The SECURE Act, which passed in December, made the most pronounced changes to retirement accounts in a long time. Those changes also have a ripple effect that has us revisiting our clients’ estate plans. Under previous law, non-spouse beneficiaries of Individual Retirement Accounts (IRA’s) were able to stretch the Required Minimum Distributions (RMD’s) due from those accounts over their life expectancy, which was advantageous in terms of spreading out the tax due on those withdrawals. With the law change those distributions need to take place within a ten-year period for a non-spouse beneficiary.
Trusts as Beneficiaries
Many individuals, in their estate plan, have listed Trusts as the beneficiaries of their IRA accounts in order to help protect assets that their beneficiaries inherit. The most popular of these Trusts is called a conduit trust. After the IRA owner passes away the IRA pays its RMD each year to the Trust, which in turn then pays the beneficiary. These Trusts made a lot of sense to protect assets when beneficiaries could potentially be taking distributions over a number of decades. With the change in law, at the end of the ten-year distribution period the entire retirement account would be payable to the beneficiary outright, thus eliminating any protections that the conduit trust would provide.
If protecting the assets is a primary concern, individuals might consider creating an accumulation trust in which the RMD’s can be paid annually, and then a Trustee can have the authority to decide when or how to release those funds to the beneficiary.
Another option if the IRA owner is charitably inclined is to name a Charitable Remainder Trust (CRT) as the beneficiary of the IRA. The CRT can be structured so that the beneficiary receives a payment each year from the Trust, which is taxable just like an RMD would be, and the payments can be made over their lifetime. The benefit here is that the account can continue to grow on a tax-deferred basis, essentially recreating the Stretch IRA. At the end of the beneficiaries’ lifetime (or a set term of years) the remaining assets go to one or more charities that the IRA owner selected upon creating the CRT.
The SECURE Act and its Impact on the Estate Plan
In summary, the SECURE Act could have a meaningful impact on the estate plan you currently have in place. It will force individuals to take a different approach to protecting retirement assets for beneficiaries and to think more creatively about ways to limit the accelerated taxation that beneficiaries will now face with the stretch IRA being eliminated.
As always, if you should have any questions on how your estate plan is impacted, please do not hesitate to reach out to your Advisor.
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