issue. In 2025, a trust hits the top federal income tax rate of 37% at just $15,650 of taxable income. An individual does not reach that same rate until $626,350. That is a 40x difference in the threshold.
On top of that, the 3.8% Net Investment Income Tax applies at the same $15,650 level for trusts. So your trust could be paying over 40% in combined federal taxes on IRA distributions above that amount, while your beneficiary would have paid 12% or 22% on the same money.
I see this pattern in my Alabama practice regularly. A family pays for a revocable trust, names it as IRA beneficiary, and never revisits the decision. The trust accumulates distributions, hits the compressed brackets, and the family loses thousands they did not need to lose.
What Is the SECURE Act 10-Year Rule?
Before the SECURE Act, non-spouse beneficiaries could stretch inherited IRA distributions over their lifetime. That is gone for most people.
Under current rules, most non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner’s death. If the owner died on or after their Required Beginning Date, annual minimum distributions are also required during that 10-year window.
If your trust qualifies as a “see-through” trust, the 10-year rule applies based on the oldest trust beneficiary. If the trust fails see-through status, the payout could be compressed to just 5 years (if the owner died before their Required Beginning Date), accelerating the tax hit even further.
What Makes a Trust “See-Through” Under IRS Rules?
A trust must meet all four of these requirements to qualify as see-through under IRS Publication 590-B:
- Valid trust under state law. In Alabama, this means a properly executed trust instrument under the Alabama Uniform Trust Code.
- Irrevocable at death (or becomes irrevocable upon the account owner’s death).
- All beneficiaries are identifiable individuals. If a charity, estate, or non-individual entity is a beneficiary (even as a remainder), the trust fails.
- Trust documentation is provided to the IRA custodian by October 31 of the year following the account owner’s death.
Miss any one of these requirements and the trust is not see-through. The IRA custodian treats it as a non-designated beneficiary with worse distribution and tax treatment.
Conduit Trust vs. Accumulation Trust: Which Is Better?
If you do name a trust as IRA beneficiary, the trust’s drafting determines whether it is a conduit or accumulation trust:
Conduit trust: All IRA distributions received by the trust must be passed through to the beneficiaries immediately. The beneficiaries pay income tax at their own individual rates. Less control, better tax outcome.
Accumulation trust: The trustee can hold IRA distributions inside the trust. This gives more control over when and how beneficiaries receive funds, but the trust pays tax at the compressed trust brackets (37% at $15,650). More control, worse tax outcome.
Pre-2020 conduit trust language that worked under the old stretch rules may now create unintended consequences under the 10-year rule. If you have a conduit trust drafted before the SECURE Act, it needs review.
What Are the Alabama-Specific Considerations?
Alabama generally taxes IRA distributions as ordinary income to the distributee. The key question is who the distributee is:
- If the trust accumulates IRA distributions, the trust pays Alabama income tax.
- If the trust passes distributions through to beneficiaries, the beneficiaries pay at their own rates.
Alabama’s elective-share statute adds another layer. The surviving spouse’s interest in a trust is valued at roughly half the trust’s value for elective-share purposes. If retirement assets are the largest part of the estate and they flow to a trust, poor coordination between federal IRA rules and Alabama’s elective share can leave a spouse under-funded or create disputes.
When Does Naming a Trust as IRA Beneficiary Make Sense?
Despite the tax disadvantages, there are situations where naming a trust is the right call:
- Special needs beneficiaries. A beneficiary receiving SSI or Medicaid would lose eligibility if they inherited an IRA directly. A properly drafted special needs trust protects both the inheritance and the benefits.
- Minor children. Children under 18 cannot manage large retirement accounts. A trust with a responsible trustee prevents mismanagement.
- Spendthrift or creditor protection. If a beneficiary has debt problems, addiction issues, or creditors, a trust shields the IRA from claims.
- Blended families. When you need to protect assets for children from a prior marriage while providing for a current spouse, a trust can control who gets what and when.
- When control outweighs tax efficiency. Sometimes the peace of mind from knowing a trustee manages distributions is worth the tax cost.
Ready to review your estate plan? If your plan was drafted before the SECURE Act changed the rules in 2020, the old strategies may be costing your family money. Schedule a free 30-minute consultation with Key Law LLC or call (256) 715-5711.
Frequently Asked Questions
Should I name my trust as beneficiary of my IRA in Alabama?
For most Alabama families, naming individuals directly as IRA beneficiaries is the better tax move. Trusts hit the 37% federal bracket at $15,650, while individuals do not reach it until $626,350. Name a trust only when you need special needs protection, creditor shielding, or control over distributions to minors or blended family situations.
What is the 10-year rule for inherited IRAs under the SECURE Act?
Most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. If the owner died on or after their Required Beginning Date, annual required minimum distributions are also mandatory during that window.
What is a see-through trust for IRA purposes?
A see-through trust meets four IRS requirements: it is valid under state law, irrevocable at death, has only identifiable individual beneficiaries, and the trustee provides documentation to the IRA custodian by October 31 of the year after the owner’s death. Failing any requirement means worse distribution rules.
What is the difference between a conduit trust and an accumulation trust?
A conduit trust must pass all IRA distributions through to beneficiaries immediately (they pay tax at individual rates). An accumulation trust can hold distributions inside the trust, but the trust pays tax at compressed brackets, hitting 37% at just $15,650.
How does Alabama tax inherited IRA distributions through a trust?
Alabama taxes IRA distributions as ordinary income to the distributee. If the trust accumulates the distributions, the trust pays Alabama income tax. If the trust passes them through to beneficiaries, the beneficiaries pay at their individual rates, which are usually lower.
Should I update my estate plan if it was drafted before the SECURE Act?
Yes. The SECURE Act (2020) and SECURE 2.0 eliminated the stretch IRA for most beneficiaries and changed how trusts interact with retirement accounts. Conduit trust language drafted before 2020 may create unnecessary tax exposure under current rules. A review with an estate planning attorney is strongly recommended.
