Name a Trust as Your IRA Beneficiary and Every Dollar It Holds Back Is Taxed at 37% Above $15,650. Name Your Kids Directly and the Same Dollar Is Taxed at Their Rate, Usually 22% or 24%

Picture a 70-year-old widower with a $1 million traditional IRA and two grown children. His estate attorney suggests naming a trust as the beneficiary, for control. That sounds prudent. Depending on how the trust is written, the tax code can treat it as a reason to charge the top rate.

Here’s the gap. For tax year 2025, a trust that keeps IRA withdrawals inside pays 37% on every dollar of taxable income above $15,650. An individual filer didn’t reach 37% that year until taxable income exceeded $626,350. Name the kids directly and the same dollars land in their own brackets, which for many working adults means 22% or 24%.

Trusts Hit 37% at $15,650 While Your Kids Need $626,350

The cause is the compressed trust rate schedule in 26 U.S.C. § 1(j)(2)(E). Trusts use four rates: 10%, 24%, 35%, and 37%, packed into a band narrow enough to fit inside one modest salary.

Under the IRS’s 2025 schedule, a trust owes $3,777 plus 37% of the excess over $15,650. For 2026, the 37% line moves up to $16,000. The trustee calculates that tax and pays it out of the trust itself, 26 U.S.C. § 641(b).

SECURE Act’s 10-Year Rule Forces the Money Out Fast

When an IRA owner dies after December 31, 2019, most beneficiaries who aren’t spouses must empty the account by the end of the 10th year after death. For an owner who died in 2025, the IRA has to be fully distributed by December 31, 2035.

On a $1 million account, that schedule works out to about $100,000 a year. Every withdrawal from a traditional IRA counts as ordinary income. The only question is whose tax return it lands on.

Worked Example: Same $100,000, Two Very Different Tax Bills

Assumptions: 2025 federal rates, $100,000 withdrawn in one year, state tax and the trust’s small exemption ignored. Each child files single and already has $75,000 of taxable income from work.

Trust keeps the money. The first $15,650 costs $3,777. The remaining $84,350 is taxed at 37%. Total: about $34,987.

Kids inherit directly. Each child takes $50,000, raising taxable income from $75,000 to $125,000. The first $28,350 fills the 22% bracket, which tops out at $103,350. The other $21,650 is taxed at 24%. Each child owes $11,433, or $22,866 combined.

That gap of about $121,000 comes from where the dollars are taxed. The heirs, the account and the withdrawal pace are identical. For 2026, the 24% bracket for individuals starts above $105,700, so the comparison holds.

Conduit Trusts Pass the Income Through to Your Kids’ Brackets

A trust can avoid the 37% bill when it’s set up to pay income out. Under Internal Revenue Code § 661(a), a trust deducts amounts it distributes to beneficiaries, and the beneficiaries report that income on their own returns.

A conduit trust also known as a specialized form of see-through trust requires the trustee to pass every IRA withdrawal straight through, so the tax follows the money into the kids’ brackets. An accumulation trust lets the trustee hold distributions back, and every dollar held back gets the compressed schedule. That means the trust document itself effectively sets your family’s tax rate. The clause to look for is whether the trustee can keep IRA distributions inside the trust.

NOTE: The trust instrument, beneficiary rights, and timing of required distributions must be reviewed to classify it correctly.

Timing matters too. A trustee or heir who spreads withdrawals across all 10 years keeps each year’s piece in lower brackets. Waiting until year 10 to empty the account piles it all into one return.

When Paying 37% Is Still Worth It

Accumulation trusts earn their cost in specific cases:

• A beneficiary is a minor, or struggles with addiction, debt or creditors.
• A child faces a divorce that could reach an inheritance.
• A beneficiary receives means-tested benefits such as SSI or Medicaid, which a direct inheritance could disqualify.
• A blended family wants a surviving spouse supported while principal is kept for children from a first marriage.

For responsible adult children, naming them directly usually keeps more money in the family. A trust can stay as the contingent beneficiary for minor grandchildren. A second move is converting part of the IRA to a Roth during your own lower-bracket years, so heirs inherit withdrawals that are generally tax-free, though the 10-year clock still applies.

Beneficiary forms generally override a will, so review them alongside the trust language. Most estate messes trace back to a outdated beneficiary or a conflicting trust clause, which is why the full cleanup checklist appears in a free estate guide here. This is the kind of calculation to review with an estate tax attorney that specializes in trust documents and a CPA before the form gets signed.

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