In 2026, a trust reaches the top 37% federal income tax bracket once taxable income exceeds $16,000. An unmarried individual does not hit that same rate until income passes $640,600, the IRS confirmed in its 2026 bracket tables.
That 40-to-1 gap becomes a practical problem when a traditional individual retirement account (IRA) names a trust as its beneficiary.
Retirement account distributions flowing into that trust can land in the highest bracket within a single year, Fidelity noted in an August 4, 2026 article on naming trusts as IRA beneficiaries.
Fidelity ties the tax problem to IRA money that stays inside the trust
Traditional IRA withdrawals are generally taxed as ordinary income. When those withdrawals flow to a trust, and the trustee retains the money rather than distributing it to beneficiaries, the trust itself owes the tax.
Fidelity’s wealth management team explained that dynamic in the August 4 note.
David Peterson, head of wealth planning at Fidelity, urges anyone with a pre-2020 IRA trust to get it professionally reassessed.
Given these changes, if you are leaving your IRA to an irrevocable trust and have not had your documents reviewed by an attorney since the end of 2019, it is critical that you do so to make sure distributions will be paid in accordance with your wishes
Trust income tax brackets compress far more aggressively than individual brackets. That compression looks even steeper against joint filers, who do not reach 37% until $768,700 of taxable income, the IRS‘s 2026 rate schedule shows.
“Whether you should leave an IRA to a trust is far more nuanced than a simple yes or no,” Catherine Neijstrom, Fidelity Investments vice president, financial and trust planning lead, said in the firm’s August 4, 2026 article.
The SECURE Act forces more IRA money out on a tighter schedule
Before 2020, many nonspouse beneficiaries could stretch inherited IRA withdrawals over their life expectancy. The SECURE Act, enacted in December 2019, replaced that option with a 10-year payout rule for most nonspouse heirs.
That window can concentrate years of taxable distributions into far fewer tax years, and Fidelity has highlighted the impact by comparing current tax brackets for individuals and trusts.
Final Treasury and IRS regulations issued in July 2024 added another requirement: when the IRA owner dies after reaching the required beginning date, beneficiaries generally must take annual withdrawals during the 10-year period rather than waiting until year ten.
Conduit versus accumulation trust structure determines who pays the tax
The type of trust language an estate plan uses shapes where the tax burden lands. Treasury’s final regulations formally distinguish two structures with very different consequences.
Conduit trusts
A conduit trust requires the trustee to distribute IRA withdrawals to the named beneficiaries. Tax responsibility follows the money outward, and the beneficiary reports it at individual rates, Fidelity’s SECURE Act analysis explained.
That avoids the compressed trust brackets, but the trust cannot hold onto the withdrawn funds for long-term protection. Under the 10-year rule, the IRA must still be emptied on schedule, stripping away the control the trust was designed to provide.
Accumulation trusts
An accumulation trust can keep IRA distributions under the trustee’s discretion, and that preserves creditor protection and control over financially vulnerable beneficiaries. Retention is precisely where the compressed brackets become costly.
Taxable traditional IRA distributions held inside an accumulation trust hit the 37% bracket at the same $16,000 threshold that applies to any retained trust income. The trade-off is direct: keep family protection intact but owe substantially more in federal income tax.
Fidelity identifies when a trust still fits despite the tax cost
The compressed brackets do not make trusts universally wrong for IRA beneficiaries. Minor children who cannot manage a large inheritance benefit from trustee oversight.
Beneficiaries with disabilities or chronic illness may need a trust to preserve eligibility for government benefits, Fidelity noted.
Heirs facing creditor exposure, divorce risk, or difficulty managing money present another common case. In those scenarios, the extra tax cost functions as the price of meeting a specific family planning goal, Fidelity’s August report indicated.
How trust structure, beneficiary type, and IRA type shape the final tax bill
No single rule governs every IRA trust, and the tax outcome depends on whether the IRA is traditional or Roth. Roth distributions are generally tax-free, and the owner is treated as dying before the required beginning date under the final Treasury regulations.
Three variables drive the distribution schedule and tax exposure: whether the trust uses conduit or accumulation language, who the countable beneficiaries are, and whether the original IRA owner died before or after the required beginning date.
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The Treasury Department‘s July 2024 final regulations (T.D. 10001) and subsequent analysis from Kitces lay out how each variable shifts the outcome.
Estate plans drafted before the SECURE Act may contain trust provisions built around lifetime stretch distributions that no longer exist. Those documents can produce results the original owner never intended under the current 10-year framework, Fidelity warned.
Trust structure, not the $16,000 threshold, drives the final tax outcome
For IRA owners naming a trust as beneficiary, Fidelity’s August 4 analysis points to a broader concern than the $16,000 threshold alone.
Trusts can reach the top federal income-tax bracket far faster than individuals, and the tax result depends heavily on how the trust is structured and treated under inherited IRA rules.
A trust that qualifies as a designated beneficiary trust may preserve certain beneficiary-based distribution treatment, but the SECURE Act’s 10-year framework and the 2024 Treasury regulations have made inherited IRA planning more complex.
Older estate plans built around lifetime stretch distributions may no longer work as intended, making trust language, beneficiary status, and the timing of required withdrawals increasingly important.
Related: Fidelity warns American workers on 401(k), IRA mistakes
