For some people, the SECURE Act will have little impact. For those who spend down their IRAs for their retirement, or who are leaving everything outright to their beneficiaries or making distributions at younger ages (under 40 generally, although this varies by each plan), then the SECURE Act will not greatly impact your planning. However, for those who have plans that leave everything in trust to beneficiaries for their lifetime and who expect to pass along larger amounts (for instance, more than $400,000) in retirement accounts (such as IRAs ,401(k), 403(b), 457(b), 401(a), ESOP, Cash Balance Plans, or other defined benefit plans) modifications may need to be made. The needed revisions may include an accumulation trust.
Moving forward, people who wish to leave their retirement accounts to beneficiaries in trust should consider an accumulation trust because it may be the best fit. The Trustee of an accumulation trust is able to decide how much of the retirement funds are distributed and when. Instead of money being distributed directly to a beneficiary, the funds are distributed to the trust. Within 10 years the retirement account must leave the current financial institution and be held entirely by the trust, but the Trustee controls the money and can decide if he or she wishes to distribute the funds to the beneficiary. If the funds are held by the trust, they will likely be taxed at a higher rate unless the beneficiary is already in the highest tax rate because trusts are taxed at higher rates than individuals for the same amount of income but the maximum rate is the same; however, the money will be protected. In an accumulation trust, the Trustee determines whether it is in the beneficiary’s best interest to distribute the funds to the beneficiary and allow the funds to be taxed at the beneficiary’s individual tax rate or to accumulate them in the trust and pay taxes at the trust’s tax rate.
For example: Kim passes at 85 with an $800,000 IRA. Her Revocable Living Trust leaves everything to her granddaughter, Becky, who is 20, in trust for Becky’s lifetime. While Becky is a good kid, she is young, in college, and doesn’t make the best financial decisions. Kim does not want Becky to get almost a million dollars outright by the age of 30, she instead wants Becky to receive smaller distributions throughout her lifetime and for a Trustee to control the investments and to determine when distributions will be made. One of Kim’s goals is to ensure that if Becky divorces the money will be protected from an ex-spouse. With these goals in mind, Kim includes an accumulation trust which will allow the Trustee to withdraw the $800,000 in the 10 years following Kim’s death and to distribute the funds to Becky as needed while holding the remainder in the trust where it is protected for Becky’s future use.
The incorporation of an accumulation trust in this example allows the Trustee to determine distributions taking taxes, a beneficiary’s financial situation, marital situation, and other factors into consideration.
There are also considerations if you have Roth IRA’s. For additional related information on Roth IRA’s read: https://www.forbes.com/sites/leonlabrecque/2019/12/23/the-new-secure-act-will-make-roth-strategies-much-more-appealing-here-are-five-ways-to-use-a-roth/#4644ae6381d1
Utilizing an estate plan for retirement accounts is still a good idea, but will require a balancing act as described above. Working closely with your attorney, CPA and financial planner will provide both you, your Trustee, and the beneficiary with the most effective plan.
We work with individuals to develop plans that address their needs and wishes while providing flexibility under the current tax laws. If you are thinking of creating a trust with these protections, call us at 678.781.9230 to schedule a time to come in and have a conversation about your needs.
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