The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, was created to help people save more for retirement. As always, though, there are changes—and these changes may affect your estate planning.
An important note: there are many details and exceptions in the SECURE Act, so not all information that follows will apply to all!
The SECURE Act altered how a beneficiary of an IRA is required to take withdrawals, limiting this, in many cases, to a ten-year period. See our blog post on how stretch distributions have changed to learn more. This affects the taxes your beneficiaries will have to pay. In a ten-year period, the taxes may add up to a higher number, faster, which may be harder for your individual beneficiaries to plan for and pay.
Because of this, it may be more advantageous to make a trust the beneficiary of an IRA. That way, the trust controls who the beneficiaries are and how the funds of an inherited IRA may be distributed or withdrawn. This can be a better option if you are concerned that the individual beneficiaries might immediately drain the IRA without setting aside the funds needed to pay taxes due. A trust also provides other benefits.
It’s crucial to set up the trust carefully, however. If the trust has multiple beneficiaries, and anyone is not a spouse or one of the few exceptions (a minor child, a person no more than ten years younger, or a person who is disabled or chronically ill), you may force all recipients to withdraw funds within ten years, regardless.
The type of trust matters, too. The SECURE Act affects how conduit and accumulation trusts may be used to pass on your assets to benefit your loved ones.
A conduit trust is just that: any distributions received by the trust must be distributed to beneficiaries that same year. The trust is a conduit that holds the IRA for the benefit of its beneficiaries. Those beneficiaries will need to pay taxes on the funds they receive, and those funds are counted as income in the year they are received. In some situations, a conduit trust will require just one required minimum distribution at the end of ten years. The problem may be taxes (will your beneficiaries be able to plan for that and pay taxes on time?) or timing (will your beneficiaries need the funds sooner?)
As with most rules, there are exceptions: If the beneficiary qualifies as an eligible designated beneficiary (EDB), the 10-year payout does not apply, and the eligible designated beneficiary can stretch payments out over their lifetime, with some further exceptions. Eligible designated beneficiaries include the surviving spouse of the original IRA owner, minor children of the original IRA owner (until the age of majority, which IRS proposed regulations define as 21), disabled or chronically ill individuals, and beneficiaries who are no more than 10 years younger than the original IRA owner.
As it relates to surviving spouses: the stretch provision can be used if the assets are held under a conduit trust for the surviving spouse’s benefit, provided that the spouse is the only named beneficiary. Distributions can be stretched out over the spouse’s lifetime, with required minimum distributions beginning at the later of 1. the year after the year of the owner’s death or 2. when the owner would have reached age 72. Upon the surviving spouse’s death, the remaining beneficiaries are subject to a 10-year payout period.
Keep in mind that the rules work differently if there are multiple trust beneficiaries. If all trust beneficiaries are eligible designated beneficiaries, the life expectancy stretch payout is based on the oldest of the trust beneficiaries. If one of the trust beneficiaries is not an eligible designated beneficiary, the required minimum distribution will be applied using the 10-year period, and if one of the beneficiaries is not an individual, the required minimum distributions will be paid under the 5-year rule.
An accumulation trust accumulates assets, which means that there is more leeway about when to allow withdrawals from an inherited IRA. The benefits: the assets that remain in the trust are protected from the beneficiaries’ creditors, judgments, and divorce proceedings, and if your beneficiaries are fiscally immature or irresponsible with money management, this helps prevent them from receiving too much, too soon. However, income earned by trusts is typically taxed more than individuals, so this needs to be carefully planned around as well.
Yes, it’s complicated. We are here to recommend strategies and help you navigate every twist and turn. If you have any questions or would like to set up a consultation, please contact us.
More on the SECURE Act: This is the third of three blog posts that detail how the SECURE Act may affect your estate planning and your legacy. Read more about what the SECURE Act 2.0 has changed and how stretch distributions have been affected.
To proactively adapt your plan to changes in estate and tax laws and regulations, we recommend that our clients enroll in the JM LAW CARES estate and legacy planning maintenance program. To find out more, see our overview of the JM LAW CARES program.
This post was created by Jessica Marchegiano, founder of JM LAW and senior estate planning attorney.
8180 Greensboro Drive, Suite 1100 | McLean, Virginia 22102 | (703) 956-5738
Disclaimer: Materials prepared by JM LAW, PLLC are for general informational purposes only. Educational material does not create an attorney-client relationship and is not an offer to represent you. You should not act or refrain from acting based on information provided.