Posted by: The Life and Legacy Planning Group
If you have kept up with current events, you know that there is real potential for change to your retirement accounts. The Senate is working to pass new legislation that would help seniors prepare for their golden years more efficiently. Better known as the SECURE Act, Setting Every Community Up for Retirement Enhancement seeks to make Individual Retirement Accounts (IRAs) more appealing for Americans of all backgrounds.
Though the legislation has not yet cleared the Senate, the SECURE Act saw wide bipartisan support in the House of Representatives. And while some details within the law may change, the Act could have a serious impact on the future of your estate plans. One major provision of the SECURE Act is the elimination of the lifetime “stretch” for beneficiaries, with a few exceptions. Instead of allowing a non-spouse beneficiary to withdraw the required minimum distribution (RMD) over his or her life expectancy, the SECURE Act looks to shorten this time frame to either 5 or 10 years.
What Does This Mean?
A beneficiary would be required to withdraw the full amount of an inherited retirement account within either 5 or 10 years of the original account owner’s death. One major implication of this is that income tax due on any inherited accounts will be accelerated. Instead of potentially being able to stretch the income tax obligation on the IRA distributions over the lifetime of the beneficiary, it will now be due within either five or ten years after the death of the plan participant. This will allow the government to receive the income tax on the retirement account faster; however, because of the acceleration, non-spouse beneficiaries may end up with less of the value of an inherited IRA than anticipated. While nothing is set in stone, it’s important to update your estate plan to adjust for this change in the law.
Trusts as Beneficiaries of Accounts
Once considered a safe harbor approach, “conduit trust” provisions were often included in Revocable Living Trusts so that the trust would qualify as a “designated beneficiary.” Under a conduit trust, any required minimum distributions (RMDs) would be paid directly to the trust’s beneficiaries, leaving the retirement account itself safe from creditors (and preventing the premature liquidation of the account). With a 5 or 10 year mandatory liquidation of retirement accounts, conduit trusts will no longer provide the protection many account owners want for their beneficiaries. If you named your Revocable Living Trust as the beneficiary of your retirement accounts, or you created “conduit trusts” for beneficiaries within your Living Trusts, you will need to revisit your plan and instead consider a Standalone Retirement Trust with accumulation provisions. This will ensure that even if a 5 or 10-year payout is required under the new law, the balance of the account will remain protected within this trust for the benefit of your intended beneficiary–safe from creditors.
Charitable Giving As a Solution
A charitable remainder trust may be the right solution to plan for the disposition of your retirement accounts. Such a trust would allow you, the grantor, to retain or name beneficiaries to receive an annual income stream from the retirement account. At the end of the term, the remaining funds would go to a charity named in the trust agreement.
When the trust is created, the net present value of the remainder interest must be at least 10 percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon the plan participant’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust. Depending on the value of the retirement account, the age of the trust beneficiaries, and the current tax rate, the deduction will likely cover a large portion of the retirement account.
There are still a lot of questions surrounding the SECURE Act and how it will impact us. Should the legislation become law, it’s important to understand the specific ways in which your wishes regarding the ultimate beneficiaries of your IRA could be affected. Schedule an appointment today to meet with us for guidance on how the SECURE Act could impact your estate plan.