The SECURE Act: What does it mean for my Estate Plan?
Updated: Feb 21, 2020
On January 1, 2020, the SECURE Act became effective, marking big changes to how retirement savings and planning will work going forward. Much of the new law and its rules focus on expanding savings opportunities for future retirees. However, there are some provisions that now negatively impact inherited IRAs, which could cause issues with your current Estate Plan.
Old rules vs. new rules
Previously, when a person inherited an IRA, they were able to "stretch" the required minimum distributions from the account over the period of their life expectancy. This resulted in significant tax savings as the funds in the IRA were able to continue to grow, while only the small minimum required withdrawals were taxed. It especially benefited young beneficiaries who could extend out their minimum withdrawals over decades before their eventual retirement, resulting in significant tax savings over that time.
Under the new rules enacted by the SECURE ACT, beneficiaries are now required to distribute the entire inherited IRA to themselves within 10 years. There are exceptions to the 10 year requirement including transfers to spouses, minor children, and people with disabilities, but for all others, the loss of this "stretch" provision may not only cause increased taxes by forcing withdrawals from the IRA, but it may also frustrate intentions in your Estate Plan if you haven't accounted for this contingency.
What it means for your Trust
Trusts are often named as a contingent beneficiaries of IRAs in Estate Plans as this allows for more control over distributions, including requirements and restrictions on your beneficiaries (such as a minimum age in which the beneficiary will get access to money) that are not possible when an IRA is directly inherited. However, with the new 10 year distribution requirements, many of these controls on how and when a beneficiary may get their IRA distributions may be frustrated. For example, if you have minor children, any distribution limitation from an IRA past the age of 28 will no longer be effective as the IRA must be fully distributed within 10 years of the child becoming an adult.
Options going forward
There are options that may preserve the ability to control IRA distributions through a Trust, but for most people, it will require a change to the Trust language to accomplish. In most situations, Trusts that were drafted before the SECURE Act generally had language that authorized the IRA to be inherited by the Trust, but for all intents and purposes, the distributions were made directly to the beneficiary and taxed at individual tax rates. This "conduit" language, does nothing to stop the required 10 year mandatory distributions that are now required.
However, using "accumulation" trust language, the Trust can take the IRA distributions directly and then hold the funds in accordance with the Trust provision where the distributions are to extend longer than the 10 year period. However, there may be significant tax downsides to doing this as IRA income distributed through a Trust in this manner is generally taxed at a higher rate than individual tax rates.
Unfortunately, there isn't a simple answer for the best option for your Estate Plan, as one limits your choices, but the other may require higher tax rates. In order to determine what the best options are, you should talk with your Estate Planning attorney to determine whether a change to your Trust for IRA purposes makes sense.
- Chris Blatter
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