IRAs vs Trusts: Taxes, Rules and Client Needs

Financial advisors and clients are weighing taxes, changes to retirement rules and household needs when deciding whether to use an individual retirement account or a trust in long-term estate plans. The choice now hinges on the Secure Act’s 10-year payout rule for most nonspouse beneficiaries, the costs and complexity of trust administration, and specific goals such as protecting benefits for a child with special needs or shielding assets from creditors.

The Secure Act ended the stretch-IRA approach for most nonspouse heirs, requiring inherited IRAs to be emptied within 10 years. That timing change has led some clients to consider trusts as a way to preserve control over distributions and extend benefits across generations when the trust is drafted to allow it. Fahmin Fardous of Zenith Wealth Partners wrote, “An IRA is a savings-and-tax vehicle; the trust is a control-and-distribution vehicle.”

IRAs retain tax advantages and simplicity. Roth IRAs offer tax-free growth and withdrawals when rules are met, while traditional IRAs defer taxes until distributions. IRAs are straightforward to open and maintain, do not require trustee or legal drafting fees, pass directly to named beneficiaries, and avoid probate.

Trusts allow grantors to set when and how heirs receive assets, which can matter when beneficiaries are young, lack financial experience or rely on means-tested government benefits. Trusts also provide more protection from creditors in some bankruptcy and divorce situations. A 2014 Supreme Court decision reduced bankruptcy protections for many IRAs, and that outcome has led advisors to name trusts as IRA beneficiaries in some cases. Griffin Bridgers, an estate planning lawyer at Illumine Legal, warned that trusts bring tax and timing tradeoffs: “Any IRA distributions that come out are going to be taxed to the trust.”

Trusts face higher administrative costs and different tax treatment. Trust tax brackets are compressed compared with individual rates, which can increase taxes on distributions. Depending on the trust language and applicable rules, distributions to a trust can require faster payout schedules in some cases, shortening the period for tax-deferred growth. Establishing and running a trust often involves legal fees, trustee fees and careful drafting; Bridgers cautioned that digital legal services and some attorneys may omit language needed to achieve a grantor’s goals.

Special-needs planning is a common reason to favor trusts. Eric Ludwig of The American College for Financial Services noted that parents who serve as primary caregivers often use trusts to help preserve a disabled adult’s eligibility for government benefits. Ludwig also said charitable gifts can reduce the tax impact of forced IRA distributions under the 10-year rule. Bridgers added that recent limits on charitable deductions under legislation such as the One Big Beautiful Bill Act could affect those strategies.

Advisors also emphasize routine maintenance for IRAs. Fardous urged clients to update beneficiary designations after significant life events-births, marriages, divorces, inheritances or business sales-because IRAs pass outside probate directly to named beneficiaries and beneficiary forms determine where the assets go.

Planners run scenarios that account for taxes, payout timing, administrative costs and a family’s distribution wishes before recommending an IRA, a trust or a combination of the two. The decision depends on an individual family’s tax exposure, need for control over distributions, privacy preferences and potential creditor or estate tax risks.