Navigating the SECURE Act and Inherited Retirement Accounts
By Jason Livingston
In the two years since the enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), planners continue to manage the fallout of its effects on inherited retirement accounts (IRAs).
The SECURE Act resulted in a major tax reform relating to the use of trusts for retirement planning and retirement accounts. One significant change relates to the “stretch” provision of IRAs. Previous law allowed a non-spouse beneficiary or qualifying trust to “stretch” the distributions from the IRA over their life expectancy.
The SECURE Act eliminated this “stretch” provision and now requires any non-spouse beneficiary to withdraw the entire balance of the IRA within 10 years of the account owner’s death. Beneficiaries may take disbursements from the IRA, but the account must be emptied by the end of the 10 years, requiring more planning than previously necessary to minimize tax consequences.
‘The SECURE Act resulted in a major tax reform relating to the use of trusts for retirement planning and retirement accounts.’
The SECURE Act, however, classifies certain groups who are not subject to the 10-year rule. These individuals are referred to as eligible designated beneficiaries (EDB) and they are: (1) spouses; (2) disabled or chronically ill individuals; (3) individuals less than 10 years younger than the decedent; and (4) minor children of the IRA owner — once they are adults, they become subject to the 10-year rule.
The rules regarding stretching distributions become complex when trusts are created for the benefit of an EDB, such as for a surviving spouse or minor children. These trusts may be desirable for estate tax reasons, long term care planning, or second marriage situations.
If a trust is designed as a “conduit trust” then any retirement distributions would flow directly from the trust to the beneficiary and would be allowed to stretch the distributions. If the trust is an “accumulation trust” any distributions from the retirement account can be held within the trust rather than distributed immediately. This flexibility disqualifies the trust for stretch distributions and the retirement account would have to be paid out following the 10-year rule. The only exception to this rule is if the trust is for the benefit of a disabled or chronically ill beneficiary.
The SECURE Act has made the retirement planning landscape more difficult to navigate without the assistance of an adviser versed in the changing laws. IRAs make up the bulk of the average individual’s retirement plan and knowing the implications of these accounts on your beneficiaries can help plan for your future.