Inherited IRA & Trust Mistakes to Avoid
Brandon Van Goethen is a financial advisor at Cornerstone based in Reno, NV. Brandon has obtained his Series 7, 63, and 65 and found a passion for investment counseling and portfolio management. He pilots new initiatives that thrive on tailoring financial plans to clients’ specific needs and provides every client with the attention to detail and dedication they deserve.
Inherited IRA & Trust Mistakes to Avoid
How misaligned trusts, outdated designations, and poor tax timing can quietly drain your legacy
Protecting your legacy takes more than having an estate plan and who receives your wealth. It is about ensuring that your assets pass to the right people, at the right time, with as little unnecessary tax exposure, confusion, and conflict as possible. It requires making sure your trusts, retirement accounts, and beneficiary designations work together. Yet even families with carefully prepared estate plans can make costly mistakes when trusts and inherited Individual Retirement Accounts (IRAs) are involved. A trust may be designed to protect a beneficiary, while an inherited IRA may be subject to strict distribution rules and income taxes. If these two pieces of the plan are not coordinated, the result can be very different from what the original account owner intended.
The good news? Many of these missteps can be avoided with thoughtful planning, regular reviews, and coordination among financial advisors, estate planning attorneys, and tax professionals. Here are some important considerations to help protect your family's inheritance.
Don't Assume Your Will or Trust Controls Your IRA
One of the most common estate planning mistakes is assuming that a will or revocable living trust automatically determines who inherits an IRA. In most cases, retirement accounts pass according to the beneficiary designation on file with the financial institution, rather than under the terms of a will. If an IRA names an individual beneficiary, that designation generally governs who receives the account, even if the will says something different. For example, someone may establish a trust intending to leave assets to their children while providing additional protections for a child who struggles with financial management. If the IRA still names that child directly, the retirement account may bypass the trust entirely.
Don't Overlook the Inherited IRA 10-Year Rule
The rules governing inherited IRAs changed significantly under the SECURE Act, and the timing of distributions can have a major impact on a beneficiary's tax bill. Under the general 10-year rule, many non-spouse beneficiaries who inherit an IRA must withdraw the entire account balance by December 31 of the tenth year following the original owner's death. Depending on the circumstances, annual required minimum distributions may also apply during that period.
Exceptions exist for certain eligible designated beneficiaries, including qualifying surviving spouses, minor children of the account owner, or individuals with disabilities or chronic illnesses. The applicable rules depend on factors such as the beneficiary's relationship to the original owner, the date of death, and whether required minimum distributions had already begun.
Why does this matter? Traditional IRA distributions are generally taxable as ordinary income. Taking large withdrawals in a short period can push a beneficiary into a higher marginal tax bracket, potentially increasing the overall tax burden.
Avoid Forgetting About the Surviving Spouse's Options
A surviving spouse who inherits an IRA may have options that are not available to other beneficiaries. Depending on the circumstances, the spouse may be able to treat the inherited IRA as their own or retain it as an inherited account. These choices can affect required minimum distributions, access to funds, and the potential tax consequences of withdrawals. For example, treating an inherited IRA as one's own may provide long-term retirement planning advantages, but it can also affect when required distributions begin and whether withdrawals before age 59½ are subject to the 10% additional tax on early distributions. Keeping the account as an inherited IRA may offer different advantages, depending on the surviving spouse's age and financial needs. The right decision is not necessarily the same for every surviving spouse.
Don't Let Outdated Beneficiary Designations Undermine Your Plan
Life changes, but beneficiary forms are often forgotten. Marriage, divorce, the birth of a child, the death of a loved one, or a significant change in family finances can all affect whether an existing beneficiary designation remains appropriate. An outdated designation can unintentionally direct assets to an ex-spouse, leave out a new family member, or undermine a carefully structured estate plan. Naming multiple beneficiaries without reviewing how their shares will be distributed can also create unintended complications. Trusts require the same attention. A trust that made sense when it was drafted years ago may no longer reflect the family's needs, tax considerations, or intended distribution strategy.
Coordinate Your Financial Advisor, Estate Attorney, and Tax Professional
Perhaps the most overlooked inheritance mistake is treating estate planning, retirement planning, and tax planning as separate activities. Each professional brings a different perspective. An estate planning attorney focuses on legal structure and asset distribution. A financial advisor considers investment strategy, cash flow, and the family's long-term goals. A tax professional evaluates the income tax consequences of distributions and the interaction with other taxable income. When these professionals work independently, important details can fall through the cracks. For example, a trust may be legally appropriate but create an unnecessarily complicated tax outcome. Alternatively, a beneficiary may take an IRA distribution without realizing that a different withdrawal schedule could better support their financial goals.
Protecting Your Legacy Starts With Proactive Planning
A well-designed estate plan should do more than transfer wealth. It should help protect beneficiaries, preserve flexibility, and make the transition of assets as smooth and tax-efficient as reasonably possible. Trusts and inherited IRAs can be powerful tools for achieving those goals, but they must be structured and coordinated carefully. A beneficiary designation that no longer reflects your wishes, a trust that was not designed with retirement accounts in mind, or an overlooked distribution deadline can create unnecessary financial and administrative burdens for the people you want to protect. The best time to address these issues is before an inheritance occurs. Reviewing your plan now can help reduce uncertainty, identify potential problems, and give your family greater confidence that your wishes will be carried out. To see how Prime Capital Financial can help you build and protect your legacy, call our office today at (775) 853-9033 or click here.
Based in Reno, NV, Prime Capital Financial is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.
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