Retirement accounts are often one of the largest assets in a Massachusetts family’s estate, and they have transfer rules and nuances that differ from many other assets. A carefully drafted will or trust has no effect on the beneficiary destination of an IRA or 401(k). Beneficiary designations control, and those designations are filed with a plan administrator, not in the documents sitting in the safe at home. Understanding how these accounts transfer at death, what tax rules apply to the recipients, and how to coordinate the accounts with the rest of the plan is vital to proper estate planning.
Beneficiary Designations Override the Will
The first thing to understand about retirement accounts is that the beneficiary designation controls, not the will or the trust. If the account owner named a primary beneficiary on the form (a spouse, a child, a trust, a charity), that beneficiary takes the account at death regardless of what the will says. If the beneficiary designation is outdated, blank, or defaults to “my estate,” the account may end up in probate and may lose favorable tax treatment in the process.
For ERISA-governed employer plans (such as 401(k) and 403(b) plans covered by the Employee Retirement Income Security Act of 1974), federal law preempts state law on who the beneficiary is. The Supreme Court confirmed this in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), which held that a state statute automatically revoking a spouse’s beneficiary designation on divorce was preempted by ERISA. The practical consequence: a state law that would automatically strip an ex-spouse from a beneficiary designation (such as Massachusetts’s own automatic revocation under MGL c. 190B, section 2-804) does not apply to ERISA-governed plans. The ex-spouse remains the named beneficiary unless the participant affirmatively updates the plan’s records.
IRAs are governed by state law, not ERISA, so the Massachusetts automatic revocation on divorce does apply to IRAs. However, individuals should not rely on automatic statutory revocation. Updating beneficiary designations directly with the custodian after any major life event is a more reliable approach.
The SECURE Act and the Ten-Year Rule
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), and the subsequent SECURE Act 2.0 of 2022, significantly changed how retirement accounts pass at death for deaths occurring after December 31, 2019. Before the SECURE Act, most designated beneficiaries could “stretch” required minimum distributions over their own life expectancy, which allowed inherited retirement accounts to continue tax-deferred growth for decades.
The SECURE Act eliminated the lifetime stretch for most non-spouse beneficiaries. Most beneficiaries must fully distribute inherited retirement accounts within ten years of the account owner’s death. Under Treasury’s 2024 final regulations (generally applicable for calendar years beginning January 1, 2025), if the account owner died on or after the required beginning date, a designated beneficiary subject to the ten-year rule must also take annual minimum distributions during years one through nine, with the balance distributed by year ten.
The practical effect is significant. A child who inherits a $500,000 IRA from a parent must now withdraw that entire balance within ten years, accelerating the income-tax consequences into a much shorter period. The distributions are taxable as ordinary income to the beneficiary, which can push the recipient into higher federal and Massachusetts tax brackets. Families who built their plans around the old stretch rules should revisit them.
Eligible Designated Beneficiaries
The SECURE Act preserved more favorable treatment for a narrow category called “eligible designated beneficiaries.” This category includes:
The surviving spouse. A surviving spouse may still stretch distributions over life expectancy, and has additional rollover options discussed below.
A minor child of the account owner. A minor child can use life-expectancy distributions until reaching the age of majority, at which point the ten-year rule starts and the remaining balance must be distributed within the following ten years. This favorable treatment applies only to the account owner’s own children, not to grandchildren or other minors.
A disabled or chronically ill beneficiary. A beneficiary who is disabled or chronically ill may use life-expectancy distributions.
A beneficiary not more than ten years younger than the account owner. Siblings and close-in-age friends or partners may use life-expectancy distributions.
For beneficiaries outside these categories, the ten-year rule applies.
The Spousal Rollover
A surviving spouse has a planning option that no other beneficiary has: the spousal rollover. Under IRS rules, a surviving spouse who is the sole beneficiary of an IRA may treat the inherited IRA as the spouse’s own, either by rolling it over or by retitling it. The account then follows the surviving spouse’s own required distribution timeline, which typically extends distributions far longer than the ten-year rule would.
Traditional vs. Roth
Traditional IRAs and 401(k)s are funded with pre-tax dollars, and distributions (during life or after death) are taxable as ordinary income to the recipient. The account owner deferred the tax during life, and the tax is due when the money is withdrawn.
Roth IRAs and Roth 401(k) accounts are funded with after-tax dollars, and qualified distributions are generally income-tax-free. The SECURE Act’s ten-year rule still applies to most inherited Roth IRAs and Roth designated accounts, but qualified post-death distributions are generally not subject to federal income tax.
Inherited Roth accounts remain subject to the ten-year distribution period for most beneficiaries, but because qualified Roth distributions are generally tax-free, Roth assets may be especially efficient for beneficiaries who otherwise would face substantial income-tax consequences from inherited traditional retirement accounts. If the original Roth owner had not yet satisfied the applicable five-year holding period, however, the beneficiary must “finish out” the remainder of the period before taking tax free distributions.
Trusts as Beneficiaries
Naming a trust as the beneficiary of a retirement account is permissible and, in some cases, advisable—particularly when planning for minor children, beneficiaries with disabilities, spendthrift concerns, or creditor protection. However, retirement-beneficiary trust planning became substantially more complex after the SECURE Act and SECURE 2.0, and careful drafting is essential.
To qualify as a “see-through” or pass-through trust for purposes of the required minimum distribution rules under IRC section 401(a)(9), the trust generally must: (1) be valid under applicable state law; (2) be irrevocable upon the account owner’s death, or become irrevocable at that time; (3) have identifiable individual beneficiaries; and (4) provide the required trust documentation to the plan administrator or IRA custodian within the applicable deadline.
The distinction between conduit trusts and accumulation trusts is particularly important under the current post-SECURE framework. A conduit trust requires retirement distributions received by the trust to be paid directly to the trust beneficiary, while an accumulation trust permits the trustee to retain distributions within the trust. Each structure carries different income-tax, asset-protection, and distribution consequences. In many cases, accumulation trusts provide greater control and protection but may accelerate income taxation because trusts reach the highest federal income-tax brackets at relatively low income levels. Conduit trusts may produce more favorable income-tax treatment but can reduce long-term asset protection because required distributions must pass directly to the beneficiary.
Coordinating With the Rest of the Plan
Retirement accounts operate independently from the estate planning documents themselves. Any plan review should include a direct look at the beneficiary designations on every retirement account. An IRA that names an ex-spouse, or an old 401(k) from a former employer that was rolled over but never had a new designation filed, can reduce some of the benefits of a carefully drafted estate plan.
For married couples, the common structure is to name the spouse as primary beneficiary, then either children or a trust as contingent. For single owners with minor children, naming a revocable trust as the primary beneficiary is typical. The specifics depend on the family situation, the size of the account, and the tax outlook of the likely beneficiaries.
Planning Ahead
Families should review the beneficiary designations on all retirement accounts periodically—generally every three to five years—and after any major life event such as marriage, divorce, the birth of a child, or the death of a beneficiary. Beneficiary designations should also be coordinated carefully with the family’s broader estate plan, including wills, trusts, and tax-planning strategies.
The SECURE Act and SECURE 2.0 significantly changed the rules governing inherited retirement accounts, particularly through the expansion of the ten-year distribution rule and changes to required minimum distribution ages.
A comprehensive review is the best way to confirm that retirement accounts will pass according to the family’s objectives while accounting for current federal and state tax law.
References
- IRC section 401(a)(9) (required minimum distribution rules)
- Setting Every Community Up for Retirement Enhancement Act of 2019, P.L. 116-94 (SECURE Act)
- SECURE 2.0 Act of 2022, Division T of P.L. 117-328 (further retirement account changes)
- Employee Retirement Income Security Act of 1974 (ERISA)
- Egelhoff v. Egelhoff, 532 U.S. 141 (2001) (ERISA preemption of state beneficiary revocation laws)
- MGL c. 190B, section 2-804 (automatic revocation of beneficiary designations on divorce, non-ERISA)