Your Trust Can Hit the Highest Tax Bracket Faster Than You Think
You did the work. You saved for retirement, created a trust, and named beneficiaries because you wanted to protect the people you love. That matters. A lot.
Now imagine you're sitting across from me with the plan you created years ago. Your IRA has grown into one of your largest assets, and you feel good knowing it will eventually pass to your children with the protections you intentionally put in place.
Then I ask one simple question: Can I see the beneficiary form?
Your trust is named. You did that for a reason to create protection, not a giant tax headache. But no one has reviewed that designation since the SECURE Act changed the rules for inherited retirement accounts. And suddenly, the plan you carefully created may not work the way you think it does.
In 2026, estates and trusts can reach the 37% federal marginal income tax bracket once taxable income exceeds $16,000. A single individual doesn't reach that same bracket until taxable income exceeds $640,600.
Those numbers will absolutely get your attention. But they're not the most important question.
The real question is: What do you want this money to actually do for the people you love?
Your Estate Plan Didn't Change. The IRA Rules Did.
The original SECURE Act, passed in 2019, changed the game for inherited retirement accounts by creating the 10-year distribution framework we're talking about here. SECURE 2.0 came later and changed plenty of other retirement rules, but this particular inherited IRA rule started with the original SECURE Act.
Before 2020, someone who inherited your IRA could often stretch withdrawals over their lifetime. The SECURE Act took that option away for most non-spouse beneficiaries and replaced it with a much shorter 10-year window.
And depending on whether you had already started taking your own required minimum distributions, your beneficiary may not simply be able to sit back for 10 years and empty the account at the end. They may have to take distributions along the way. There are exceptions for certain beneficiaries, including a surviving spouse, a qualifying minor child, someone who is disabled or chronically ill, or someone close to you in age.
Why does this matter? Taxes.
Traditional IRA withdrawals generally create taxable income. So if your beneficiary has to squeeze those withdrawals into 10 years instead of stretching them over a lifetime, that income could land right on top of their salary, business income, and investments, potentially during some of their highest earning years.
And if you've named a trust as the beneficiary? Now we have another layer to unpack. I need to know what the trust actually says, whether distributions can stay in the trust, who ultimately receives that money, and most importantly whether those rules still accomplish what you wanted for your family in the first place.
Whether a trust gets five years, 10 years, or another distribution period depends on how the trust is drafted and who is treated as the beneficiary under the retirement-account rules. A properly structured see-through trust may qualify for beneficiary-based treatment, including the 10-year rule for many beneficiaries. If the trust doesn't qualify and you die before your required beginning date, the five-year rule may apply. If you die on or after that date, yet another rule based on remaining life expectancy may come into play.
Translation: this is not something we figure out by glancing at the beneficiary form.
We need to look at the trust language, the people behind the trust, and your required-distribution status together to understand what will actually happen.
The bottom line: The law changed the rules your estate plan has to play by. If your plan was created before those rules changed, it's worth making sure it can still do the job you intended.
Don’t Let the $16,000 Number Drive the Entire Plan
The One Big Beautiful Bill didn't create these super-compressed tax brackets for trusts. What it did was make the existing individual, estate, and trust tax-rate structure permanent. And after the 2026 inflation adjustments, estates and trusts hit the 37% federal marginal income tax bracket once taxable income exceeds just $16,000.
For 2026, the federal income tax brackets for estates and trusts look like this:
10% on the first $3,300;24% from $3,300 to $11,700;35% from $11,700 to $16,000;and 37% on taxable income over $16,000.
Now, before you panic: these are marginal tax brackets. That does not mean the entire $16,000 is suddenly taxed at 37%. But it does mean a trust can reach the highest federal income tax bracket with dramatically less taxable income than an individual.
And this is where I want you to stop looking at the tax return for a minute and think about the actual person you're trying to protect.
Maybe your daughter is going through a divorce. Maybe your son owns a business and has personally guaranteed its debt. Maybe a child is struggling with addiction or simply isn't ready to have six figures dropped into their bank account with no guardrails.
In those situations, automatically pushing every IRA distribution out of the trust just to get a lower tax rate could expose that inheritance to the exact risks you created the trust to protect against in the first place.
Taxes matter. Of course they do. But taxes aren't the only thing we're planning for.
Sometimes paying more in taxes may be worth the protection the trust provides. Sometimes distributing the money makes more sense. The answer depends on your family, your beneficiaries, and what you actually want this wealth to accomplish.
The bottom line: That $16,000 number tells us where to start asking questions. It doesn't give us the answer. The right plan balances tax efficiency with the reason you created the trust in the first place: protecting the people you love.
Same IRA. Two Families. Two Completely Different Plans.
If your plan uses a conduit trust, IRA withdrawals generally flow through the trust and out to your beneficiary. That can move the taxable income away from the trust's compressed tax brackets and onto the beneficiary's individual return. Great for taxes, potentially. But it also means the money lands directly in their hands.
An accumulation trust works differently. The trustee can keep IRA withdrawals inside the trust rather than immediately handing them over. Yes, income retained in the trust may be taxed at higher rates. But the money can also remain protected if your child is going through a divorce, gets sued, struggles with addiction, or simply isn't ready to manage a significant inheritance.
So which one is better? It depends.
When I'm working through that decision with you, I'm not just looking at a tax bracket. I'm looking at your actual child. How old are they? Are they married? Do they own a business? Have debt? Are they financially responsible? What else are they likely to inherit? Then we talk about what you want this money to make possible for them and, just as importantly, what you never want it exposed to.
That's the work we do in a Personal Family Lawyer® relationship. I'm not picking "conduit" or "accumulation" from a menu. I'm helping you look at the legal, tax, financial, and very human pieces of the puzzle and decide how they should work together for your family.
The bottom line: We're not just protecting an IRA. We're protecting the person who will inherit it. And sometimes the best tax answer isn't the best family answer.
Your Beneficiary Form and Your Estate Plan Better Match
Your IRA generally goes where the beneficiary form tells it to go, not where your will says it should. Which means you can have a beautifully drafted estate plan sitting in a binder while one outdated form sends one of your largest assets in a completely different direction.
I see it all the time. An ex-spouse is still named. An adult child is named outright even though the current plan was designed to protect their inheritance. Or the beneficiary form points to a trust that has since been amended. And even when all the names are technically right, the tax and distribution provisions may no longer accomplish what you want under today's rules.
This is exactly the kind of gap I want to catch before it becomes a problem. I review the beneficiary designation alongside the trust, the retirement account, your family's other assets, and most importantly, the actual people who will inherit. I also coordinate with your CPA, financial advisor, and insurance professional so we're all looking at the same picture and working toward the same goal.
The bottom line: Your beneficiary form isn't some random piece of paperwork sitting outside your estate plan. It's part of the plan and it needs to tell the same story.
Good Stewardship Starts Before Anyone Inherits a Dime
Parents tell me all the time: “I want to protect the inheritance, but I don't want to control my kids from the grave.”
Good. That's exactly the distinction we should be making.
Protection isn't about controlling every decision your children make for the rest of their lives. It's about giving them a stronger foundation while still allowing them to grow up, make decisions, build lives, and eventually manage wealth responsibly on their own.
So I ask questions you're definitely not going to find on an IRA beneficiary form. Do your children understand why you worked so hard to build this wealth? Do they understand why some of it may stay protected in trust? And have you chosen a trustee who understands not only the legal job, but the actual human being whose life will be affected by the decisions they make?
A trust can protect the money. But good, relationship-based planning can do something more. It can prepare your children, preserve the stories and values behind the wealth, and make sure the next generation has someone they trust to call when the decisions stop being hypothetical and become real.
The bottom line: Protecting the inheritance is one job. Preparing your children to receive and eventually manage it is another. A really good plan does both.
Someone Needs to See the Whole Picture
The plan that worked perfectly five years ago may not work perfectly today. Your IRA may have doubled. Your child may have gotten married. A business may now carry significant debt. Or the person you named as trustee years ago may no longer be the person you'd choose today.
Life changes. Laws change. Your plan needs to keep up with both.
That's the value of an ongoing Personal Family Lawyer® relationship. We review those changes while you still have options, not after something happens and your family discovers that the plan no longer works the way you intended.
And that relationship matters just as much when your family eventually needs the plan. When you die and the people you love are grieving, the last thing they should have to do is introduce themselves to a stranger, hunt down every account, and figure out which attorney, CPA, or financial advisor they're supposed to call first.
Because we've stayed connected, your family already has someone who knows the plan, knows the people, and understands what you wanted your wealth to actually do for them.
The bottom line: The documents create the plan. The relationship is what keeps that plan connected to your real life and helps make sure it actually works when your family needs it.
Your Next Step: Review the Plan Before the Money Moves
If your estate plan was created before the SECURE Act, your IRA has grown significantly, or you've named a trust as beneficiary and haven't looked at that decision in years, it's time to bring the whole plan back to the table.
As your Personal Family Lawyer®, I help you create an Estate Plan that connects all the pieces, your family, your assets, your beneficiary designations, your legal documents, and the financial professionals helping you manage it all. Because none of these decisions should be made in a vacuum.
And the relationship doesn't end when you sign the documents and walk out the door. We stay connected as your life, your wealth, and the law change. And when something eventually happens, your family already knows exactly who to call.
Schedule a complimentary 15-minute discovery call, and let's make sure the plan you have still works for the life and the family you have today: https://pages.20westlegal.com/schedule/15-minute-intro-call
This article is a service of 20West Legal, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer an Estate Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule an Estate Planning Session.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.
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