SECURE Act Impact on Trusts
While we were focused on the impeachment hearings, Congress and the President were busy passing the SECURE Act. The Act was signed into law on December 20, 2019 and is effective January 1, 2020. In addition to funding federal agencies through September, the SECURE Act impacts trusts by reducing the deferral period upon the participant’s death to 10 years for most beneficiaries. This change effectively eliminates the so called “stretch out” – spreading out retirement account distributions over the beneficiary’s life expectancy. There are exceptions for spouses, minor children, disabled or chronically ill, and individuals less than 10 year younger than the participant. However, all other beneficiaries will be subject to the new payout period.
What is the change?
The new law accelerates the distributions from the IRA and a correspondingly accelerates the income tax payable on those distributions. If an exception does not apply, the beneficiary must take the distributions within 10 years of the participant’s death. For large retirement accounts this bunching of income may increase the beneficiary’s marginal tax rate. In addition, if the decedent was planning on their trustee being able to control the timing of distributions and stretch out the associated income tax obligation over the beneficiary’s life expectancy, they are no longer able to do so in most situations.
Example: A common approach to control the retirement account after death and defer the income tax obligation was to draft the trust as a “conduit trust” and name it as the beneficiary of the account. Under the terms of a conduit trust, all the retirement account distributions received by the trust must be distributed out to the beneficiary as soon as they are received by the trust. This was acceptable to the participant because the required distributions were relatively small and paid over the beneficiary’s lifetime. However, under the new law those distributions will be larger and fully dispersed to the trust and then to the beneficiary within 10 years.
What do I need to do?
The change may not impact your estate plan if you did not name your trust as the beneficiary or your retirement accounts are relatively small. However, the acceleration of the distributions may have an adverse impact on your trust and overall estate plan. To determine whether your current estate plan needs to be reviewed and updated ask yourself or your financial advisor the following questions:
- Is my trust the designated beneficiary of my retirement account?
- Is my retirement account a disproportionately large portion of my total net worth?
If the answer to both of the above questions is yes, you need to contact us immediately because we need to review the impact of the SECURE Act on your trust and estate planning objectives and discuss alternatives.
What are the alternatives?
There are a few alternatives to the new law’s adverse impact on naming your trust as the beneficiary. These alternatives include spending down the IRA instead of other assets, converting the account to a Roth IRA, naming siblings rather than the trust as beneficiaries, modifying the trust to delay distributions from other assets until after the 10 year period, changing the trust provisions from a conduit trust to an accumulations type trust and giving the retirement account to charitable beneficiaries or charitable remainder trusts. If you would like to talk through the alternatives, please give us a call.