Decedent’s Children as Retirement Account Beneficiaries

Tax News You Can Use | For Professional Advisors

January 27, 2025

There has been a shift in planning for IRAs and qualified plans (retirement accounts) since 2019. The SECURE Act, SECURE Act 2.0, the SECURE regulations and various announcements from the IRS have had a significant impact on how retirement account beneficiaries are treated for tax purposes. In this article, we will review the rules for beneficiaries of retirement accounts other than surviving spouses.

Before SECURE, most retirement account owners focused on stretching their distributions over the longest period possible to maximize income tax deferral. After SECURE eliminated the opportunity for “stretch-out” for most categories of beneficiaries, the focus has shifted to structuring a beneficiary designation since withdrawals cannot be postponed. And given the shorter distribution timelines for most beneficiaries, many parents are rethinking whether to name a trust as beneficiary of their retirement account.

If Your Child is a Minor

The minor child of the retirement account owner is classified as an “eligible designated beneficiary” (EDB) under SECURE, and therefore, receives more favorable treatment than other non-spouse beneficiaries. A beneficiary who is the minor child of the account owner has until age 31 (the tenth anniversary of reaching majority) to withdraw all assets. The same holds true if the named beneficiary is a conduit trust (a trust that distributes all assets withdrawn from the account to the beneficiary as withdrawn) for the benefit of the owner’s minor child. Note that this rule is applicable because the beneficiary is the owner’s minor child and not just because the beneficiary is underage. A minor grandchild, for example, is not an EDB and is subject to the same ten-year withdrawal period applicable to other individuals named as beneficiaries of a retirement account.

An accumulation trust does not require immediate distribution to the beneficiary of all assets withdrawn from the account. There is a special rule applicable to accumulation trusts for the minor child of the account owner. Normally, you must look at all beneficiaries of an accumulation trust, including presumptive remainder beneficiaries, to determine if a trust is an EDB. However, with an accumulation trust for a minor child, as long as the assets must be distributed to the beneficiary by the time they reach age 31, the other beneficiaries of the trust are ignored. This allows the accumulation trust to qualify for EDB treatment even if a charity or a person older than the minor child is the remainder beneficiary of the trust.

Parents who previously named a conduit trust for minor children as beneficiaries of their retirement accounts may now prefer an accumulation trust if they are comfortable with the age 31 rule. This approach allows assets withdrawn to be retained in trust and distributed as needed, rather than pushing the required minimum distributions (RMDs) from the account out to the beneficiary each year, which might require a guardianship or a custodianship while the child is still a minor.

If Your Child Is an Adult and Not Disabled or Chronically Ill

Adult, non-disabled children and conduit trusts for their benefit are “Designated Beneficiaries” (DBs), and they must withdraw retirement account assets in full by the end of the tenth year following the death of the account owner. This same ten-year rule applies to all individual beneficiaries and conduit trusts for individuals, other than surviving spouses, minor children of the account owner and disabled or chronically-ill beneficiaries. Accumulation trusts get the same treatment if all of the counted beneficiaries are also individuals.

Final regulations issued in July 2024 confirm that, beginning January 1, 2025, beneficiaries of retirement accounts whose owner died after January 1, 2020 and after the account owner’s required beginning date for RMDS (age 72, 73 or 75, depending on the account owner’s year of birth or later if the account owner is still working and does not own more than 5% of the stock in the employer), are required to take RMDs each year based on the beneficiary’s life expectancy. This is in addition to the requirement that all assets of the retirement account be withdrawn by the beneficiary by the end the tenth year following the decedent’s death. Treasury waived the RMD requirement for those accounts for 2021 through 2024, but those RMD requirements will be enforced for 2025 and subsequent years.

An accumulation trust for an adult child is also subject to the ten-year rule unless there is also a non-DB (e.g., a charity or the decedent’s estate) beneficiary of the accumulation trust. In that case, the five-year rule applies (the assets must be withdrawn by the end of the fifth year after the decedent’s death).

If You Name a Trust for Multiple Children, Some of Whom Are Minors, None of Whom Are Disabled

A conduit trust or an accumulation trust with multiple beneficiaries (at least one of which is a minor child of the retirement account owner) is an EDB, and the life expectancy rule applies. This requires RMDs based on the age of the oldest beneficiary of the trust until the youngest minor reaches age 21. At that point, the ten-year rule applies.

If Your Child Is Disabled or Chronically Ill

Disabled or chronically-ill beneficiaries are EDBs and are entitled to stretch out the IRA withdrawals over their life expectancy without any cut off. You can get the same treatment with a trust with multiple individual beneficiaries if the interests of the other beneficiaries do not arise until after the death of the disabled beneficiary. This type of Applicable Multi-Beneficiary Trust is a useful tool for families to provide for a chronically-ill or disabled beneficiary. Where this is an option, parents may prefer to direct the retirement account benefits to the share of the estate for the disabled or chronically-ill child and use other assets to benefit the non-disabled children. Newly added is the option of naming a charity as the remainder beneficiary of the trust for the disabled or chronically-ill beneficiary without disqualifying it as an EDB.

If you have questions about naming your minor or adult children, or trusts for their benefit, as the beneficiaries of your retirement account, please contact your legal and tax advisors.