Does the SECURE Act Impact Your Estate Plan?

In December 2019, Congress passed the SECURE Act which went into effect on January 1, 2020.  Among other changes, the SECURE Act limited the distribution timeline for inherited retirement accounts.  With a few exceptions (i.e. spouse beneficiaries and minors), the SECURE Act has shortened the IRA distribution period for an inherited account to 10 years; whereas prior to this year an inherited IRA could be “stretched” over the beneficiaries lifetime. 

This change could have a significant impact on your estate plan.

Prior to the SECURE Act, individuals with retirement plans who wished to leave their beneficiaries’ inheritance in trust would often utilize a mechanism within those trusts called “conduit” provisions. These conduit trusts only affected distributions received from a qualified retirement plan and required that any income received from retirement plans be distributed out to the beneficiary upon receipt.  This structure enabled the retirement plan to make distributions as it would to an individual, allowing for the lifetime stretch benefit, while protecting the principal of the retirement account with the trust.  It also provided the tax advantage of enabling each beneficiary to use their own life expectancy to calculate the required minimum distributions annually.  This meant that the beneficiary could inherit an IRA in trust but continue to get preferential tax treatment during his or her lifetime. 

However, the SECURE Act has significantly limited this stretch benefit.  With a few exceptions, an inherited retirement account must be paid out in its entirety to the beneficiary within 10 years of the plan participant’s death.  Thus the conduit trusts may no longer serve the purpose they were drafted, which was to protect the principal of the retirement account. 

One alternative is to create an accumulation trust rather than a conduit trust to receive the IRA withdrawals.  With this type of trust, the IRA withdrawals could be accumulated within the trust account and distributed in accordance with the distribution provisions of the trust itself, but the trust itself is much more limited in its drafting options.  The income taxes associated with trusts also become a more crucial issue with this type of trust, as trysts are subject to graduated tax brackets just like individuals, but such brackets are much more compressed than for individuals.   

There are several options for dealing with retirement plans in your estate plan and each requires careful consideration, both of your unique family situation, as well as your legacy goals.  We can help you work through these to craft a plan for you and your family to deliver peace of mind.