When an Estate Inherits an IRA: New IRS Guidance Allows Tax-Free Division into Separate Inherited IRAs

One of the most common and costly retirement-account mistakes is failing to identify beneficiaries on an IRA. When no beneficiary is designated (or the designation fails), the account passes to the decedent’s estate by default. That outcome usually produces worse required minimum distribution (RMD) rules and can create administrative headaches for the executor and the heirs. In PLR 202624001 (released February 20, 2026), the IRS confirmed a practical and taxpayer-friendly solution: an estate that inherits an IRA can divide the account into separate inherited IRAs for the individual beneficiaries named in the will, using trustee-to-trustee transfers, without triggering a taxable distribution.

The Facts of the RulingThe decedent owned a traditional IRA and died after reaching the age at which RMDs were required. No beneficiary designation was on file, so the estate became the sole beneficiary of the IRA. The decedent’s will left the residuary estate (including the IRA) equally to three children. 

The executor proposed to divide the IRA into three equal shares, and move each share by direct trustee-to-trustee transfer into a separate inherited IRA titled in the decedent’s name for the benefit of each child (as a beneficiary of the estate).  We'll discuss "why" the executor suggested this plan after reporting the ruling of the IRS.

What the IRS Ruled

The Service granted four favorable rulings.  The IRS ruled that:

• each beneficiary’s interest in the estate’s IRA may be segregated into separate IRAs for RMD purposes;

• the new accounts, properly titled and funded by trustee-to-trustee transfer, qualify as inherited IRAs under IRC § 408(d)(3);

• each beneficiary may take RMDs from his or her separate inherited IRA over the decedent’s remaining life expectancy (using the Single Life Table); and

• The trustee-to-trustee transfers themselves are not taxable distributions under § 408(d)(1) and are not treated as rollovers under § 408(d)(3).

In short, splitting the estate-owned IRA into separate inherited IRAs for the will beneficiaries does not create immediate income tax.

The Executor's Objectives

The main goals were administrative clarity, separate control, and cleaner tax reporting, while staying within the limited options available once the estate is the beneficiary.  Key benefits of the approved approach:

• Separate accounts for each beneficiary:  Each child receives their own inherited IRA. They can manage investments, take distributions, and deal with the custodian independently instead of everything flowing through the estate.
• Independent RMD tracking
  Each beneficiary satisfies the required minimum distribution rules from their own account. This avoids the need for the executor to calculate and distribute one combined RMD and then allocate it among the heirs.
• Avoids (or minimizes) estate-level income taxation
  When the IRA stays in the estate’s name, distributions are generally reported to the estate under its EIN. The estate may have to pay tax at compressed fiduciary rates if it retains the funds, or it must distribute the money out so the beneficiaries pick up the income. Splitting into separate inherited IRAs lets the income flow more directly to the individual beneficiaries.
• Non-taxable movement of the assets
  The IRS confirmed that the trustee-to-trustee transfers themselves are not taxable distributions and are not treated as rollovers. The tax is deferred until actual distributions are taken from the new inherited IRAs.
• Practical administration
  Once the separate inherited IRAs are established, the estate can close out its involvement with the retirement account more cleanly.

Note that the beneficiaries still had to use the decedent’s remaining life expectancy for RMDs. Because the estate (not the individuals) was the designated beneficiary, they could not use their own longer life expectancies or the more favorable 10-year rule that usually applies to designated individual beneficiaries.What If the Proposal Had Been Denied?

If the IRS had refused to allow the division into separate inherited IRAs, the practical and tax consequences would have been less favorable:

• The entire IRA would have remained titled in the name of the estate.
• All post-death distributions would be reported on Form 1099-R issued to the estate.
• The estate would include those amounts in its gross income (Form 1041).
  • If the estate retained the funds, it would pay tax at the compressed fiduciary income-tax rates (which reach the highest bracket very quickly).
  • If the estate distributed the money to the beneficiaries in the same year, the income could be passed out via Schedule K-1, but the timing and character still flow through the estate’s return first.
• The executor would have to continue administering the IRA as an estate asset, calculating the single RMD based on the decedent’s remaining life expectancy, and then allocating shares among the three children.
• Beneficiaries would have less direct control and more dependence on the estate administration process.
• There could be delays, extra accounting costs, and potential mismatches between when the estate receives the distribution and when the beneficiaries actually receive their shares.
• Alternately, the executor could have distributed the funds from the IRA, incurring immediate taxable consequences to either the estate or to the individual beneficiaries on the entire amount distributed, sacrificing any favorable tax deferral.

In short, the ruling gave the executor a clean, tax-free way to move from one estate-owned IRA to three separate inherited IRAs. That structure is administratively superior and generally more tax-efficient for the beneficiaries than leaving the account stuck inside the estate. It does not, however, improve the underlying RMD period; that limitation is locked in once the estate is the beneficiary. This is why proper beneficiary designations (or a qualifying look-through trust) remain far preferable to relying on this post-death rescue technique.

Why This Matters and Why It Is Still Second-BestThis guidance is helpful for executors who discover that an IRA has no designated beneficiary. It allows the estate to move the assets into individual inherited IRAs so each heir can manage his or her own share and satisfy RMDs independently.  The ruling, however, also underscores a critical limitation: because the estate was the beneficiary, the heirs are stuck with the decedent’s remaining life expectancy. They cannot use their own longer life expectancies, nor (in most post-SECURE Act cases) the more flexible 10-year rule that often applies to designated individual beneficiaries or qualifying look-through trusts. The result is typically faster forced distributions and higher income taxes over a shorter period.Planning Implications for Aging-in-Place and Elder Law ClientsThe following remain actionable and preferred planning tools:

• Name a Beneficiary:  A properly drafted see-through trust, but if not, an individual primary and contingent beneficiary or beneficiaries. The cleanest solution is still a direct beneficiary designation. This PLR is a rescue technique, not a preferred plan.

• Review Beneficiary Forms Regularly:  Marriage, divorce, births, deaths, and changes in relationships all require updates. Custodians’ default rules (often the estate) should never be left in place by accident.

• Coordinate the Will and Beneficiary Designations: Even when the will names the same people, the absence of a designation on the IRA form forces the slower, less favorable estate-as-beneficiary path.

• Executors should act promptly: Establishing the separate inherited IRAs and confirming the RMD method early reduces the risk of missed distributions or custodian resistance. Some custodians still prefer or require a PLR before allowing the split; this published ruling may ease that process.

• Consider the Income-tax Impact on the Heirs. Faster RMDs based on the decedent’s life expectancy can push beneficiaries into higher tax brackets, another reason to avoid estate-as-beneficiary status whenever possible.

Bottom Line

PLR 202624001 gives executors a clear, tax-free path to divide an estate-owned IRA into separate inherited IRAs for the individual heirs. That is welcome administrative relief. It does not, however, cure the underlying problem of a missing or failed beneficiary designation. The best protection remains proactive: keep beneficiary designations current, coordinate them with the overall estate plan, and avoid letting retirement accounts fall into the estate by default.

Clients who hold IRAs or other retirement accounts should review their beneficiary designations as part of any comprehensive aging-in-place or estate-planning update. A few minutes spent confirming those forms can save heirs both taxes and complications later.

Private Letter Ruling (PLR) 202624001 (released June 12, 2026).  

The Illinois Digital Asset Transaction Tax: Why Multi-State Tax Exposure Must Now Be Part of Every Financial Projection

In July 2026, Illinois became the first state to enact a dedicated tax on cryptocurrency and other digital-asset transactions. The Illinois Digital Asset Tax Act (IDATA) imposes a 0.2% levy on the value of digital assets involved in each covered transaction. The tax is scheduled to take effect in 2027.This development is more than a narrow cryptocurrency industry story. It is a concrete reminder that state tax systems are becoming more aggressive and creative, and that citizens and their advisors can no longer assume that only their state of residence will tax their financial activity.

The Nature of the Tax

IDATA is a transaction tax, not a traditional income tax or capital-gains tax. It is calculated on the value of the digital assets involved in the transaction itself, not upon gain or appreciation.  Because it is imposed on the transaction rather than on realized gain or ordinary income, conventional tax-planning techniques that focus on character of income, holding period, or realization events offer only limited protection. That distinction matters. A pure income or capital-gains tax can often be managed through timing, entity structure, or realization planning. A transaction tax is harder to avoid once the taxable event (the transfer or trade) occurs and is deemed to have a sufficient connection to the taxing state.

Why This Matters for Broader Financial and Estate Planning

IDATA illustrates a growing reality: states are increasingly willing to tax economic activity that has only a partial or temporary connection to their borders.  The risk of unexpected state-level taxation is no longer theoretical for clients who:

• Maintain accounts or wallets with platforms that have Illinois operations or customers;
• Spend significant time in multiple states;
• Engage in frequent trading or transfers; 
• Expect to make large transactions such as lifetime gifts or estate transfers at death; and/or
• Hold digital assets inside trusts or business entities.

Citizens and planners must now routinely include the possibility of taxation by other states in financial projections. Relying solely on the tax rules of the client’s home state is incomplete. Multi-state exposure, whether from income tax, capital-gains tax, transaction taxes, or new forms of digital-asset levies, should be treated as a standard planning variable.

Here are a few estate planning scenarios in which the IDATA could produce an unexpected levy:

• Lifetime Gifts: A retired Ohio executive makes a lifetime gift of $2 million in Bitcoin to his daughter, who lives in Chicago. When he instructs his exchange to transfer the coins from his account to hers, the platform, having nexus with Illinois and treating the daughter as an Illinois customer, collects the 0.2% tax on the full value, instantly reducing the gift.

• Trust Estate Distributions: A Missouri successor trustee distributes $1.5 million in Ethereum from a decedent’s exchange account to a beneficiary who resides in Illinois; the broker’s transfer again triggers the tax, quietly siphoning the tax from the inheritance before the assets ever reach the beneficiary. 

• Probate Estate Distributions:  Probate Administrations are where this tax can be particularly pernicious.  The tax can unexpectedly affect estates in other states and jurisdictions.  It also can result in unequal or inequitable distributions.   

Unequal Distributions: A Hidden Trap in Probate

Assume an Ohio decedent dies owning $900,000 of cryptocurrency held in a custodial account at a major exchange. The probate executor opens an estate account at the same exchange and transfers the entire $900,000 from the decedent’s wallet into the newly created estate wallet. Because the transfer occurs on the platform, the exchange processes it as a broker-mediated movement.

The will directs the executor to distribute the cryptocurrency in equal one-third shares ($300,000 each) to three adult children: Beneficiary A who lives in Illinois; Beneficiary B who lives in Ohio; and Beneficiary C who lives in Florida.  When the executor instructs the exchange to send $300,000 to each beneficiary’s personal wallet:

• The transfer to Beneficiary A (Illinois resident) is treated as a covered digital-asset transfer involving an Illinois customer. The exchange collects the Illinois Digital Asset Tax before completing the movement. Beneficiary A therefore receives less than the full distribution amount;
• The transfers to Beneficiaries B and C have no Illinois customer connection, so no Illinois transaction tax is withheld. Each receives the full distribution; and
• Even if it is not readily apparent to Beneficiary A at the time of the transaction that s/he received less, it will be obvious when the Final Account reports an amount for the distribution to Beneficiary A that differs from the amount the Beneficiary actually received.  

As a result, the three beneficiaries do not receive equal net amounts even though the will called for equal distributions. The Illinois resident bears a reduction solely because of IDATA, while the non-Illinois beneficiaries receive their full shares. The executor must then decide whether to equalize the difference from other estate assets or leave the disparity in place. 

Families focused on traditional income, gift, or estate taxes may discover only after the fact that a simple electronic movement of digital assets through a broker has generated an unanticipated transaction tax.  Differing and unexpected or unanticipated outcomes often mean controversy, conflict and contests.

Digital Assets Covered by the Digital Asset Tax:  Beyond Typical Cryptocurrencies

The IDATA defines a “digital asset” as: "a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not fiat currency."  This definition is intentionally broader than just Bitcoin, Ethereum, and similar cryptocurrencies. Based on the statutory language and analyses of the Act, the tax can reach the following categories (when they meet the medium-of-exchange/unit-of-account/store-of-value test and are handled by a covered broker):

Covered (or potentially covered) Beyond Standard Cryptocurrencies

Category	Status	Notes
Stablecoins (USDC, USDT, etc.)	Covered	Explicitly treated as digital assets; the statute pulls in instruments designed to maintain a stable nominal value.
Governance tokens	Generally covered	Function as store of value / medium of exchange within protocols.
Altcoins and other crypto tokens	Covered	Any token used as medium of exchange, unit of account, or store of value.
Meme coins	Covered	Specifically brought back into the definition even if they lack intrinsic utility.
Tokenized traditional assets (tokenized stocks, bonds, commodities, deposits, etc.)	Potentially covered	When the token itself is used as a medium of exchange, unit of account, or store of value.
Other blockchain-based representations of value used for investment or speculation	Covered	Broad residual category.

The following are the only digital assets explicitly excluded from (IDATA):

• Loyalty, affinity, or rewards program points;
• In-game currencies or items used primarily inside games;
• Digital art, music, literary works, collectibles, and similar items that have substantial value/utility beyond being a digital asset;
• Event tickets, licenses, and similar rights;
• Prepaid card balances; and
• Pure NFTs that function mainly as digital collectibles or art (rather than as a medium of exchange or store of value).

While the tax is commonly described as a “cryptocurrency tax,” it obviously reaches a wider set of digital representations of value, especially stablecoins, governance tokens, meme coins, and many other tokens, whenever they are exchanged, transferred, or stored by a digital asset broker on behalf of an Illinois customer. Pure digital collectibles and in-game items are generally outside its scope.

Although IDATA contains exclusions for certain digital items that are not marketed for investment or speculation, it expressly carves stablecoins back in. IDATA covers any digital representation of value that is “marketed, used, promoted, offered, or sold in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.” This language was written intending to capture stablecoins (USDC, USDT, DAI, and similar instruments pegged to the dollar or another reference asset).

Moreover, because stablecoins are designed to maintain a stable value, the tax is especially noticeable: the levy is imposed on the full face value even though the holder has little or no price appreciation. Stablecoins are treated the same as other covered digital assets: any exchange, transfer, or custodial storage of stablecoins by a digital asset broker on behalf of an Illinois customer can generate the transaction tax.

Planning Strategies

Although IDATA is structured as a transaction tax, several approaches may still limit its impact or the impact of similar future taxes:

• Entity and Ownership Structure:
  Holding digital assets through carefully designed entities or trusts may affect how (or whether) a state asserts taxing jurisdiction. The analysis is fact-specific and must consider both the state’s nexus rules and the client’s overall estate plan.

• Residency and Domicile Planning:
  Clear documentation of domicile and the limitation of days spent in high-tax or aggressive-tax states remains foundational. While a transaction tax can reach non-residents, strong residency evidence still helps in disputes over sourcing and nexus.

• Platform and Counterparty Selection:
  The identity and location of the exchange, broker, or counterparty can influence whether a state claims the transaction has a taxable connection. Clients and advisors should evaluate where platforms are based and how they report activity.

• Timing and Frequency of Transactions:
  Because the tax is imposed on each covered transaction, reducing unnecessary transfers or consolidating activity may lower the cumulative burden. High-frequency trading is particularly exposed.

• Monitoring Legislative and Constitutional Challenges:
  IDATA is already facing criticism and a proposed repeal bill. Similar future taxes may be challenged under the Commerce Clause, Due Process Clause, or other constitutional theories. Clients should stay informed and be prepared to adjust.

• Integration with Overall Tax Projections:   
  Financial models, retirement projections, and estate-tax estimates should now include sensitivity analyses for potential multi-state taxation of investment activity—not only for digital assets, but for other mobile forms of wealth as states continue to innovate.

Beginning of a Trend?

IDATA is the first of its kind, but it is unlikely to be the last. It signals that states are looking for new ways to tax financial activity that crosses borders. For individuals and families engaged in serious planning, the practical lesson is straightforward: possible taxation by other states must be included in financial projections. A transaction-based tax is more difficult to plan around than a conventional income or capital-gains tax, which makes early awareness and structural planning all the more important. Clients who treat multi-state tax risk as an afterthought may discover that the cost of a single state’s policy choice is far higher than expected.

If you or your clients hold cryptocurrency, stablecoins, or other digital assets, do not wait for the first unexpected levy to appear. Review where those assets are held, how they will move at death or during lifetime gifting, and whether any beneficiary or platform connection could create Illinois tax exposure. A short conversation with your estate planning attorney now can prevent unequal distributions, family conflict, and avoidable costs later. The Illinois Digital Asset Tax is already law; planning around it should begin before it takes effect.

Looking Ahead to 2026- Estate Tax Exemption Sunset and Current Planning Opportunities

The estate and gift tax exemption amounts will decrease at the end of 2025. Decreasing the exemption amounts is tantamount to an increase in the tax because more people are impacted by the existing tax. Currently, an individual can make transfers by gift during life, and bequests at death, up to an aggregate of $12.92 million, with that amount increasing to $13.44 million in 2024, without incurring gift or federal estate tax. Similarly, the federal Generation Skipping Tax (GST) exemption is currently $12.92 million, increasing to $13.44 million in 2024. 

On January 1, 2026, these amounts are scheduled to “sunset” and revert back to the 2017 amount of $5 million, adjusted for inflation. Although the time frame for sunsetting may be extended depending on political and economic factors, it would be prudent for people with larger estates to take advantage of the opportunities available now by utilizing the exemption amounts in excess of the projected 2026 exemption amounts, in case the exemptions are reduced as scheduled in 2026 (or possibly changed before then).

In light of the looming reduction of estate and gift tax exemption amounts, consider some of the following opportunities:

• Complete gifts now to use available exemptions, particularly GST tax exemption for gifts into a long-term dynasty trust. In light of the pending decrease of the estate, gift and GST tax exemption amounts and taking into consideration the proposed effective dates, it may make sense for those individuals who have exemptions available to make gifts prior to year-end 2023, and before the uncertainties inherent in election year 2024.
• In connection with making gifts in 2023, giving a fractional interest in the property (such as an interest in an LLC or real estate) may prove beneficial as the value for gift tax purposes may be reduced by certain discounts, such as a discount for lack of control and/or lack of marketability.
• Consider a spousal lifetime access trust (SLAT) to take advantage of the current high gift and GST exemptions, while retaining some access to the trust assets at the spousal level.
• Consider giving to an irrevocable “grantor trust” that includes a power to reimburse the grantor for income taxes paid. A “grantor trust” means the grantor, not the trust, is treated as the owner for income tax purposes. The grantor pays all income taxes attributable to the trust income, which allows the trust assets to grow without reduction for income taxes. Grantor trusts can be drafted to permit a trustee to reimburse the grantor for income taxes paid; however, until recently it was an open question whether such a power in a California grantor trust would cause negative estate tax consequences to the grantor. This is because prior announcements from the IRS stated that a power to reimburse a grantor for income taxes paid does not cause inclusion of the trust in the grantor’s estate if certain requirements are met, including that applicable state law must not subject the trust assets to the claims of a settlor’s creditors. Effective January 1, 2023, the California Probate Code clarifies that a trustee’s power to reimburse the grantor for income taxes paid does not create a beneficial interest that would allow the settlor’s creditors to reach trust assets.
• For those who are charitably inclined, consider charitable planning such as charitable remainder unitrusts (CRUTs) and charitable lead annuity trusts (CLATs).
• For individuals and families who do not have a significant amount of estate and gift tax exemption available but wish to reduce their overall estate, consider a sale to a trust in exchange for a promissory note. If structured properly, since the transaction is a sale, it will not be treated as a taxable gift, and the assets sold to the trust will be excluded from the estate of the grantor/contributor. The note becomes the replacement asset of grantor/contributor, effectively transferring the appreciation on the asset to the trust.
• If you own Qualified Small Business Stock (QSBS), consider gifts to one or more irrevocable trusts to take advantage of substantial exclusions from federal income tax on capital gains. Gifts of QSBS continue to be eligible for the exclusion on gain, and the transferor’s five-year holding period “tacks” to the transferee. The gifted shares to irrevocable trusts that are appropriately structured will be eligible for a separate exclusion (up to the limitation amount) in addition to the exclusion that continues to be available for eligible shares retained by the transferor.
• For individuals who have used their lifetime gift exemption but still have unused GST exemption, consider a late allocation of your remaining GST exemption amount to an existing GST non-exempt trust you have previously created. Alternatively, consider setting up a new two-year grantor retained annuity trust (GRAT) before the end of 2023 so you can apply your unused GST exemption to the GRAT remainder interest prior to January 1, 2026.

The foregoing is solely for illustration purposes. You should reach out to your legal advisor before undertaking any tax or estate planning to determine if it is appropriate for your situation.

New Tax Credit Planning Opportunities for Individuals and Families

Beyond the general planning opportunities previously discussed, individuals and families should be aware of certain new tax planning opportunities. In June, the Department of the Treasury and IRS released guidance on Internal Revenue Code (IRC) Section 6418, which provides taxpayers a new way to monetize certain energy tax credits. The guidance included proposed regulations relating to the transferability of tax credits under IRC Section 6418. Specifically, Section 6418 allows for the sale of tax credits solely for cash to unrelated taxpayers, and such payment does not constitute taxable income to the transferor (and is not deductible by the transferee). Prior to the enactment of Section 6418, investors typically accessed renewable energy tax credits by investing in so-called “tax equity” partnerships—which were only workable for more sophisticated investors due to the costs and qualifications under such partnership arrangements. Now, with the new rules, monetization of renewable energy tax credits has been made more accessible to a broader range of investors, including partners of a partnership and individuals. Unfortunately, limitations exist. For one, the “passive activity” limitations, applying to individuals, trusts and estates (but not corporations), make such transferees subject to IRC Section 469, only allowing them to utilize purchased tax credits against tax liabilities associated with passive income generated from other sources.  Additional information can be found here.

IRS Targets on Wealthy Taxpayers

In September, the IRS announced it is focusing on high-income earners to “identify sophisticated schemes to avoid taxes.” Bolstered by its funding from the Inflation Reduction Act (IRA) of 2022 (P.L. 117-169) and equipped with artificial intelligence and machine-learning technologies, the IRS employed three key initiatives. The first “High Wealth, High Balance Due Taxpayer Field Initiative,” committed dozens of revenue officers to focus on taxpayers with total positive income above $1 million and more than $250,000 in recognized tax debt. The second bolstered IRS compliance efforts related to ongoing discrepancies on the balance sheets of partnerships with over $10 million in assets. The third program focuses on monitoring returns for partnerships with greater than $10 billion in assets.

Summary

The IRS is committed to increasing collection of tax revenue, and federal and state governments are more likely to to increase rather than decrease taxes. Advanced planning to avoid taxation makes sense.  It is best to plan now than discover that you have lost planning opportunities, and incurred unnecessary and avoidable tax liability.