Everything You Should Know About Stretch IRA Trusts

Everything You Should Know About Stretch IRA Trusts | The Pollock Firm LLC

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A Stretch IRA Trust is a trust designed specifically to receive retirement assets upon the death of the account holder. While colloquially known as a Stretch IRA Trust or an IRA Stretch Trust, these trusts can be used for any IRA, 401(k), 403(b), SEP, ROTH, 457 plan, or similar retirement account. Broadly speaking, the purpose of a Stretch IRA Trust is to allow the owner of a retirement account to leave money to a beneficiary in a tax efficient manner while also protecting the funds from creditors.

The easiest way to understand what a Stretch IRA Trust is and how it works is to take a step back and look at how retirement accounts work in general when the account holder passes away. After all, a Stretch IRA Trust only becomes funded after the death of the account holder and only if the Stretch IRA Trust is named as a beneficiary.

Naming an Individual as the Beneficiary of Retirement Accounts

The owner of a retirement account is generally allowed to name any beneficiary the owner wishes to name. (If you have an ERISA account such as a 401(k), you may be required to name your spouse unless they otherwise consent.) In most cases, it is simple to name an individual beneficiary and it is often the most tax-efficient thing to do.

When an individual is named as the beneficiary of a retirement account, then upon the death of the account holder, the individual has many options regarding how to receive the funds. The beneficiary does NOT have to withdraw it immediately upon the death of the account holder. This is important as the immediate withdrawal of a large retirement account would cause a significant income tax.

Understanding the different types of Beneficiaries of Retirement Accounts

Historically, after the account holder died, the beneficiaries were able to make an election to withdraw the funds over their life expectancies. In 2019, a new law, known as the Secure Act, was passed. The Secure Act introduced new rules and terminology that are imperative to understanding your rights as a beneficiary of a retirement account.

The IRS characterizes each beneficiary of a retirement account as an “Eligible Designated Beneficiary”, a “Designated Beneficiary”, or simply a “Beneficiary”.

Eligible Designated Beneficiaries

  • Spouse
  • Minor child of the deceased account holder (but only while the child is a minor)
  • Disabled or Chronically Ill individual (but only while Disabled or Chronically Ill)
  • An Individual who is not more than 10 years younger than the IRA owner or plan participant

Designated Beneficiary

  • Any individual designated as the beneficiary of an IRA or retirement plan


  • Any other beneficiary of an IRA or retirement plan (such as entities, estates, or traditional trusts)

The type of beneficiary an individual is affects how quickly funds must be withdrawn from an inherited retirement account. If a person is characterized as an “Eligible Designated Beneficiary”, funds may be withdrawn from the retirement account based upon such person’s life expectancy. If the person is characterized as a “Designated Beneficiary”, funds may be withdrawn from the account over a 10-year period. For all other beneficiaries, funds in the account must be withdrawn over a 5-year period. 

Rules for minors are particularly tricky since while the beneficiary is a minor, the lifetime withdrawal rule applies. Then, when minors become adults, they turn into Designated Beneficiaries and have an additional 10 years to withdraw the funds from the retirement account.

The IRS sums up the new rules and terminology nicely here: Retirement Topics – Beneficiary.

Stretching an IRA

The longer you wait to withdraw funds from a retirement account, the longer it can grow tax deferred. Accordingly, if you can afford to do so, the best way to continue to grow an inherited retirement account is to stretch out the withdrawals for as long as possible. Hence, the phrase “Stretching an IRA” refers to a beneficiary withdrawing only the minimum amount required by law. As discussed above, the amount that must be withdrawn could be based on their life expectancy, while for others, it could be based on the new 10-year rule.

The minimum amount that must be withdrawn on an annual basis from a retirement account is known as the required minimum distribution (also known as the “RMD”).

If a beneficiary is a responsible adult, there is probably no harm in naming that person outright. However, not all beneficiaries are responsible. (For example, perhaps the beneficiary is a minor or someone who is unable to manage the money.) Additionally, even if a beneficiary is responsible, perhaps there is still a reason for such person not to inherit outright. Accordingly, if you wish for funds to go to a person, but not outright, the solution would be to set up a trust for that beneficiary.

Trusts in General

A trust is a legal relationship that exists when one person or an entity (the Trustee) holds title to money or property for the benefit of one or more people (the Beneficiaries). The terms of the relationship are decided by the person providing money to the trust (the Grantor), and are usually in writing.

A traditional trust typically states something to the effect of: until the beneficiary reaches age X, the Trustee can give money to the beneficiary for their health, education, maintenance, and support. A trust can be more restrictive or it can provide more liberal access to funds. A trust can be for a term of years, or for generations. There are countless different ways to customize a trust.

You can put almost any asset in trust for another person. Unfortunately, if you name a traditional trust as the beneficiary of a retirement account, it is not very tax efficient. The 5-year withdrawal rule applies and the retirement account cannot grow tax deferred for as long as if you were to name an individual. This is why Stretch IRA Trusts were created.

Design of a “Stretch IRA Trust”

In order for a trust to be considered a Stretch IRA Trust, the Trustee must determine who the beneficiaries of the trust are, and then withdraw the RMD annually. There are two types of Stretch IRA Trusts, a “Conduit Trust” and an “Accumulation Trust”.

Conduit Trusts

A Conduit Trust states that the Trustee MUST withdraw the RMD annually and MUST pay the RMD over to the beneficiary of the Stretch IRA Trust. The payment to the beneficiary must also occur annually. This can be problematic if the beneficiary is a minor or unable to manage the funds.

Accumulation Trusts

An Accumulation Trust states that the Trustee MUST withdraw the RMD annually, but without the requirement that anything must be paid to the beneficiary of the Stretch IRA Trust. (In other words, the inherited retirement account MAY be paid to the beneficiary of an Accumulation Trust, whereas the beneficiary of a Conduit Trust MUST be paid.) Accumulation Trusts are therefore better for asset protection and Special Needs beneficiaries.

Technical Differences between Conduit and Accumulation Trusts

I mentioned above that the Trustee must determine who is the beneficiary of a Stretch IRA Trust. More specifically, one must “look-through” the trust to see if the beneficiary of the Stretch IRA Trust is an Eligible Designated Beneficiary, a Designated Beneficiary, or simply a Beneficiary. The IRS considers this a critical aspect in order to determine the withdrawal period.

With a Conduit Trust, it is usually easy to determine who the beneficiary is; it is the person to whom the RMD is being paid. The only complication would be if there is more than one beneficiary. In such cases, the required withdrawal period would be made based on who is in the worst class. (For tax purposes, the “Beneficiary” class is the worst class, since it has the shortest withdrawal period, while the Eligible Designated Beneficiary is the best class since it potentially has the longest withdrawal period.) If the beneficiaries are in the same class, then the oldest person would be considered the measuring life for such class of beneficiaries.

With an Accumulation Trust, the rules are very complex. You must generally consider any person, or entity, that can be a beneficiary, unless the chance of that beneficiary is minimal or remote. Accordingly, if you name your children as the beneficiary of an accumulation trust, with the trust fund going to Charity upon the death of your children, the Charity would be considered the worst class, and the 5-year withdrawal rule will apply.

IRS Bulletin 2022-11 explains many of these technical details in great length with examples.

Prior to the Secure Act, when a child or grandchild had a lifetime withdrawal option, it was far more common to set up a Stretch IRA Trust as a Conduit Trust. Now, if a beneficiary needs a trust, it is probably better to set it up as an Accumulation Trust.

Incidentally, a Stretch IRA Trust may be funded with any asset, not just IRAs. However, for the sake of simplicity, we generally refer to this type of trust as an IRA Stretch Trust.

What are the Benefits of a Stretch IRA Trust?

Guarantees Deferred Payout of a Retirement Account

When you name an individual as the beneficiary of a retirement account, it is possible that the beneficiary may withdraw the entire amount all at once, creating a huge income tax. Naming a Stretch IRA Trust as the beneficiary of your IRA will ensure that your loved ones defer the built-in tax for as long as possible. This is especially useful for young or irresponsible children/grandchildren.

Allows for Control of Assets After You Die

You can set the terms of a Stretch IRA Trust so that your heirs receive money over time, rather than in a lump sum. You can also control where the money goes at the death of the beneficiary if the beneficiary should die before all the money is distributed.

Asset Protection

A trust can protect your money from creditors or divorce and make it less likely your heirs will fritter away their inheritance.

Allows for Post-mortem Planning

It is difficult to do much planning with retirement accounts. However, in the event your children do not need the funds, creating a trust structure will permit your children to transfer the IRA to their heirs, via disclaimer, without fear that the money will be squandered.

Avoids Over-funding of Spouse for Estate Tax Purposes

A trust structure can both provide income for a surviving spouse and allow both spouses to make proper use of their tax exemptions, thereby minimizing federal and state estate taxes upon the second to die.

Who Should Consider a Stretch IRA Trust?

Individuals with Significant Retirement Accounts

Individuals with substantial wealth trapped in their retirement accounts may benefit from a Stretch IRA Trust as a way to guarantee that income taxes are reduced, the assets continue to grow on a tax-deferred basis, the assets are protected from creditors, and your wealth is preserved. This is particularly helpful for individuals who have young or irresponsible children/grandchildren.

We do not normally recommend a Stretch IRA Trust if you have a small retirement account (unless it is likely to grow). While naming a traditional trust can cause additional taxes, it will be easier to administer and therefore likely cost less overall.

Couples in a Second Marriage

If you name a spouse as the beneficiary of a retirement account, it goes to them outright. If you are in a blended marriage (e.g. a second marriage with children from a previous relationship), this can lead to unintended results – like the money going to the children of your new spouse rather than to your own children! Giving the money to your spouse in a Stretch IRA Trust will ensure that the money is available for your spouse, but also provide for any remainder to go to the people you truly wish to benefit after your spouse passes. (Note that in order to qualify for a Marital Estate Tax Deduction, there are special rules for how this trust must be created.)

If the Beneficiary Has Special Needs

We recommend that all Third Party Special Needs Trusts be created as Stretch IRA Trusts. (Third Party Special Needs Trusts are also commonly known as Supplemental Needs Trusts.)

What Is Involved In Creating a Stretch IRA Trust?

Hiring an Attorney

When choosing an attorney to prepare your Stretch IRA Trust, you should choose an attorney who is knowledgeable in estate planning, retirement planning, the current tax law, and asset protection law.

Choosing a Trustee

You can hire either a corporate trustee or an individual trustee. Many people simply have their spouse or a relative act as trustee. You may also have a corporate fiduciary and another person act as co-trustees.

Beneficiary Designation Forms

Whether you create a Stretch IRA Trust or plan to stretch a retirement account without a trust, it is imperative that you correctly fill out the beneficiary designation forms associated with your retirement account correctly. Beneficiary Designation Forms will supersede a Will! If you do not correctly complete these forms, you may accidentally exclude your loved ones and whoever does inherit will likely have to pay a lot of unnecessary taxes.


A Stretch IRA Trust generally requires no maintenance until after the death of the account holder.


There are many benefits to a Stretch IRA Trust. It helps to guarantee that beneficiaries of an inherited retirement account can grow the funds in a tax deferred manner, while also providing asset protection. If you would like to learn more about creating a Stretch IRA Trust, contact one of our estate planning attorneys. (Written by Kevin A. Pollock, LL.M., Esq. Thanks to Robert J. Goldberg, Esq. for help with editing.)

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