2020 Update - The Impact of the Secure Act

The SECURE Act was signed into federal law at the end of 2019, becoming effective January 1, 2020.  In addition to many other changes, the law now restricts the use of the “stretch” IRA technique to a limited group of IRA beneficiaries.  Before these SECURE Act restrictions, stretch IRA permitted any IRA beneficiary who is an individual or a “see-through” (conduit) trust to take minimum distributions from an inherited IRA over the beneficiary’s life expectancy. This flexibility allowed eligible beneficiaries to “stretch” payments from the inherited IRA over many years (the beneficiary’s life expectancy).

With the new 10-year payout rule under the SECURE Act, much of this planning has been eliminated.  For IRA owners who pass away in 2020 or later, unless the beneficiary falls into one of the limited exemptions (a surviving spouse is one such exemption who can still “rollover” the IRA), the beneficiary must take a complete distribution of the IRA within 10 years after the IRA owner passes away.

While this creates an unfortunate acceleration of distributions and related income tax, the practical issue is how this might affect your estate plan, and most especially how to plan for families with minor children.  For minor children, the law allows a deferral of the 10-year rule and related withdrawals until after the child attains age 18.   Since many families use Trusts to defer benefits to children until ages of maturity (i.e. 30-35-40) the effect of this is that the benefits will be either be distributed to the children sooner than was hoped (and income taxable at the child’s income tax rate rate) or held in trust until the ages of maturity specified in the trust, with income tax being assessed at the trust’s (higher) income tax rate.

Since each estate plan is unique to the client, I suggest that if you have an IRA that you were planning on “stretching”, or have young children or grandchildren as beneficiaries, we discuss whether any of your estate planning documents/beneficiary forms need to be reviewed and possibly revised.  This is also a good opportunity to speak with your financial advisor and accountant to discuss any related changes to your financial and income tax planning strategies.

Please contact us if you have any related questions or planning considerations.