Why You Should NOT Name Your Trust as Your IRA Beneficiary in Florida
An IRA is often the largest asset in a Florida resident's estate. How you designate the beneficiary of that account can have an enormous impact on how much of it your family actually keeps. For many people, naming a trust as the IRA beneficiary creates an avoidable tax problem — one that compounds over the ten years your heirs have to withdraw the funds.
Overview
Individual retirement accounts, including traditional IRAs and rollover IRAs, grow tax-deferred during your lifetime. When you die, the person or entity you named on the beneficiary designation form inherits the account. That form — not your will, not your trust — controls who gets the money. Federal law governs how quickly the beneficiary must withdraw the funds and pay income taxes on the distributions. The SECURE Act of 2019, updated by SECURE 2.0 in 2022, significantly changed those rules. For most non-spouse beneficiaries, the old "stretch IRA" — which allowed lifetime distributions — is gone. Today, most beneficiaries must withdraw the entire inherited IRA within ten years of the original owner's death. When a trust is named as the beneficiary, an additional layer of federal tax rules applies, and the results are often worse than naming individuals directly.
The Trust Tax Bracket Problem
The core problem with leaving an IRA to a trust is how trusts are taxed on income. A trust reaches the highest federal income tax bracket — 37 percent — once its income exceeds approximately $15,650 in a given year. An individual filer does not reach that same 37 percent rate until income exceeds $626,350. If your trust receives IRA distributions and holds them rather than passing them immediately to individual beneficiaries, those retained funds are taxed at the compressed trust rate. That difference can cost your family tens of thousands of dollars in unnecessary federal income taxes across a ten-year withdrawal period — on money that was already subject to income tax when your employer or you contributed it.
The See-Through Trust Exception
Federal law under IRC §401(a)(9) and Treasury Regulation §1.401(a)(9)-4 provides one pathway for a trust to avoid the worst outcomes: qualifying as a see-through trust. A see-through trust allows the IRS to look through the trust to the individual beneficiaries underneath, and apply the same distribution rules that would apply if those individuals were named directly on the beneficiary form. To qualify, a trust must meet four requirements. The trust must be valid under state law. It must become irrevocable upon the IRA owner's death. All trust beneficiaries must be identifiable individuals — not charities or the estate. And a copy of the trust document must be provided to the IRA custodian by October 31 of the year following the year of the owner's death. A trust that fails any of these requirements is treated as a non-designated beneficiary. In that case, the entire IRA must be distributed within five years of the owner's death — generating a far faster, larger tax bill than the ten-year rule allows.
When a Trust as IRA Beneficiary Actually Makes Sense
There are situations where naming a trust as an IRA beneficiary is the right answer, but the trust must be specifically drafted for that purpose. A see-through trust that complies with IRS requirements can make sense when a beneficiary has special needs and direct IRA ownership could disqualify them from government benefits. It can also make sense when a beneficiary is a minor child, a spendthrift adult, or a participant in a blended family situation where the IRA owner wants to control the timing and flow of distributions. In these cases, the trust must be drafted as either a conduit trust — which passes IRA distributions directly to the beneficiary each year — or an accumulation trust, which gives the trustee discretion to retain distributions inside the trust at the cost of compressed tax rates. A standard Florida revocable living trust does not automatically qualify as a see-through trust. Without specific language addressing IRS requirements for retirement assets, naming a standard revocable trust as an IRA beneficiary can produce unintended and costly results.
Ready to Get Started?
Your IRA beneficiary designation is one of the most important documents in your estate plan — and one of the most frequently overlooked. Reviewing your beneficiary forms, coordinating them with your trust and will, and understanding how the SECURE Act affects your plan is essential for any Florida resident with significant retirement assets. For related reading, see the Karia Law estate planning overview page at karialaw.com.
Frequently Asked Questions
No. A standard Florida revocable living trust does not automatically meet the IRS requirements for a see-through trust under IRC §401(a)(9) and Treasury Regulation §1.401(a)(9)-4. Without specific drafting language addressing retirement assets, naming your standard revocable trust as an IRA beneficiary can trigger the five-year distribution rule — creating a faster, larger tax liability for your family than naming individuals directly.
If your IRA passes to your estate — either because no beneficiary is named or because the named beneficiary predeceased you — it is treated as having no designated beneficiary under federal law. The entire account must typically be distributed within five years of your death if you had not yet begun required minimum distributions. This outcome is generally the worst-case scenario for income tax purposes and is one of the most common avoidable mistakes in Florida estate planning.
Yes. A surviving spouse has more options than other beneficiaries under federal law. A spouse can roll the inherited IRA into their own IRA and defer distributions until their own required beginning date. This is one of the most powerful tax benefits available to married couples, and it is entirely separate from the ten-year rule that applies to most other non-spouse beneficiaries. Coordinating your IRA beneficiary designations with your overall estate plan — including your spouse's plan — is essential.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. It does not create an attorney-client relationship. Laws vary and individual circumstances differ. Consult a licensed Florida estate planning attorney for advice specific to your situation. Tejus Karia, Esq. is a member of The Florida Bar.
- Does my Florida revocable living trust automatically qualify to receive my IRA?
- What happens to an IRA if there is no named beneficiary and it passes through my estate?
- Can my spouse inherit my IRA differently than other beneficiaries?