Why do I need a Trust for my IRA? What to do after the SECURE act

Three things you need to do after the SECURE Act:

1.        Check your beneficiary designations
2.        Find out if you have a “conduit trust” 
3.        Points of Good Counsel – the right questions to ask… 

Ten Year Payout for Inherited IRA or Retirement Account

Among other retirement planning trends, the most important thing to know, however, is that for most beneficiaries of an inherited retirement account (not including a surviving spouse), they must take the entire account out, and pay income taxes on that money, within ten years. But the devil is in the details, because there are several classes of eligible Designated Beneficiaries who still can get a life-expectancy payout as opposed to the straight ten years. The benefit of a long period of tax deferral is enormous.

The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death. If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. § 1.401(a)(9)-3, Q&A (4)(a)(2) and 1.401(a)(9)-5, Q&A (5)(b)

Exceptions to Mandatory Ten Year Withdrawal

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule. The exceptions are spouses, beneficiaries who are not more than ten years younger than the account owner (think brothers or sisters or life partners who are not spouses), the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals.

The Old Way – The Stretch IRA Trust

Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated.

Tax Impact Verses the Need to Protect Your Beneficiaries

Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.

SECURE Act Plan of Action for IRA or Retirement Account

Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)

Check to see if you have a trust as the beneficiary of you retirement account or IRA.

If you do have a trust as the beneficiary of your retirement account, your trust may have included a “conduit” provision. Under the old law, before the SECURE act, the trustee would only distribute required minimum distributions (RMDs) to the trust beneficiaries, allowing the continued “stretch” based upon their age and life expectancy.  A conduit trust protected the account balance, and only RMDs–much smaller amounts–were vulnerable to creditors and divorcing spouses. With the SECURE Act’s passage, a conduit trust structure will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death.

You need to think about whether or not your beneficiaries should have immediate access to the entire balance of the retirement account after your death. If they should not have that access, then you need to think about having a new trust.

The benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and protect them rather than distributing them, or pay them for the benefit of the beneficiary. Or, the beneficiary can have control, but still have creditor protection, if they are responsible.

The reality is that many things have changed in the last year. Estate planning for the boomer generation and beyond is becoming more challenging.

Consider a Trust for Your Retirement Account or IRA

For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance.

You may want to consider choosing a lawyer to make your will.

Review Your Beneficiary Designations

Remember, a beneficiary designation cannot have “if than” instructions. In other words, with a trust you can give distributions if they should be given, and hold them, if they should be held.

With the changes to the laws surrounding retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.

 Life Changes…

If you have recently divorced or married, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.

You can learn more at our free estate planning workshop.