In late December of last year, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was passed, taking effect January 1, 2020. How the SECURE Act helped enhance communities’ retirements is, as yet, unclear, but it did throw a wrench into many established estate plans involving retirement assets.
The SECURE Act’s wrench is that it mostly eliminates the ability of many IRA beneficiaries to take distributions from an inherited IRA over their lifetime, the so-called IRA stretch. For example, pre-SECURE Act, a widowed IRA owner could leave her IRA to her children in equal shares, and each child could then take distributions over his or her lifetime. Under the SECURE Act, children of an IRA owner no longer have that option.
In fact, the only beneficiaries that can take lifetime distributions now are: (1) the owner’s surviving spouse; (2) the owner’s minor children (until they’re 18); (3) a beneficiary who is not more than 10 years younger than the owner; and (4) disabled or chronically ill beneficiaries.
A beneficiary who is not eligible for lifetime distributions must cash out the IRA by the end of the 10th anniversary year of the account owner’s death. For example, an adult child inherits his mother’s IRA after she dies in June 2020. The beneficiary must cash out the IRA by December 31, 2030. However, there are no required distributions before then, so the beneficiary can time distributions for tax purposes.
The IRA stretch elimination has its greatest impact on IRA owners who created trusts to receive IRA benefits for their children or grandchildren to keep them from having direct control over IRA distributions. Those trusts must be revisited now to see if any changes are needed because of the SECURE Act. In particular, IRA trusts that were designed to pass the required minimum distributions to the beneficiary each year must be re-examined because it may give the entire account to the beneficiary in 10 years. IRA trusts that leave beneficiary distributions to the trustee’s discretion will be less impacted, but those trusts will have to shoulder the income tax impact of taking out all account funds by that 10th anniversary year.
There are some positive aspects of the SECURE Act. For example, the required beginning date for IRA owners is now 72 instead of 70 ½. IRA owners who continue to work past age 72 can continue making contributions to their IRA, whereas those contributions were previously barred. IRA owners can still make charitable contributions from IRA’s of up to $100,000, but that limit is reduced by the value of contributions made after age 70 ½. And an IRA owner who owns less than 5% of his company and keeps working can defer required minimum distributions until retirement.
The SECURE Act changed the rules that IRA owners have been operating under for years, and we still do not know just how much those changes will affect taxpayers or their estate plans. If you have questions about your IRA and its inclusion in your estate plan please see your attorney.
Chiumento Dwyer Hertel Grant is a full-service estate planning law firm serving Florida residents throughout Flagler and Volusia Counties since 1973. The firm has offices in Palm Coast (386-753-3293) and Ormond Beach (386-238-9288), Florida. For more details, contact them today. The offices are open Monday – Friday, 9:00 a.m. – 5:00 p.m.