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

Year	IRA Growth	Withdrawal	Tax on withdrawal	IRA Balance	Personal Investment Growth	Personal Balance	Personal Tax	Net
1	50,000	0	0	1,050,000	0	0	0	1,050,000
2	52,500	0	0	1,102,500	0	0	0	1,102,500
3	55,125	0	0	1,157,625	0	0	0	1,157,625
4	57,881	0	0	1,215,506	0	0	0	1,215,506
5	60,775	0	0	1,276,282	0	0	0	1,276,282
6	63,814	0	0	1,340,096	0	0	0	1,340,096
7	67,005	0	0	1,407,100	0	0	0	1,407,100
8	70,355	0	0	1,477,455	0	0	0	1,477,455
9	73,873	0	0	1,551,328	0	0	0	1,551,328
10	77,566	1,628,895	(651,558)	0	0	977,337	0	977,337

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

Age	IRA Growth	Withdrawal	Tax on withdrawal	IRA Balance	Personal Investment Growth	Personal Balance	Personal Tax	Net
72	50,000	58,480	(23,392)	991,520	0	35,088	(281)	1,026,608
73	49,576	61,585	(24,634)	979,511	1,754	73,498	(295)	1,053,010
74	48,976	64,868	(25,947)	963,619	3,675	115,477	(617)	1,079,096
75	48,181	68,342	(27,337)	943,458	5,774	161,286	(970)	1,104,744
76	47,173	72,020	(28,808)	918,611	8,064	211,207	(1,355)	1,129,818
77	45,931	75,918	(30,367)	888,623	10,560	265,544	(1,774)	1,154,168
78	44,431	80,056	(32,022)	852,998	13,277	324,625	(2,231)	1,177,623
79	42,650	84,455	(33,782)	811,193	16,231	388,802	(2,727)	1,199,995
80	40,560	89,142	(35,657)	762,611	19,440	458,462	(3,266)	1,221,072
81	38,131	94,149	(37,660)	706,592	22,923	534,023	(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

Age	IRA Growth	Withdrawal	Tax on withdrawal	IRA Balance	Personal Investment Growth	Personal Balance	Personal Tax	Net
81	50,000	95,238	(38,095)	954,762	0	57,143	(457)	1,011,905
82	47,738	100,501	(40,201)	901,999	2,857	119,821	(480)	1,021,819
83	45,100	106,117	(42,447)	840,981	5,991	188,476	(1,006)	1,029,457
84	42,049	112,131	(44,852)	770,899	9,424	263,595	(1,583)	1,034,494
85	38,545	118,600	(47,440)	690,844	13,180	345,720	(2,214)	1,036,565
86	34,542	125,608	(50,243)	599,779	17,286	435,467	(2,904)	1,035,246
87	29,989	133,284	(53,314)	496,483	21,773	533,553	(3,658)	1,030,037
88	24,824	141,852	(56,741)	379,455	26,678	640,860	(4,482)	1,020,316
89	18,973	151,782	(60,713)	246,646	32,043	758,589	(5,383)	1,005,235
90	12,332	164,431	(65,772)	94,548	37,929	888,805	(6,372)	983,353
91	4,727	99,275	(39,710)	0	44,440	985,344	(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.