The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019, and went into effect on January 1, 2020. It is the most impactful legislation affecting retirement accounts in at least a decade.
If your estate plan distributes your retirement assets to your beneficiaries in trust, please contact us for a review of your plan to determine if updates are required to avoid the “conduit trust disaster,” explained below.
The SECURE Act poses significant problems for clients who wish to protect retirement assets for their beneficiaries in a trust.
Previously, in order to protect retirement assets for a beneficiary and also minimize the income tax on those distributions, many people chose to name a trust as the beneficiary of the retirement account. When properly drafted, this plan worked well under the old rules to provide asset protection and minimize taxes, because the IRA distributions were calculated based upon the age of the trust’s primary beneficiary, and the beneficiary paid the income tax on those distributions over his or her lifetime. These specially designed trusts are called “conduit trusts.”
Under the SECURE Act, conduit trust provisions will not work as previously intended. Instead, the retirement benefits will be paid out directly to the beneficiary within 10 years of the account owner’s death, destroying both the asset protection and the income tax benefits for which a conduit trust was designed. There are certain exceptions to the new, 10 year pay-out rule for spouses, or for beneficiaries who are disabled or chronically ill, or for beneficiaries who are less than ten years younger than the account owner. Additionally, minors can delay withdrawal until ten years after reaching the age of majority. But apart from these exceptions, opportunities for stretching the IRA over an extended period of time for non-spouse beneficiaries will no longer be available.
There are other options for our clients to consider. We will be happy to review your plan and address which option, or combination of options, will work best for your specific situation.
Some of the strategies you might consider:
- If it is your desire to protect an inheritance from a beneficiary’s creditors, divorces, or lawsuits, you should consider redrafting your trust to provide for “accumulation” rather than “conduit” provisions (these trusts have significant tax consequences, but will provide asset protection);
- If you can afford to pay the taxes, you may wish to convert your IRA to a Roth IRA;
- If you wish to offset the increased tax liability, you might consider withdrawing some of your IRA to invest in life insurance;
- If you will be leaving a share of your estate to charity, you may be able to use a charitable remainder trust as the beneficiary of an IRA, which can make payments to an individual beneficiary over his or her lifetime, and at the end of the trust, the remaining assets will go to the charity.
Financial Advisor and President of Link Wealth Management, Tim Zadzora, indicates that the SECURE Act significantly alters inherited (stretch) IRA distribution calculations and schedules for non-spouse beneficiaries for any new inherited situations starting in 2020. So, even if your plan does not leave benefits to a trust, this is a good time to review your plan with your trusted professionals and make sure you have made the best decisions under the new law.
In short, inherited retirement accounts will not provide the same benefits post-SECURE Act, but we can help you navigate the new rules to provide you with peace of mind and ensure your retirement assets are passed to your beneficiaries in the most efficient and protected manner.