It is not uncommon for retirement accounts to be the largest asset in a client’s estate. Many clients know the distribution rules for their IRAs during their lifetime. They know most IRAs require that they to start taking their required minimum distributions (RMDs) when they reached a certain age. Now, in 2025, that age is 73. They may know that the RMD amount each year is computed according to the “Uniform Lifetime Table.”

Clients may know the rules for distributions during their lifetime. But, they often are not familiar with the rules for IRAs when the account holder dies. IRAs allow you to name a beneficiary to receive the account. There are different consequences for naming different categories of people as a beneficiary of your IRA. Before we jump into the rules, know that the rules have changed a few times in the last five years. The SECURE Act changed the rules in 2020. Again, with SECURE 2.0 changed them 2023. Since 2023 there have been additional regulations clarifying the rules. If you inherited an IRA prior to that time, these rules may not apply.

General Rule

Following SECURE Act, the general rule is that most beneficiaries are required to follow the 10-year rule. The 10-year rule requires that the beneficiary empty the entire account by the end of the tenth year following the death of the account owner.

There are some exceptions to the 10-year rule for what the IRS calls “eligible designated beneficiaries.” Eligible designated beneficiaries include surviving spouses and minor children of the deceased account holder. The category also includes disabled or chronically ill individuals. It also includes an individual who is not more than ten years younger than the IRA owner.

Rules for Eligible Designated Beneficiaries

First, surviving spouses have their own set of rules. A surviving spouse who inherits an IRA doesn’t have to start distributions until the account holder would have been 72. Then, they have the option to follow the 10-year rule, take distributions based on their own life expectancy, or roll over the IRA into their own IRA.

For minor children of the account holder, the life expectancy of the child can be used to calculate their annual RMD until the minor reaches the age of majority. After the minor reaches the age of majority, the 10-year rule applies. It should be noted that a child may be treated as having not reached the age of majority if the child has not completed their education up until the age of 26. Additionally, a child who is disabled will be treated as having not reached the age of majority so long as they continue to be disabled.

For other eligible designated beneficiaries, (including those who are disabled and/ or chronically ill) the beneficiary has options. The beneficiary can follow the 10-year rule or take distributions over the longer of their own life expectancy or the account holder’s remaining life expectancy. Often times, the extension of the amount of time eligible designated beneficiaries have to receive the IRAs is referred to as a “stretch.”

Does a special needs trust get the stretch?

You probably don’t want to list a disabled beneficiary as the beneficiary of an IRA outright. There are a number of reasons for this. One big reason is that receiving an IRA outright could make the beneficiary ineligible of means tested government benefits. Additionally, the disabled beneficiary may not be capable of managing the IRA on their own.

The solution? A third party special needs trust. Assets (including IRAs) left to a special needs trust maintain the beneficiaries eligibility for public benefits. But, the trust still allows the assets to be used for benefit of the beneficiary during their lifetime.

But does naming a pecial needs trust as the beneficiary of an IRA still get the same stretch as the disabled beneficiary? Yes, so long as certain requirements are met. If certain requirements are met the IRS will see through the trust, to the beneficiary of the trust when determining which IRA rules apply. A trust for the “sole benefit” of a person who is disabled or chronically ill can stretch the distribution over the trust beneficiary’s actuarial life expectancy.

Is calling it a special needs trust enough?

Just calling a trust a “special needs trust” is not enough to get the stretch. It’s also not enough for the trust to be for the sole benefit of one beneficiary. The sole beneficiary must also be determined to be disabled or chronically ill. A doctor’s certification is sufficient to show that a beneficiary is chronically ill. For disability, the social security definition of disability applies. July 2024 regulations indirectly hinted a doctors certification of disability may be enough to qualify for the stretch as well, but it is unclear.

Tax implications

Many retirement accounts are tax-deferred. This means that tax isn’t paid until distributions come out. When the distribution is taken, it is counted as income on the beneficiary’s tax return. The benefit to to maximizing the stretch on an IRA is because the smaller the distribution, the less taxable income there is. Of course one of the downsides to naming a trust as the beneficiary of an IRA is that income retained in the trust will usually be taxed at the trust’s tax bracket, which may be higher than the income of the individual.