The SECURE Act (Setting Every Community Up For Retirement Enhancement Act) became effective January 1, 2020. What does this mean for YOU? Let’s focus on the biggest Estate Planning impact, the elimination of the Stretch IRA or other retirement plans.
Previously, many beneficiaries, including trusts, were allowed to roll an inherited IRA or 401(k) into an “Inherited IRA” and to use the life expectancy of the beneficiary to determine the required minimum distributions and stretch those distributions over that lifetime, many times referred to as a Stretch IRA. The result for most beneficiaries was the ability to stretch the payment of taxes over their lifetime which many times resulted in a lower tax on the inherited IRA.
For example: Kimberly is 90 when she passes but has an IRA that she left to her granddaughter, Becky, who is 30, for Becky’s lifetime. Before the SECURE Act, the IRS would look at Becky’s life expectancy (let’s say it’s another 60 years), and divide the IRA funds by that life expectancy so that each year Becky received a very small portion of that IRA (the required minimum distribution). i.e.- Becky may receive $10,000 a year for 60 years and would only pay taxes on the $10,000 she received from the Stretch IRA. If the IRA was left to Becky in trust, the remaining principal of the IRA would be protected in a trust from creditors, divorce, lawsuits, or just poor money management by Becky. This distribution plan is known as a conduit trust.
Under the new law, most beneficiaries (excluding spouses) including Becky, must withdraw the entire IRA balance within 10 years and pay the associated taxes as the distributions are taken. If the IRA is left to a conduit trust, the Trustee MUST distribute the net amount of the IRA, after taxes, to Becky within 10 years. This means that Becky would have all of the funds from the IRA by the time she is 40 and would have to pay tax on those funds. Becky now either takes large lump sums over the 10 years and pays taxes on the distributions, or receives the full amount of the IRA at the end of 10 years and pays taxes on the full amount.
A conduit trust’s primary purpose was to allow the IRA to be stretched over a lifetime, which required distributions from the IRA be passed to the beneficiary. Under the new law, the beneficiary must receive the net IRA proceeds within 10 years. As a result, the IRA assets are only protected from divorce, lawsuits, bankruptcy, and poor spending habits for a shorter period of time.
There are a few exceptions to this new law. Spouses will still be treated the same; meaning, a spouse can roll over a retirement account to their name and take RMDs at 72 or can use the Stretch IRA provisions to take RMDs. Minor children, or trusts for minor children, will not be required to pay out a retirement account within 10 years, but once a minor attains the age of majority (18 in Georgia), the retirement account must be paid out within 10 years (by age 28). The other exceptions are disabled or chronically ill beneficiaries and any beneficiary who is not less than 10 years younger than the plan holder (i.e.- Bob was 90 when he died and left his retirement account to his sister, Bonnie, who is 80), all of which can stretch the retirement account over their life expectancy.
What do you need to do? What changes and impacts will the new law have?
See our next blog, Accumulation Trusts, to learn about an alternative that allows the net IRA proceeds to be held by a trust rather than paid out to the beneficiary. If you have a trust or are thinking of creating a trust and leaving your IRA to the trust, call us at 678.781.9230 to schedule a time to come in and have a conversation about your needs and whether a change is needed.
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This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney client relationship between you and Grissom Law, LLC.