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The SECURE Act and IRAs in Estate Planning

US Congress must pass the 2020 budget bill to by this Friday, December 19 to avoid a government shutdown. Attached to the budget is a new Act which has been gaining momentum for several years. The Setting Every Community Up for Retirement Enhancement (SECURE) Act seeks to make several changes to the use of traditional Individual Retirement Accounts including, among other things:

  • repealing the maximum age for IRA contributions

  • raising the retirement age from 70 1/2 to 72 (the year when required minimum distributions are triggered)

  • allows small business to enter into pools of 401(k) plans and receive tax benefits for automatically (opt-out instead of opt-in) enrolling their employees into the plans

  • part-time workers may be eligible for retirement benefits

  • allows for annuities to be used in retirement plans by employers

And much more.

There is one major drawback for estate planning purposes, and that is the changes to what happens to remaining IRA money after death of the account owner. Currently, an account owner may 'stretch' the IRA over the course of a beneficiary's lifetime. This allows for much more time for the principal in the account to grow tax free.

In simple terms - a person has a traditional IRA (taxed when you withdraw the money, not when you contribute it, typically anticipating a lower tax bracket on retirement). The person does well and they do not need to fully liquidate all the money from the IRA for their retirement. There is money leftover when they pass away. The beneficiary of the account is say 25 years old. They can use the IRS life expectancy tables to withdraw that money (required minimum distributions) over their anticipated lifetime. This allows for the bulk of the money to grow tax deferred, and minimizes the impact on their own income tax each year.

Under the SECURE Act, this changes. Under most circumstances, the entire account will need to be distributed within 10 years after the death of the IRA owner. This can and will cause a lot of headaches for people who are using the IRA as an estate planning tool to help younger beneficiaries (perhaps even under the age of majority) receive money for their lifetimes. Now that 25 year old in our example above will have to distribute potentially large amounts of money until their 35 and owe income tax on the same. This could be a major cause for concern.

While it is not totally clear how to deal with this from an estate planning perspective yet (the Act still needs to pass), there are some existing trust tools, using certain types of IRA beneficiary trusts, which could help divert some of these concerns and manage the risks created by these new rules.

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