The SECURE Act may mean changes to Estate Plans are needed. The act significantly changes to how IRA distributions occur after 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 revising wills and trusts that 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 trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust, as they may allow beneficiaries access to retirement funds MUCH FASTER than you want.
Rethinking and possibly completely restructuring the planning for the IRA account may need to occur. This may mean making a charity the beneficiary of the account, 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 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 result of the SECURE Act will be to generate tax revenues. In the past, the ability to stretch an IRA out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the IRAs continued to grow tax-free.
Another interesting change: No withdrawals need be made during that ten-year period if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes will need to be paid.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, but when they become legal adults, the ten-year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the IRA 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.
We will be holding webinars, starting in March, on “How the SECURE Act may require changes to your planning.”
Check the Events portion of our website in the next few weeks if you want to register.
Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”