Your Trust Could Reach the 37% Tax Bracket at Just $16,000

You put in the effort. You saved for retirement, established a trust, and designated beneficiaries because you wanted to ensure the safety of your loved ones. That is significant. We truly mean it.

Now, you find yourself sitting with us, reviewing the plan you set up years ago. Your IRA has grown to be one of your most substantial assets, and you trust it will be passed down to your children as you intended, with the necessary protection.

Then we request to see the beneficiary form.

The trust is listed. You made that decision to ensure security, not to create a tax issue. However, no one has revisited it since the SECURE Act altered the rules for inherited retirement accounts, and your SECURE Act IRA trust might now lead to an outcome you never anticipated.

In 2026, estates and trusts will fall into the 37% federal marginal income tax bracket once their taxable income surpasses $16,000. In contrast, a single person won’t enter that bracket until their taxable income exceeds $640,600.

Those figures are eye-catching. Yet, they don’t address the most crucial question: What do you envision this wealth enabling for your loved ones?

The SECURE Act Altered the Regulations for IRA Trusts After Families Established Their Plans

The original SECURE Act, which was enacted in 2019, established the 10-year distribution framework that we are discussing here. Although SECURE 2.0 later modified other retirement-account regulations, it did not alter this key inherited-IRA rule.

Prior to 2020, individuals who inherited your IRA could typically spread their withdrawals over their lifetime. However, the SECURE Act changed that option, instituting a 10-year distribution period for most non-spouse beneficiaries.

Depending on whether you had begun taking required distributions, the individual inheriting your IRA might also need to withdraw funds annually during that 10-year span, rather than just depleting the account at the end. Different regulations apply to specific individuals, including your surviving spouse, qualifying minor children, disabled or chronically ill beneficiaries, or those who are close in age to you.

Withdrawals from a traditional IRA usually result in taxable income. If your beneficiary is required to condense those withdrawals into a 10-year timeframe, the additional income could coincide with their peak earning years, adding to their salary, business income, or investment returns.

When your trust is named as the beneficiary, a new set of considerations arises. We need to understand what your trust stipulates, whether it can hold onto distributions, who will ultimately receive them, and how each decision aligns with the future you envision for your family.

The duration for which the trust receives distributions—be it five years, ten years, or another period—depends on the trust’s drafting and the individuals classified as beneficiaries under retirement-account regulations. A qualifying see-through trust may be eligible for beneficiary-based rules, which include the 10-year rule applicable to many beneficiaries. Conversely, if the trust does not qualify and you pass away before your required beginning date, the five-year rule could come into play. If you die on or after that date, a different remaining-life-expectancy rule might be applicable.

This is why it’s essential to examine the trust terms, the individuals involved with the trust, and your required-distribution status collectively.

In summary: The legal landscape has shifted, affecting how your plan must operate.

The $16,000 Figure Serves as a Caution, Not a Directive

The One Big Beautiful Bill did not establish the compressed income-tax brackets for trusts; rather, it made the existing individual, estate, and trust rate structure permanent. After factoring in the 2026 inflation adjustments, estates and trusts will enter the 37% marginal federal income-tax bracket once their taxable income surpasses $16,000.

For 2026, the federal income tax brackets for estates and trusts are as follows:

10% on the first $3,300;

24% on income from $3,300 to $11,700;

35% on income from $11,700 to $16,000;

and 37% on taxable income exceeding $16,000.

These are marginal tax brackets, meaning that not the entire $16,000 is taxed at the 37% rate. However, a trust can reach the highest tax bracket with significantly less taxable income compared to an individual.

Now, consider the individual behind the tax return. Your daughter might be going through a divorce. Your son could be running a business that relies on personal guarantees. A child may be in recovery from addiction or may not be prepared to handle a six-figure inheritance outright.

In such situations, mandating every IRA distribution from the trust to lower the tax rate could put the inheritance at the very risk you aimed to avoid. While tax efficiency is important, it is just one aspect of the overall decision.

The key takeaway: The tax figure indicates what needs to be analyzed, but it doesn’t dictate the course of action.

Two Families With Identical IRAs May Require Distinct Strategies

If your strategy involves a conduit trust, withdrawals from retirement accounts typically flow directly to your beneficiary. This can shift taxable income from the trust’s higher brackets to the beneficiary’s personal tax return, but it also places the funds directly in their possession.

Conversely, if your strategy employs an accumulation trust, the trustee has the option to retain withdrawals within the trust. Although the retained income may incur higher taxes, your assets can remain safeguarded during a divorce, legal issues, addiction challenges, or periods when your child is not equipped to handle the funds.

No single structure is ideal for every family. When we assist you in making this choice, we consider your beneficiary’s age, relationships, employment, debts, health, maturity, and any other inherited assets. We also inquire about your intentions for the money and what you wish to shield it from.

This is the essence of our work. We don’t simply select a structure from a list; we guide you in determining how the legal, tax, financial, and personal elements should integrate.

In summary: The most effective plan safeguards the individual, not just the account.

The Beneficiary Form Must Align with the Plan

Typically, your IRA is distributed according to its beneficiary designation rather than the directives in your will. You might have outstanding documents organized in a binder, but an outdated form could redirect one of your largest assets elsewhere.

We’ve encountered forms that still list an ex-spouse, designate an adult child directly when the current plan aims for protection, or refer to a trust that has since been modified. Even if the names are consistent, the tax and distribution terms may not align with your current wishes for your family under existing laws.

This is the gap we bridge upstream. We examine the beneficiary form alongside the trust, retirement account, other family assets, and the situations of the inheritors. We also collaborate with the CPA, financial advisor, and insurance expert to ensure everyone is on the same page.

The key takeaway: A beneficiary form is not an isolated task; it is integrated into the family plan.

Stewardship Begins Before the Money Changes Hands

Parents frequently express their desire to safeguard an inheritance without exerting control over their children from beyond the grave. This is a thoughtful distinction. Protection should empower the next generation with a solid foundation, rather than hinder their development into competent decision-makers.

Thus, we pose questions that you won’t find on an IRA form. Are your children aware of the reasons behind your wealth accumulation? Do they understand why certain assets will be held in trust? Have you selected a trustee who comprehends both the legal obligations and the impact of each decision on the individual involved?

A trust can safeguard funds. A planning process centered on relationships can also equip individuals, maintain family wisdom, and provide the next generation with a point of contact when real decisions arise.

The key takeaway: Safeguarding an inheritance and preparing the recipients are two distinct responsibilities. An effective plan addresses both.

The Plan Requires Someone Who Sees the Complete Picture

The plan that was suitable five years ago might not be appropriate today. Your IRA could have doubled, a child might have gotten married, a business could have taken on new debt, or the individual designated as trustee may no longer be the best fit for the position. If you reach out to us before any legal or personal changes occur, we can assess those developments while you still have options.

The value remains relevant in the present. When you pass away and your family is in mourning, they shouldn’t have to meet a stranger, search for every account on their own, and figure out which advisor to contact first. Because you maintain an ongoing relationship with us, your family has someone who is already familiar with your plan, your loved ones, and the purpose of your wealth.

The key takeaway: The relationship is what keeps the plan aligned with real life.

What You Can Do Right Now

If your estate plan was created before the SECURE Act, your IRA has increased in value, or a trust is named as a beneficiary and hasn’t been reviewed recently, it’s time to bring the entire plan back to the discussion.

We assist you in developing a Life & Legacy Plan that integrates your family, assets, beneficiary designations, legal documents, and advisory team. The relationship doesn’t conclude once the documents are signed. When something occurs, your family knows to reach out to us.

Schedule a complimentary 15-minute consultation to learn more.

This article is a service of Kristen Wong of Seasons Estate Planning, APC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.