The SECURE Act has made big changes to how IRA distributions are passed on after a participant’s death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need to be taken.
Some of the changes include reviewing wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive. Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.
It may be necessary to rethink and possibly completely restructure the planning for IRA accounts. This may mean changing the beneficiary of an account to a charity, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.
Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.
The biggest change in the SECURE Act being examined by many estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.
One reason why Congress enacted this law was to generate tax revenues that would become collectible far sooner. In the past, the ability to stretch an IRA out over many years, even decades, allowed individuals to pass their tax deferral on significant IRA growth to their family members, which meant that tax revenue due from the assets’ growth could not be collected.
Another interesting change is that there are now no periodic mandatory withdrawals when an IRA is inherited. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid. Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.
The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.
There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, and disabled heirs. Minor children are also considered eligible beneficiaries during the time that they are minors (as defined by the tax code), but when they reach the age of majority, the ten-year distribution rule then applies to them. For example, a child who has reached the age of majority at 18 must take all assets from the IRA by the time they are 28 and pay the taxes as applicable.
The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.
Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”