For decades, the “stretch IRA” was one of the most powerful estate planning tools available to individuals with large retirement account balances. By naming a young beneficiary — a child or grandchild — as the IRA beneficiary, a decedent could ensure that the account would continue to grow on a tax-deferred basis for decades after death, with the beneficiary taking only small minimum distributions each year stretched over their life expectancy. A thirty-year-old beneficiary inheriting a $2 million IRA could expect to receive distributions over fifty or more years, allowing the account to compound and potentially grow to many multiples of its inherited value. The Setting Every Community Up for Retirement Enhancement Act of 2019 — the SECURE Act — eliminated this strategy for most beneficiaries, replacing the life expectancy payout with a mandatory ten-year distribution window. SECURE 2.0, enacted in late 2022, built further changes on top of that foundation. Together, these legislative developments have profoundly reshaped how retirement assets must be integrated into an estate plan, and business owners with large IRA or qualified plan balances need to understand the new rules thoroughly.

Background: The SECURE Act of 2019 and SECURE 2.0 of 2022

The SECURE Act of 2019 made sweeping changes to the rules governing required minimum distributions from IRAs and qualified plans. Before the SECURE Act, required minimum distributions began at age seventy and a half. The SECURE Act raised the required beginning date to age seventy-two. SECURE 2.0 raised it again — to age seventy-three for individuals who reach seventy-two after December 31, 2022, and to age seventy-five for individuals who reach seventy-three after December 31, 2032. These changes give retirement savers more time to let their accounts compound before distributions begin, which can be advantageous for both income tax deferral during the owner’s lifetime and for Roth conversion planning.

SECURE 2.0 also made significant changes to Roth accounts, including the elimination of required minimum distributions from Roth accounts in qualified plans (previously, Roth 401(k) accounts were subject to RMDs, unlike Roth IRAs), and the creation of new catch-up contribution rules. For individuals aged sixty through sixty-three, SECURE 2.0 allows significantly enhanced catch-up contributions — up to $10,000 per year (indexed for inflation) for certain qualified plan participants. These provisions create additional opportunities to accumulate after-tax retirement savings that can be inherited income-tax free by beneficiaries.

The Stretch IRA: What Was Lost

To appreciate the significance of what the SECURE Act changed, it is worth understanding precisely what the stretch IRA offered. Under the pre-SECURE Act rules, a non-spouse beneficiary who inherited an IRA was required to take minimum distributions each year, but those distributions were calculated based on the beneficiary’s own life expectancy using the IRS Single Life Expectancy Table. A thirty-year-old beneficiary had a life expectancy factor of approximately fifty-three years, meaning that in the first year after inheritance, they were required to take only about one fifty-third of the account balance as a distribution. The remaining balance continued to grow tax-deferred. Over the beneficiary’s lifetime, the total distributions could far exceed the original inherited balance, and the compounding effect of decades of deferred growth was substantial.

The stretch IRA was particularly powerful for business owners who had accumulated large IRA balances over their working careers and who had other assets sufficient to fund their retirement lifestyle without drawing heavily on the IRA. By naming children or grandchildren as beneficiaries, these owners could effectively pass a multi-generational tax-deferred compounding engine to the next generation. The SECURE Act ended that for most non-spouse beneficiaries, replacing the life expectancy payout with a blunt ten-year rule.

The Ten-Year Rule and Eligible Designated Beneficiaries

Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA or qualified plan account are classified as “non-eligible designated beneficiaries” and must withdraw the entire account balance by the end of the tenth year following the year of the account owner’s death. There is no annual required minimum distribution during the ten-year window — the beneficiary has flexibility to take distributions in any pattern they choose, as long as the account is fully distributed by year ten. This was clarified by IRS proposed regulations issued in 2022, which generated significant confusion because they initially seemed to suggest that annual distributions were required even during the ten-year window; the IRS subsequently confirmed in Notice 2022-53 and subsequent guidance that the ten-year rule does not require annual distributions, and that no penalty applies for years when the beneficiary chose not to take a distribution.

The statute carves out a category of “eligible designated beneficiaries” who are still entitled to use the old life expectancy payout rules. This group includes the surviving spouse of the account owner; a minor child of the account owner (but only until the child reaches the age of majority, after which the ten-year rule applies to the remaining balance); a chronically ill individual (as defined by reference to Section 7702B(c)(2)); a disabled individual (as defined by Section 72(m)(7)); and an individual who is not more than ten years younger than the account owner. The “not more than ten years younger” category is particularly notable because it allows a sibling, a close friend, or even a spouse who happens to be within ten years of the account owner’s age to receive a life expectancy payout. These categories are narrow, and for most business owners with children as primary beneficiaries, the ten-year rule will apply.

Naming a Trust as IRA Beneficiary: Conduit Trusts and Accumulation Trusts

Many business owners with large retirement accounts name a trust as the IRA beneficiary rather than naming individuals outright. There are legitimate reasons to do so: protecting assets from the beneficiary’s creditors, managing distributions for a beneficiary who is not financially sophisticated, coordinating the retirement assets with the rest of the estate plan, and ensuring that the assets ultimately pass to the correct beneficiaries in the event of a beneficiary’s remarriage or death. However, the SECURE Act has significantly complicated the analysis of whether naming a trust makes sense.

For a trust to be an eligible beneficiary of an IRA under the look-through rules, it must satisfy four requirements: it must be valid under state law; it must be irrevocable (or become irrevocable at the account owner’s death); all beneficiaries must be identifiable; and the trust documentation must be provided to the plan administrator by October 31 of the year following the year of the account owner’s death. If these requirements are satisfied, the trust is treated as a “see-through” trust, and the classification of the underlying trust beneficiaries determines the applicable payout rules.

Under the pre-SECURE Act framework, a conduit trust — which requires all required minimum distributions received from the IRA to be distributed to the trust beneficiaries immediately — allowed the oldest trust beneficiary’s life expectancy to govern the payout period. An accumulation trust — which permits distributions to be retained inside the trust rather than passed through immediately — was riskier because the IRS considered all potential trust beneficiaries, including charitable contingent remainder beneficiaries and other entities that would not qualify as designated beneficiaries, in determining the applicable payout period.

Under the SECURE Act, the analysis has shifted substantially. For most trusts with non-eligible designated beneficiaries as the oldest identifiable beneficiary, the payout period is the ten-year rule regardless of whether the trust is a conduit or accumulation trust. The distinction between conduit and accumulation trusts now matters primarily for trusts whose beneficiaries include eligible designated beneficiaries, such as a surviving spouse or a disabled child, where the applicable life expectancy payout is available and the question is whether the trust structure will preserve that benefit.

The Income Tax Cost of Trust Accumulation Under the Ten-Year Rule

The income tax consequences of accumulating IRA distributions inside a trust are particularly harsh under current law. Trusts reach the top federal income tax bracket — currently thirty-seven percent — at taxable income above $15,200 (the 2024 threshold, adjusted annually for inflation). By contrast, an individual beneficiary does not reach the top bracket until taxable income exceeds $609,350 (for single filers in 2024). A trust that accumulates $500,000 of IRA distributions in a single year will pay tax at or near the top rate on virtually all of it, whereas the same beneficiary receiving the same distribution directly might be in a much lower bracket. The compressed trust income tax rate schedule makes accumulation inside a trust an extremely expensive approach for large IRA balances, and this consideration alone often counsels against naming a complex accumulation trust as the IRA beneficiary.

Conduit trusts avoid the accumulation problem by requiring immediate distribution to the individual beneficiaries, who then pay tax at their own rates. But a conduit trust offers less protection than an accumulation trust, since the assets pass out of the trust and into the beneficiary’s hands — where they are subject to the beneficiary’s creditors and are included in the beneficiary’s own taxable estate. For business owners with significant estate tax concerns about the next generation, the conduit trust may undermine the estate planning goals that motivated naming a trust in the first place.

Roth Conversion Strategy in the Estate Planning Context

One of the most powerful responses to the SECURE Act’s elimination of the stretch IRA is the strategic use of Roth conversions. A Roth conversion involves paying income tax now on all or a portion of a traditional IRA balance, converting it to a Roth IRA. Once converted, the Roth IRA grows income-tax free and — critically — neither the account owner nor the beneficiaries owe income tax on distributions. Under the SECURE Act, a Roth IRA inherited by a non-spouse beneficiary is still subject to the ten-year rule, but the distributions are tax-free. This means that a beneficiary who inherits a $2 million Roth IRA and must withdraw it within ten years pays no income tax on those withdrawals, whereas a beneficiary who inherits a $2 million traditional IRA and must withdraw it within ten years could owe hundreds of thousands of dollars in income tax, potentially pushing them into the top bracket for multiple years.

The economics of a Roth conversion depend primarily on the comparison between the tax rate paid today and the tax rate the beneficiary will pay when they withdraw from a traditional IRA in the future. For a business owner who expects to be in the top bracket throughout their lifetime and who expects their children to inherit the IRA in their prime earning years — when they are also likely in a high bracket — the conversion is especially attractive. The business owner pays tax at the same rate that the children would have paid anyway, but the assets inside the Roth IRA compound tax-free from the date of conversion, and no income tax is owed on distributions.

SECURE 2.0 enhanced the attractiveness of Roth planning by eliminating required minimum distributions from Roth accounts in qualified plans (effective 2024). Previously, Roth 401(k) balances were subject to RMDs during the account owner’s lifetime, which forced distributions from a tax-favored account and could complicate planning. The elimination of RMDs from designated Roth accounts in qualified plans now allows business owners to leave those balances untouched during their lifetime, maximizing the tax-free compounding benefit for their heirs.

Coordinating Retirement Assets with the Taxable Estate

One of the most important principles of retirement asset estate planning is that not all assets are created equal from an income tax perspective. IRAs and qualified plans are subject to income in respect of a decedent rules, meaning that a beneficiary who inherits an IRA must pay income tax on the distributions received, in addition to whatever estate tax may have applied to include the IRA in the decedent’s taxable estate. The combination of estate tax at the top rate and income tax at the top rate can result in an effective combined tax rate exceeding sixty percent on a dollar of traditional IRA value in a taxable estate.

Appreciated assets with low cost basis, by contrast, receive a stepped-up basis at death under Section 1014, eliminating the built-in capital gain. A business owner who holds a $5 million portfolio of appreciated stock with a $500,000 basis can leave that stock to children, who take it with a $5 million basis and owe no income tax if they sell immediately after inheriting. The same $5 million in a traditional IRA would be distributed to the children over ten years with income tax owed on every dollar.

This analysis suggests that, where possible, appreciated low-basis assets should be held outside of retirement accounts so that they receive the step-up at death, while retirement accounts should be funded with assets that do not have large built-in gains. It also suggests that IRAs are among the least tax-efficient assets to leave to children, and are generally better directed toward charitable beneficiaries or lower-bracket beneficiaries who can manage the income tax cost of distributions more efficiently.

Charitable Planning with IRA Assets

Because charities are exempt from income tax, an IRA left to a charitable beneficiary is distributed without any income tax cost — the charity receives the full dollar amount of each distribution and pays no tax on it. This makes charitable beneficiaries the ideal recipients for IRAs from a combined income and estate tax perspective. A business owner who has a charitable intent and a large IRA balance should strongly consider leaving some or all of the IRA to charity, while directing lower-basis appreciated assets — which receive a step-up and are income-tax free to heirs — to family members.

A more sophisticated charitable planning tool is the charitable remainder trust. A CRT is an irrevocable trust that pays an income stream to one or more non-charitable beneficiaries for life or a term of years, with the remainder passing to charity at the end of the trust term. By naming a CRT as the IRA beneficiary, a business owner can effectively replicate much of the economic benefit of the old stretch IRA. The IRA is distributed to the CRT, which does not pay income tax on the distribution (since it is a tax-exempt entity). The CRT then invests the proceeds and pays an annuity or unitrust interest to the individual beneficiaries over their lifetimes, spreading the income tax recognition over many years and effectively recreating the long-payout structure that the stretch IRA formerly provided. At the beneficiary’s death, the remaining CRT assets pass to the designated charity.

The CRT strategy involves some tradeoffs: the individual beneficiaries do not inherit the IRA assets outright and cannot access the principal, and the remainder ultimately passes to charity rather than to the family. For business owners with both a charitable disposition and a desire to provide an income stream to children without giving them unrestricted access to the capital, the CRT-as-IRA-beneficiary structure can be an elegant solution.

Another option for IRA owners who are at least seventy and a half years old is the qualified charitable distribution, which allows up to $105,000 per year (indexed for inflation under SECURE 2.0) to be transferred directly from an IRA to a qualifying charity without the transfer being treated as taxable income. The QCD counts toward the account owner’s required minimum distribution for the year but is excluded from adjusted gross income. For business owners who are charitably inclined and who have large IRA balances, a consistent QCD strategy can reduce the taxable portion of the IRA that would otherwise pass to heirs, while also satisfying RMD obligations in a tax-efficient way.

Practical Strategies for Business Owners with Large Retirement Balances

Business owners often accumulate large retirement account balances through defined contribution plans, particularly in the later years of their careers when catch-up contributions and high plan contribution limits allow aggressive savings. A business owner with a $5 million or $10 million IRA faces a fundamentally different planning challenge than one with a modest account, and the strategies that are appropriate at scale are correspondingly more sophisticated.

The most important first step for any business owner with a large retirement account is to model the income tax cost of the ten-year rule under the current estate plan. This analysis should estimate the bracket into which the projected IRA distributions will push the beneficiaries, calculate the total income tax cost over ten years, and compare that cost to alternatives such as Roth conversion (paying tax now at the owner’s rate) or charitable planning (eliminating income tax entirely on designated portions). Many business owners are surprised to find that the combined estate and income tax cost of leaving a large traditional IRA to children exceeds seventy percent of the account’s value when both federal taxes are applied.

Roth conversions should be evaluated annually in the context of the business owner’s current income, expected future income, and the relative tax rates of the owner versus likely beneficiaries. Conversions are particularly attractive in years when the business owner has lower than usual income — for example, in a year when the business has a loss — or when tax rates are expected to increase in the future. Business owners who are winding down a career and transitioning out of the business may find that a series of conversions in the years leading up to full retirement, when income is lower, is the most cost-effective approach.

Trust design for IRA beneficiaries should be reconsidered in light of the SECURE Act. Many estate plans that were drafted before the SECURE Act include accumulation trusts as IRA beneficiaries, and those trusts may now produce dramatically worse income tax outcomes than a direct beneficiary designation or a conduit trust arrangement. A review of existing beneficiary designations — which are not governed by the will or revocable trust but by separate beneficiary designation forms filed with the plan administrator — is one of the most important and frequently overlooked aspects of post-SECURE Act estate planning.

Finally, business owners should coordinate the allocation of retirement and non-retirement assets among beneficiaries with an eye toward the income tax profile of each asset class. Charitable beneficiaries should receive IRAs; low-basis appreciated assets should go to individual beneficiaries who can benefit from the step-up; Roth accounts are excellent assets for high-earning children who would otherwise pay tax on traditional IRA distributions at the top rate. The SECURE Act did not eliminate the usefulness of retirement accounts as estate planning tools — it changed the rules of the game. Business owners who adapt their estate plans accordingly, with the guidance of experienced counsel, can still achieve efficient and effective wealth transfer from their retirement accounts.