The decumulation plan that minimizes your lifetime tax is not necessarily the one that maximizes the after-tax wealth your heirs receive. The two objectives align in most years, but diverge sharply in the last decade of life. The SECURE Act of 2019 and the regulations finalized in 2024 made this divergence sharper by ending the stretch-IRA and replacing it with a 10-year distribution rule under IRC §401(a)(9)(H) for most non-spouse beneficiaries.
Inheritance tax surface, by bucket:
receives a full basis step-up at your death under IRC §1014. The heir inherits assets at fair market value, can sell them immediately at zero capital gains cost, and only owes tax on appreciation that occurs after the date of death. This is the most tax-efficient bequest in the Internal Revenue Code.
passes income-tax-free to the beneficiary, who must fully distribute the account within 10 years. The distributions themselves are not taxable. The only cost is the loss of tax-free compounding after year 10. For a beneficiary in any tax bracket, this is the second-best bequest.
passes to the beneficiary as ordinary income on the SECURE Act schedule. Most non-spouse beneficiaries are subject to the 10-year rule. The IRS confirmed in 2024 that beneficiaries of an owner who died after their RMD beginning date must take annual RMDs during years 1–9 and fully deplete the account by year 10. A high-earning adult child in their peak career years will inherit this stream at their marginal rate, often losing 40%+ to combined federal and state brackets. This is the worst standard bequest in the code.
is the most severely penalized inheritance in the code for non-spouse heirs. Under IRC §223(f)(8)(A), the HSA tax wrapper terminates at death, and the entire balance becomes taxable ordinary income to the beneficiary in the year of death, with no 10-year smoothing. Treat the HSA as capital to be fully spent in your lifetime, not left to children.
The reordering this implies for late-life spending:
Coordinating with the estate plan If your estate plan directs a portion of your estate to charity, name the charity as a direct beneficiary of your pre-tax IRA. The charity is tax-exempt and will inherit the IRA without paying a single dollar of income tax. This is the most efficient way to extinguish an oversized pre-tax account at death. Combined with lifetime QCDss, pre-tax accounts should serve as your primary charitable vehicle, leaving your Roth and stepped-up taxable accounts for your family. For basis step-up choreography and trust workarounds, see chapter “Estate planning”.