Leaving an IRA to a minor: What to know

I’m leaving my IRA to my 5-year-old son. If he inherits it while he’s a minor, I know that required minimum distributions (RMDs) can be taken from the IRA based on his life expectancy until he reaches the age of majority. Then it must be emptied within 10 years. What’s the age of majority?

In general, that depends on state law but for inherited IRAs, the age is 21 nationwide.

You should know that a minor can’t inherit an IRA outright. Parents in your situation can leave their IRA to a “see-through conduit trust,” naming the child as the trust beneficiary. This trust is required to pass all IRA distributions to the child’s guardian to spend on his needs, and it can take annual RMDs from the IRA based on the child’s life expectancy. (For example, a 5- year-old’s first RMD from a $5 million IRA would be $62,657.)

All the IRA distributions that pass through the see-through conduit trust are taxed as income to the child. That saves a lot of money: This year, a trust’s income is taxed at the 37% rate when it exceeds $15,200. An individual doesn’t hit the 37% bracket until her income exceeds $609,350.

But after the child turns 21, the trust must empty the IRA within 10 years — passing all the distributions to the child, who at 21 is legally an adult.

A parent who fears a 21-year-old isn’t mature enough to handle a big amount of money can leave their IRA to a trust that isn’t required to pay out all distributions. The downside: Distributions remaining in the trust are taxed as trust income. And the trust can’t take RMDs. It must empty the IRA faster — within 10 years of the original owner’s death.

The bottom line:

Minor IRA beneficiaries can only take RMDs based on their life expectancy until age 21.

More information:

bit.ly/3WxCpKE;

bit.ly/KitcesSECUREactregulations