A $1 Million IRA Left to a “Conduit Trust” Forces Every Dollar Out Within 10 Years Anyway. The Trust Estate Lawyers Sold Before 2020 Now Does the Opposite of What It Was Built For, and Here’s What Replaces It

A widower in his late 70s signed his estate plan years before 2020. His lawyer told him to name a conduit trust as beneficiary of his $1 million IRA, with his son as the trust’s beneficiary. The son had a shaky marriage and a long record of burning through windfalls. The pitch was simple. The trust would withdraw only each year’s small required minimum distribution, pass that amount to the son, and keep the rest walled off for decades.

The father died in 2025, well after he had to start taking withdrawals. The son is single, in his 50s, with about $100,000 of taxable income from his job. The trust document reads exactly as it did when it was signed. Its effect is now the reverse of what the father paid for.

Every dollar the trust withdraws must go straight to the son, and the trust has to withdraw everything by December 31, 2035. On that date the full balance sits in the son’s own name, where creditors and a future ex-spouse can reach it.

A Ten-Year Clock Overrides the Trust’s Design

The law rewrote the inherited-account rules in Section 401(a)(9) of the Internal Revenue Code. Under 26 U.S.C. § 401(a)(9)(H)(i), the old five-year window becomes “10 years” and applies “whether or not distributions of the employee’s interests have begun.”

IRS Publication 590-B spells it out. A designated beneficiary who is not an eligible designated beneficiary must empty the account by December 31 of the year that falls 10 years after the owner’s death. For an owner who died in 2025, that deadline is December 31, 2035. The father died after his required beginning date, so the IRS also requires annual distributions based on life expectancy in the years before then. Final regulations published on July 19, 2024 apply those rules to calendar years beginning on or after January 1, 2025. Skipping one of those distributions triggers an excise tax of 25% on the missed amount under 26 U.S.C. § 4974(a).

A conduit trust is defined by one clause: the trustee must pass every IRA distribution through to the beneficiary. Before 2020, that meant small annual checks. Today it means the entire account. Retirement money shows up in estates of every size: retirement assets appeared on 5,041 of the 7,195 estate tax returns filed in 2024.

Running the Son’s Numbers

These figures use the IRS’s 2025 single-filer brackets. Assume the trustee spreads withdrawals equally and the account does not grow. That works out to $100,000 a year landing on top of the son’s salary. The extra income runs through the 22% bracket, which ends at $103,350, then the 24% bracket up to $197,300, then into 32%.

Each year’s payout adds about $24,149 of federal tax. Over the decade that comes to $241,490, and everything left after tax ends up in the son’s personal account with no spendthrift protection. If the trustee lets the balance build toward year 10, the final withdrawal pushes him into the 37% bracket, which starts at $626,351.

Accumulation Trusts Keep the Wall Standing

The usual replacement is an accumulation trust. The trustee still has to empty the IRA within 10 years. But it can keep the withdrawals inside the trust, protected from the son’s creditors and his marriage. Income the trust keeps is taxed at the trust’s own brackets, which reach the top rate at a small fraction of the single-filer limit. It is one of several IRA-trust landmines we mapped out in a free guide to the IRS rules that quietly drain retirement accounts.

That cost has a limit. Tax on a kept $100,000 cannot exceed $37,000. Compared with the son’s $24,149, the most protection can cost is $12,851 a year. In years when the son is on solid footing, the trustee can pay money out to him and have it taxed at his lower rates instead.

Conduit trusts still work for the heirs the law favors: a surviving spouse, minor child, disabled or chronically ill individual, or anyone not more than 10 years younger than the owner. For disabled or chronically ill heirs, an applicable multi-beneficiary trust under 26 U.S.C. § 401(a)(9)(H)(iv) keeps the life-expectancy payout. Many attorneys now also give a trust protector the power to switch a conduit trust to accumulation after the owner dies.

Four Moves for Anyone With a Pre-2020 IRA Trust

1. Pull the trust and find the retirement-benefits clause. If it says the trustee must pay out whatever it receives from the IRA, you have a conduit trust.
2. Get the IRA custodian’s beneficiary form and confirm it names the right trust by its exact title and date.
3. Ask your estate attorney to add accumulation language or a trust protector provision, and for heirs who need no protection, name them directly on the form.
4. Trustees and heirs: ask the custodian whether the owner had started required withdrawals. If so, annual distributions start the year after death, and a missed one triggers the 25% excise tax.

One Date Decides Everything

An owner died in 2025. For that owner, a conduit trust pays the entire IRA to the heir by December 31, 2035, along with about $241,490 in federal tax in this example. An accumulation trust keeps that money protected for a few thousand dollars a year in extra tax. Conduit trusts is not appropriate for every situation; the right choice depends on the beneficiary’s circumstances and the owner’s estate-tax planning goals. An estate tax attorney can help determine which approach makes the most sense.

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