Leave a $900,000 IRA to a Trust for the Grandkids and Every Dollar the Trust Keeps Over $16,000 a Year Will Be Taxed at 37%.
Naming a trust as your IRA beneficiary sounds like a smart way to protect grandchildren from themselves, but the tax bracket waiting inside that trust can quietly consume a fortune before a single dollar reaches them.
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A former engineer, then in his late 70s, had been taking his required annual withdrawals from a $900,000 traditional IRA for years. He wanted the money to reach his adult grandchildren slowly. So he named a trust as the IRA’s beneficiary and made his daughter the trustee.
After he died, she followed the plan. She would empty the IRA in equal slices over the allowed period and keep the money inside the trust. Then the trust’s first tax return came due. Every dollar the trust kept above $16,000 was taxed at 37%.
Trusts Reach the Top Bracket Almost Immediately
A trust that keeps its income pays its own tax. Internal Revenue Code § 641(a) applies the trust tax to income “accumulated or held for future distribution,” and § 641(b) says the trustee pays it.
The trust brackets are narrow. For 2026, a trust pays 10% on the first $3,300, 24% from $3,300 to $11,700, 35% from $11,700 to $16,000, and 37% above that. A single person remains below the 37% rate until taxable income tops $640,600.
Only Some Trusts Get the 10-Year Rule
The IRS sets an inherited IRA’s payout schedule based on who inherits it. IRS Publication 590-B (2025 edition) says a trust “can’t be a designated beneficiary even if it is a named beneficiary.” A designated beneficiary is a person the IRS treats as the heir when it sets the withdrawal schedule.
There is an exception. If the trust tops four IRS tests, the IRS looks through it to the people inside, here the grandchildren. Estate tax lawyers call this a see-through trust. The tests, from Publication 590-B:
- It is a valid trust under state law.
- It can’t be changed once the owner dies.
- The trust document clearly names who benefits.
- The trustee gives the IRA custodian the paperwork it requires.
When the trust passes, the grandchildren’s status controls. The IRS list of qualifying beneficiaries covers a surviving spouse, the owner’s minor child, a disabled or chronically ill person, or someone not more than 10 years younger than the owner. Adult grandchildren fall outside it. So the trust must empty the IRA by December 31 of the year containing the 10th anniversary of his death. He died after the deadline for starting his own mandatory withdrawals, so the trust must also take a withdrawal every year until then.
When a trust fails the tests, there is no designated beneficiary and no 10-year rule. Annual withdrawals then follow the owner’s life expectancy for his age in the year of death, reduced by 1 for each subsequent year.
This trust tops all four tests, so the 10-year math below applies.
Running the Numbers on $900,000
Assumptions: 2026 federal brackets every year, no investment growth, no state tax, and no deduction for trustee fees.
Even withdrawals come to $90,000 a year. That leaves $74,000 annually above the $16,000 line. The trust owes $31,231 a year, or $312,310 over the decade.
Delaying withdrawals makes it worse. Annual withdrawals are required here, so one lump sum is off the table. Still, the more the trustee pushes into the final year, the closer the bill gets to $330,931, the tax on the full $900,000 in a single year.
Paying the Grandchildren Moves the Tax Lower
Under sections 661 and 662, money the trust pays out is deducted by the trust and taxed to the grandchild who gets it. Under § 663(b), the trustee can choose to count payments made in the first 65 days of a year as paid on the last day of the prior year.
Split the $90,000 three ways at $30,000 per grandchild. Each grandchild is a single filer whose other income already puts them in the 22% bracket, which starts above $50,400, with room to remains under the 24% line at $105,700. The family’s tax drops to $19,800 a year, or $198,000 over 10 years. That saves $114,310.
The trade-off: money paid out leaves the trust’s protection from creditors, divorces, and spending sprees. A middle path pays each grandchild enough to fill their lower brackets and keeps the rest in trust.
Moves to Make Before the Beneficiary Form Is Final
- Have the estate attorney confirm in writing that the trust meets all four see-through tests.
- Ask whether it is a conduit trust, which tops every withdrawal straight to the beneficiaries, or an accumulation trust, which can keep the money and pay the trust rates.
- Check whether the distribution clause lets the trustee pay out just enough to fill each grandchild’s lower brackets.
- Confirm with the IRA custodian whether the owner had reached the deadline to start mandatory withdrawals. That determines whether annual withdrawals are required.
- Have the trustee check the § 663(b) election box on the trust’s Form 1041 in each year when early-year payments should count for the prior year.
- For any share that needs no protection, name the grandchildren directly.
An estate tax attorney can test these steps against your own trust document. Beneficiary forms, trust naming, and the paperwork around them are where most estate messes start, and we put the full cleanup checklist in a free guide here: Die With a Plan.
Remember the $16,000 Line
A trust pays 37% on kept income above $16,000. A single grandchild reaches that rate only above $640,600. Draft the trust around that gap.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
