Inherited IRA Rules for Family Business Succession

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Your parents spent decades building a business. They saved diligently in retirement accounts. Now you’re inheriting both the business and the IRA.

Congratulations. Also, get ready for some complex decisions.

Inherited IRA rules changed dramatically with the SECURE Act of 2019 and got messier with SECURE 2.0 in 2022. The old “stretch IRA” strategy that let beneficiaries spread distributions over their lifetimes? No longer available for most beneficiaries.

Now you’ve got ten years to empty the account. Maybe. Unless you don’t. The rules depend on who you are, who died, when they died, and whether they’d started required distributions.

Let’s untangle all of this.

The SECURE Act Killed the Stretch IRA

Before 2020, non-spouse beneficiaries could stretch inherited IRA distributions over their life expectancy. Inherit an IRA at 40? You had roughly 40 years to take distributions. The tax deferral continued for decades.

The SECURE Act imposed the “10-year rule” for most beneficiaries. Inherit an IRA after December 31, 2019? You must withdraw the entire balance within ten years of the owner’s death.

No annual required minimum distributions during those ten years. Just empty the account by December 31st of the tenth year after death.

Family business successors inheriting both operating businesses and substantial IRAs face compressed distribution timelines precisely when they’re managing business transitions.

Who Gets Exceptions: Eligible Designated Beneficiaries

Not everyone is subject to the 10-year rule. “Eligible Designated Beneficiaries” can still stretch distributions over their life expectancy.

Eligible beneficiaries include:

• Surviving spouses
• Minor children of the deceased (until they reach age 21)
• Disabled individuals (meeting strict IRS definitions)
• Chronically ill individuals
• Beneficiaries not more than 10 years younger than the deceased

For family business succession, the relevant exception is usually the surviving spouse or minor children. If you’re an adult child inheriting from a parent, you’re subject to the 10-year rule.

The age gap exception is narrow. Your 75-year-old uncle leaving his IRA to you at age 68? You qualify for the stretch. Your 75-year-old parent leaving it to you at 50? Ten-year rule applies.

The Minor Child Exception That Disappears

Minor children can stretch distributions over their life expectancy. But only until they reach age 21.

Once they reach age 21, the 10-year clock starts. A child inheriting at age 15 gets the stretch for six years until age 21, then has ten years from that point to empty the account.

In family business succession, when the next generation is in their teens or early twenties, this creates a specific timeline for events. The child reaches age 21, takes control of the business, and immediately faces a 10-year distribution requirement on a potentially massive IRA.

Planning for this transition requires coordination between business succession and retirement distribution strategies. Most families don’t do this coordination. They should.

The RMD Confusion: Annual Distributions or Not?

The SECURE Act requires beneficiaries to empty inherited IRAs within 10 years. The IRS initially interpreted this as no annual RMDs required, just complete distribution by year ten.

Then, in proposed regulations, the IRS said if the original owner had reached their Required Beginning Date (RBD) and was taking RMDs, beneficiaries must take annual RMDs during the 10-year period.

The IRS waived penalties for 2021, 2022, 2023, and 2024 while developing final guidance. Final Treasury regulations were issued in July 2024, resolving the confusion.

Under the final regulations: If the deceased had started RMDs before death, beneficiaries must take annual RMDs in years 1-9 and empty the account by year 10. If the deceased died before their RBD, no annual RMDs are required—just complete distribution by year 10.

The regulations are complex, but at least the rules are now settled.

Tax Planning With the 10-Year Rule

The 10-year distribution requirement destroys tax planning flexibility, but opportunities still exist.

Front-Load Distributions in Low-Income Years: Taking business ownership often means lower W-2 income initially as you transition from employee to owner. Use those years for larger IRA distributions.

Back-Load Distributions if Income Is Increasing: If business income is growing, delay distributions until later years. You’re betting on future tax brackets, but you have the flexibility.

Strategic Roth Conversions: If you inherit a traditional IRA, consider converting portions to Roth during low-income years. You’re paying taxes on the conversion, but future growth is tax-free.

Avoid Year 10 Distribution Bombs: Don’t wait until year 10 to take the entire distribution. That’s income stacking that pushes you into the highest brackets. Spread distributions strategically.

The key insight: you have flexibility in timing within the 10-year window. Use it intelligently.

Spousal Inheritance: The Better Option

Surviving spouses have options non-spouse beneficiaries don’t get.

Treat It as Your Own: Roll the inherited IRA into your own IRA. It becomes your account. RMDs don’t start until you reach age 73 (or 75 for those born in 1960 or later under SECURE 2.0).

Remain a Beneficiary: Keep it as an inherited IRA. Take distributions based on your life expectancy. This makes sense if you’re under 59½ and might need penalty-free access.

For family business succession where one spouse built the business and the other is taking over, spousal rollover provides maximum flexibility. The surviving spouse can delay RMDs while managing the business transition.

Non-spouse beneficiaries don’t get this option. They’re stuck with the 10-year rule.

Trust as Beneficiary: Additional Complications

Many family business owners name trusts as IRA beneficiaries for asset protection or control purposes. 

Certain types of trusts that meet specific IRS requirements qualify as “See Through Trusts”. This term means the IRA treats the trust’s individual beneficiaries as designated beneficiaries. 

 

Depending on the type of See Through Trust, the IRA can apply the 10-year rule or life expectancy payout for eligible designated beneficiaries. If the trust does not qualify as a See-Through Trust, the 5-year payout rule or the owners’ remaining life expectancy applies.

 

There are two types of See Through Trusts: Conduit Trusts and Accumulation Trusts.

Conduit Trusts

In this case, the trust must distribute all IRA distributions to beneficiaries immediately. If the beneficiary is an eligible designated beneficiary, distributions can be taken over their lifetime; if the beneficiary is a non-eligible designated beneficiary, the 10-year rule applies. If there are both eligible and non-eligible designated beneficiaries, the 10-year rule applies.

Accumulation Trusts

The 10-year rule applies to distributions from the IRA to the trust. However, the trust can retain IRA distributions. The trust pays taxes at compressed trust tax rates, which hit the top 37% bracket at just $15,650 of income (2025).

Accumulation trusts destroy tax efficiency. They make sense for asset protection or beneficiaries with substance abuse or spending issues. Otherwise, they’re wealth destruction vehicles.

For family business succession, naming trusts as IRA beneficiaries usually creates more problems than it solves. Direct beneficiary designations are typically better unless specific circumstances justify the complexity.

Coordinating Business and IRA Succession

Here’s the real challenge: coordinating family business succession with inherited IRA rules.

A typical scenario:

• Parent owns successful business and $2 million IRA
• Child takes over business operations at parent’s death
• Child inherits IRA subject to 10-year rule
• Child’s income from the business is increasing as they grow into the role
• IRA distributions add taxable income precisely when business income is highest

The solution requires planning before death:

Roth Conversions During Parent’s Life: Convert traditional IRA funds to Roth before death. Inherited Roth IRAs still have the 10-year rule, but distributions are tax-free.

Life Insurance: Use IRA funds to pay life insurance premiums. Death benefit passes tax-free to beneficiaries. This effectively converts taxable IRA assets to tax-free insurance proceeds.

Charitable Remainder Trusts: For charitably inclined families, CRTs can provide income streams to beneficiaries while reducing tax impact. An IRA can name a Charitable Remainder Trust as its beneficiary.

Beneficiary Planning: Name lower-income family members as IRA beneficiaries while higher-income successors inherit business interests.

These strategies require implementation before death. Afterwards, you’re managing damage control, not optimal planning.

The Qualified Charitable Distribution Strategy

If you’re inheriting an IRA and don’t need the funds, consider Qualified Charitable Distributions (QCDs).

Once you reach age 70½, you can direct up to $108,000 annually (2025) from inherited IRAs directly to qualified charities. The distribution counts toward RMD requirements but isn’t included in taxable income.

For family business successors with substantial business income who inherit IRAs, QCDs provide tax-efficient ways to satisfy distribution requirements while supporting philanthropic goals. This is in part because the QCD reduces Adjusted Gross Income, which can help avoid higher tax brackets.

You’re taking the distribution—satisfying the 10-year rule—without creating taxable income. If you’re charitably inclined and financially secure from the business, this strategy is efficient.

The Business Sale Scenario

Selling the family business creates a specific inherited IRA planning challenge.

You inherit the business and a $3 million IRA. You decide to sell the business within five years for $10 million. Now you have:

• $10 million in sale proceeds (partially taxable as capital gains)
• $3 million IRA that must be distributed within ten years
• Potentially massive income in a single year or short period

Proper planning requires:

• Timing the business sale strategically relative to IRA distributions
• Using installment sales to spread business sale income over multiple years
• Coordinating IRA distributions to avoid income stacking
• Considering Opportunity Zone investments or other deferral strategies for sale proceeds

Failure to coordinate these moving parts results in enormous unnecessary tax liability. The difference between good planning and no planning is seven figures.

Multiple Beneficiaries: The Separate Account Rule

If multiple siblings inherit an IRA, separate account rules allow splitting the IRA into separate inherited IRAs for each beneficiary. Each beneficiary applies the RMD rules based on their own status: whether they are an eligible designated beneficiary and can use their life expectancy, or they are an ineligible designated beneficiary, and the 10-year rule applies.

This must be done by December 31st of the year following the year of death. After separation, each beneficiary’s 10-year period runs independently. 

Note: Because the life expectancy for EDB or 10 years for NonEDB may apply. After separation, each beneficiary’s extended period runs independently.

For family business succession where one child takes the business and others inherit IRA assets, separate accounts allow each beneficiary to manage distributions according to their individual tax situations.

If the December 31st deadline is not met, all beneficiaries are stuck with the shortest time of all beneficiaries.

Required Minimum Distribution Calculations

For beneficiaries subject to annual RMDs during the 10-year period, calculating the RMD is straightforward:

Take the inherited IRA balance as of December 31st of the prior year. Divide by the life expectancy factor from the IRS Single Life Expectancy Table for the beneficiary’s age in the year after death. Reduce the factor by one each subsequent year.

The calculation is mechanical. The requirement is annoying. The penalty for missing RMDs is 25% of the amount that should have been withdrawn (reduced to 10% if corrected quickly under SECURE 2.0).

Don’t miss RMDs. The penalties are punitive.

Documentation and Recordkeeping

Managing inherited IRAs requires meticulous documentation:

• Death certificate
• IRA beneficiary designation forms
• Estate documentation if applicable
• Annual statements showing distributions
• Tax forms (1099-R) for each distribution
• Records of any Roth conversions or QCDs

IRA custodians will report distributions to the IRS. Ensure your tax preparer receives all 1099-R forms. Missing a form means missing income reporting means IRS notices and penalties.

For family business successors managing multiple financial obligations, inherited IRA compliance is one more administrative burden. Delegate it to competent advisors or implement systems to ensure compliance.

When Professional Help Is Essential

Inherited IRA rules are complex enough that professional guidance isn’t optional for substantial accounts.

You need advice when:

• Inherited IRA exceeds $500,000
• You’re managing business succession simultaneously
• Multiple beneficiaries are involved
• Trust is named as beneficiary
• Estate is subject to estate tax
• You’re considering complex strategies like CRTs or life insurance

The cost of professional advice is measured in thousands. The cost of mistakes is measured in six or seven figures. 

Family Business Succession… Success

Inherited IRA rules for family business succession create compressed distribution timelines precisely when successors are managing business transitions.

The 10-year rule eliminates the stretch strategy for most beneficiaries. Planning must happen before death through Roth conversions, life insurance, and strategic beneficiary designation.

After inheritance, tax planning focuses on timing distributions within the 10-year window to minimize tax impact while managing business cash flow needs.

The rules are complex, but with the July 2024 final regulations, at least the framework is settled. Professional guidance isn’t luxury. It’s necessity.

Inherited IRA rules and family business succession planning require coordination between estate, tax, and retirement strategies. Wiss & Company works with family business successors navigating the intersection of business transitions and retirement account inheritance.

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