Trusts Are Now the Best IRA Beneficiaries

I have previously written about the complexity that the Secure Act has introduced to trust beneficiaries here and here.  I also previously suggested that under the current rules, naming a trust that can flip between a Conduit Trust and an Accumulation Trust, depending on the age of the IRA owner and the classification of the beneficiaries, would be ideal.  By analyzing the outcomes of the Ten-Year Rule (a Conduit Trust) and the Payout Rule (an Accumulation Trust) it appears fairly starkly that under the Secure Act the optimal way to plan for the maximum amount of “stretching” available to IRAs with non-spouse beneficiaries is to name a trust as the beneficiary that has terms that allow for the trust to flip between a Conduit Trust or an Accumulation Trust depending on the facts of the IRA at the owner’s death.

Below are my comparisons of the Ten-Year Rule against the Payout Rule, when the owner dies between the ages of 72 and 81.  Under the Ten-Year Rule one could not do better (in terms of the net after-tax dollars to the beneficiary) than by holding all of the investments in the IRA for the full 10 year period and then withdrawing the balance at the end of that period.  Assuming money is always invested, that investments net 5% annually, that non-IRA investments generate a net of 4% capital gains each year, and that ordinary income is taxed as 40% (State and Federal) and 20% (capital gains), here are the results:

Ten-Year Rule

YearIRA GrowthWithdrawalTax on withdrawalIRA BalancePersonal Investment GrowthPersonal BalancePersonal TaxNet
150,000001,050,0000001,050,000
252,500001,102,5000001,102,500
355,125001,157,6250001,157,625
457,881001,215,5060001,215,506
560,775001,276,2820001,276,282
663,814001,340,0960001,340,096
767,005001,407,1000001,407,100
870,355001,477,4550001,477,455
973,873001,551,3280001,551,328
1077,5661,628,895(651,558)00977,3370977,337

Accumulation Trust (Payout Rule): Owner Age 72 at Death

AgeIRA GrowthWithdrawalTax on withdrawalIRA BalancePersonal Investment GrowthPersonal BalancePersonal TaxNet
7250,00058,480(23,392)991,520035,088(281)1,026,608
7349,57661,585(24,634)979,5111,75473,498(295)1,053,010
7448,97664,868(25,947)963,6193,675115,477(617)1,079,096
7548,18168,342(27,337)943,4585,774161,286(970)1,104,744
7647,17372,020(28,808)918,6118,064211,207(1,355)1,129,818
7745,93175,918(30,367)888,62310,560265,544(1,774)1,154,168
7844,43180,056(32,022)852,99813,277324,625(2,231)1,177,623
7942,65084,455(33,782)811,19316,231388,802(2,727)1,199,995
8040,56089,142(35,657)762,61119,440458,462(3,266)1,221,072
8138,13194,149(37,660)706,59222,923534,023(3,851)1,240,615

In fact, if one runs the numbers for the 72 year old owner out until the end of the stretch period (which is when the owner would have turned 89), the net balance would be $1,347,320 under these assumptions–roughly $370,000 better that the Ten-Year Rule.

The results are still better than the Ten-Year Rule when the owner is 81 years old at death (being the last age at which the IRS table assume the owner would have a life expectancy of over 10 years):

Accumulation Trust (Payout Rule): Owner Age 81 at Death

AgeIRA GrowthWithdrawalTax on withdrawalIRA BalancePersonal Investment GrowthPersonal BalancePersonal TaxNet
8150,00095,238(38,095)954,762057,143(457)1,011,905
8247,738100,501(40,201)901,9992,857119,821(480)1,021,819
8345,100106,117(42,447)840,9815,991188,476(1,006)1,029,457
8442,049112,131(44,852)770,8999,424263,595(1,583)1,034,494
8538,545118,600(47,440)690,84413,180345,720(2,214)1,036,565
8634,542125,608(50,243)599,77917,286435,467(2,904)1,035,246
8729,989133,284(53,314)496,48321,773533,553(3,658)1,030,037
8824,824141,852(56,741)379,45526,678640,860(4,482)1,020,316
8918,973151,782(60,713)246,64632,043758,589(5,383)1,005,235
9012,332164,431(65,772)94,54837,929888,805(6,372)983,353
914,72799,275(39,710)044,440985,344(7,466)985,344

The moral of the story is that, under the Secure Act, trust beneficiaries of IRAs give the maximum flexibility to stretch the IRA after the owner’s death, if the beneficiary is not a spouse and the owner dies between the ages of 72 and 81. That is, naming a non-spouse beneficiary directly subjects the beneficiary to the Ten-Year Rule, which cannot out perform the Payout Rule that an Accumulation Trust could generate under these assumptions. The Ten-Year Rule outperforms the trust when the Five-Year Rule would apply or the owner dies after age 81.

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