The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our fifth of six installments on how the SECURE Act could impact you.
I set up a trust to protect this money for my children after I pass. What impact will the SECURE Act have on this?
If you have significant retirement plan assets, you may have considered naming a trust as the beneficiary of your IRA. Trusts can provide asset protection from creditors and ensure that beneficiaries cannot receive all inherited assets at once. This aspect of control is appealing to many parents or grandparents who want assurance their heirs won’t be able to quickly spend down an inheritance. Previously these trusts would have been set up as pass-through or conduit trusts that allowed Required Minimum Distributions (RMDs) to pass through to the beneficiary over the course of their lifetime.
Under the new rules of the SECURE Act, most non-spouse beneficiaries are no longer subject to yearly RMDs, but they are required to distribute all funds by the end of year 10. There are no RMDs for most non-spouse beneficiaries until year 10. Conduit trusts would now hold IRA assets within the trust for 10 years and then distribute the entire account balance at once at the end of the 10 year period. This means that trusts previously set up to protect children or grandchildren from having access to inherited IRA assets all at once no longer serve this purpose. There are also significant tax implications to all assets being paid out as income in one year.
If it is important to you that beneficiaries receive an inheritance over a longer period and not all at once, there are a couple of strategies you might consider:
- A discretionary or accumulation trust can retain IRA funds, even after 10 years. The downside is that income retained within these types of trusts are taxed at high trust tax rates. However, this is a potential solution if control of assets is much more important than minimizing taxes.
- Some are turning to life insurance products as a way to leave assets to a trust. Since there are no RMDs and the proceeds are tax-free, this option provides a lot more flexibility around how funds are distributed.
If you’ve named a trust as a beneficiary to an IRA, we recommend reviewing your estate plan with an attorney.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Second Installment: How to Optimize Your Accounts After the SECURE Act
Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act
Sixth Installment: Inheriting an IRA? New Rules to Consider
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
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Paige worked in the tech industry for several years and is passionate about helping tech employees and other mid-career professionals bridge the gap between their intentions and actions. Paige recognizes that money is incredibly personal and strives to create an open and non-judgmental space where you can invest with your values and make progress towards your goals.
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