IRA guidelines have modified and heirs have to be cautious

You could convert your retirement account to a Roth IRA, said Nick Holeman, a certified financial planner with online advisor Betterment. Unlike traditional IRAs, money is added to an after-tax Roth, so taxes are generally not owed on withdrawals as long as certain rules are followed. The account holder would owe tax at the time of conversion, but withdrawals would then be tax-free for the heirs.

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

Another approach is for the account holder to split the IRA funds among multiple beneficiaries, giving less money to each, and minimizing certain tax concerns.

Trusts are complicated, but they can have additional benefits.

The new rules include potential minefields, especially for those who have selected a trust to be the beneficiary of an IRA on behalf of children or grandchildren. Trusts are instruments used to control the distribution of funds and to protect funds from mismanagement or loss in the event of divorce or liability.

Certain types of trusts can qualify for stretch IRAs. An example is a conduit trust that instantly forwards the required withdrawals from an IRA to the beneficiary of the trust. The beneficiaries pay taxes on the money at their personal tax rates. But under the new rule, the trust has to pay out all of the money within 10 years – a problem for people who worry that heirs will waste a large payout.

Instead, it might be worth considering “accumulation” or discretionary trust that will allow the required IRA withdrawals to remain in trust and grow. In that case, a trustee can spend beyond the 10-year range, said Michael Clear, an attorney who specializes in estate planning at Wiggin and Dana in Greenwich, Connecticut. There is a catch, however: holding on to money can trigger a larger amount of tax, as funds in a trust are usually taxed at a higher rate. Anyone with an IRA with a trust beneficiary should consult a professional to determine if changes are needed, advisors say.