I.R.A. Rules Have Changed, and Heirs Need to Pay Attention

They could convert their retirement account to a Roth I.R.A., said Nick Holeman, a certified financial planner with the online adviser Betterment. Unlike with traditional I.R.A.s, money is contributed to a Roth after-tax, so taxes generally aren’t owed on withdrawals as long as certain rules are followed. The account owner would owe taxes at the time of the conversion, but withdrawals would then be tax-free to the heirs.

“The Roth option as a planning tool becomes more interesting” under the new rules, said Ephie Coumanakos, a wealth manager in Wilmington, Del.

Another approach is for the account owner to divide the I.R.A. funds among several beneficiaries, giving each less money, and minimizing certain tax concerns.

Trusts are complicated but they can confer extra benefits.

The new rules contain potential minefields, especially for people who have chosen a trust as the beneficiary of an I.R.A., on behalf of children or grandchildren. Trusts are tools used to direct how funds are distributed, and to protect funds from mismanagement, or from loss in cases of divorce or liability.

Certain kinds of trusts can qualify for stretch I.R.A.s. One example is a “conduit” trust, which immediately funnels required withdrawals from an I.R.A. to the trust’s beneficiary. The beneficiaries pay taxes on the money at their personal tax rates. But under the new rule, the trust will have to pay out all of the money within 10 years — a problem for people worried about heirs squandering a big payout.

Instead, it might be worth considering an “accumulation” or discretionary trust, which allows required I.R.A. withdrawals to remain and grow in the trust. In this case, a trustee can dole out funds beyond the 10-year span, said Michael Clear, a lawyer specializing in estate planning at Wiggin and Dana in Greenwich, Conn. There’s a catch, though: Holding onto the money may trigger a larger tax bill, because funds in a trust are typically taxed at a higher rate. Anyone with an I.R.A. with a trust as a beneficiary should consult a professional to see if changes are needed, advisers say.