The SECURE Act will bring changes that may require you to rethink your estate plan. McDonough Law is here to help you navigate and create an estate plan that protects you and your loved ones.
SECURE Act: More Planning Ideas For You To Consider
The Setting Every Community Up for Retirement Enhancement Act of 2019, called the “SECURE Act” makes significant changes to how IRAs and certain retirement benefits must be treated post-death. We reviewed many of the changes and planning implications of this new law on your IRA and retirement benefits in “SECURE Act New IRA Rules: Change Your Estate Plan,” Dec 25, 2019. This article will expand on those discussions and explore additional rules, implications and planning ideas.
Killing the Stretch
The heart of the SECURE Act is the mandated payout of many plans in about 10 years after the plan owner dies. Estimates are that this might raise almost $16 Billion for the Treasury.
10-Year Rule – Plan Pay Out After 10-Years
If the beneficiary of the plan is an individual, then the entire plan balance will have to be paid out by the 10th anniversary of the plan holder’s death. Many taxpayers relied on the assumption that the valuable income tax deferral and tax free growth inside the plan would dissuade an otherwise imprudent beneficiary from taking the plan balance faster then the long-term or “stretched” payout period, even if no trust were used. But with the loss of that motivating tax benefit in after 10-years, that may not be the case.
Given the horror stories and statistics on how fast many heirs burn through an inheritance, IRA or otherwise, that assumption that a valuable tax benefit would dissuade an heir from taking more than the minimum payment required to be made out of an inherited IRA may not have been reliable in many cases. Perhaps that is the reason that has given rise to so many taxpayers with larger balances relying instead on naming trusts as beneficiaries of their IRAs, rather than the intended heir directly.
If the beneficiary of the conduit trust does not qualify as an eligible designated beneficiary (“EDB”), then the entire plan balance will have to be paid out by the 10th anniversary of the plan holder’s death. That limits the deferral and protection to about 10 years for many plan beneficiaries even if a protective trust is used.
Some commentators have suggested that the plan balance will have to be distributed by the end of the calendar year (December 31) which year includes the 10th anniversary of the plan holder’s death. Thus, the post-SECURE Act “stretch” can be longer than 10 years.