The Senate is currently reviewing new legislation that will presumably help seniors prepare for their golden years. 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 before a final vote, the Act may impact the future of your estate plans. Among other provisions, the SECURE Act will eliminate the lifetime “stretch” for beneficiaries, with a few exceptions. Instead of requiring 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. This means that income tax due on inherited accounts will be accelerated. Instead of the income tax being paid over the lifetime of the beneficiary, it will now be due 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 will end up with a reduced total value. While the act is still under review, it’s time to consider updating your estate plan to adjust for this change.
Trusts as Beneficiaries
As a form of asset protection, “conduit trust” provisions have often been often included in Revocable Living Trusts so that the trust could 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, revisit your plan. Consider an alternative, a Standalone Retirement Plan 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 and safe from creditors until it’s transferred to your beneficiary.
Consider Charitable Giving
A charitable remainder trust may be a smart way to dispose of your retirement accounts. Such a trust would allow you, the grantor, to name beneficiaries who will receive an annual income stream from your retirement account. At the end of the term, the remaining funds would go to a charity chosen by you and named in the trust.
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. The deduction may be large enough to cover a significant percentage of the retirement account/taxes due, depending on the value of the account, the age of the trust beneficiaries, and the current tax rate.
The SECURE Act has not yet come up for a vote and many questions and changes remain to be seen. But should the legislation become law, you’ll need to understand how the beneficiaries of your IRA could be affected. Schedule an appointment today to discuss how the SECURE Act could affect your estate plan.