Estate Planning Journal for Retirees

Creative Planning Around the SECURE Act

$15 billion in 10 years.  That is the predicted new tax revenue from the SECURE Act. 

So where is that money coming from?  

Your IRA beneficiaries, that’s who.  

The SECURE Act is old news by now. Most everyone knows that the much-beloved “stretch” payout for non-spouse IRA beneficiaries is a thing of the past. For all but a select few, beneficiaries must now draw down their inherited IRA within 10 years.

That is a problem for a lot of people.  If you own any retirement benefits, then you need to at least review your estate plan. Under the SECURE Act, the increased forced withdrawal will push a lot of beneficiaries into a higher tax bracket and increase the taxes on his or her distributions. Higher taxes means less of your hard-earned savings will actually get to your beneficiaries.

Under the new law, there are 3 categories of beneficiaries. The first is an “eligible designated beneficiary”, defined as one of the following: your surviving spouse, your minor child, a beneficiary who is disabled, a beneficiary who is chronically ill, or a beneficiary who is not more than 10 years younger. These receive a modified version of the previous stretch withdrawal.

The second category is “designated beneficiary.” This covers all of the individuals or see-through trusts that do not fall into the first category, above. These have a forced 10-year withdrawal.

The last category is any beneficiary who is not a “designated beneficiary,” which covers your estate, a charity or a trust that does not qualify as a see-through trust.  These have a forced 5-year withdrawal. This category has not changed.

So what can you do to alleviate the impact on your beneficiaries? There is no magic potion that will work for everyone’s plan, but there are a few things you should consider. 

You do not have to do anything if you do not own any retirement benefits or if you left all of your retirement benefits to charity. The SECURE Act does not affect you.

If your entire estate plan is centered on leaving a long-term stretch pay-out for your grandchildren, then you probably need to scrap that plan and start over.

If you left your retirement benefits to a conduit trust, then you should review your plan ASAP. It might still work fine if your beneficiary qualifies as an “eligible designated beneficiary” category, but it may also result in a fundamentally different outcome that you had envisioned.

If you left your retirement benefits to an accumulation trust, then that still works, but your trustee will probably have a substantially accelerated tax bill.

You may want to consider converting your IRA to a Roth or finding a new funding source, such as life insurance, to pay the difference in taxes that your beneficiaries will incur.  

True, you will be making your decisions in a landscape strewn with unanswered questions and contradictory advice. All the same, you ignore the SECURE Act at your peril.    

Virginia Hammerle is the President of Hammerle Finley Law Firm.   To sign up for the firm newsletter,  email legaltalktexas@hammerle.comEmployment opportunities available.

This article does not constitute legal advice.