Estate Planning with IRA Trusts after the SECURE Act
When the legislation known in Congress as the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law, the rules governing beneficiaries of IRAs inherited after January 1, 2020 were changed significantly. For owners of IRA accounts who implemented special trusts for the post-mortem preservation of their retirement plan assets, it is now essential to assess the implications of these new rules on their existing estate plan.
Out with the RMD. Before the SECURE Act, beneficiaries of inherited IRAs were able to make a choice to take a lump sum withdrawal (and suffer the income tax liability) or to “stretch” the withdrawal of “required minimum distributions” (“RMDs”) over their life expectancy using tables published by the IRS. Where clients expressed concern that one of their designated beneficiaries would not have the discipline to defer the withdrawal of their retirement plan funds, the IRA Trust provided the solution: create a revocable, unfunded, standby trust and designate the trustee as beneficiary of the inherited IRA for the spendthrift child. These trusts contain tax-oriented provisions which enable the trustee to “stretch” the withdrawal of RMDs using the age of the trust beneficiary and to accumulate those funds for distribution in accordance with the terms of the trust.
In with the 10-year Rule. The key change under the SECURE Act is that inherited IRAs must be distributed in full by the end of the 10th calendar year following the death of the IRA owner.* This new 10-year rule also applies to a trust named as the beneficiary of an inherited IRA. From an estate planning perspective, the 10-year rule now requires that existing IRA trusts (also known as “Designated Beneficiary Trusts”) be replaced, so that the new SECURE Act language is substituted for the old RMD language (those terms which govern and direct the trustee as to withdrawals made from the IRA). It is also advisable to incorporate new terms with relevant guidance and considerations for the trustee which outline the income tax implications of the timing of withdrawals and distributions, both on the trust and the beneficiary.
Forget not the Beneficiary Designation. Most IRAs made payable to trusts have customized beneficiary designations on file with the IRA custodian which provide specific instructions and intentions for the withdrawal of RMDs using the “stretch” rules – rules which are no longer in effect. Therefore, new custom beneficiary designations should be filed immediately after implementing the new SECURE Act-compliant IRA trust.
Roth IRAs. The 10-year distribution rule under the SECURE Act applies to Roth IRAs, as well, but since there is no income tax liability for withdrawals, a trustee might well leave the investments in the IRA for 9.5 years in order to allow for tax-free growth, making withdrawals as appropriate for distributions to the trust beneficiary and the final withdrawal within 10 years.
Revoke and Replace. The SECURE Act contains several key provisions on other elements of qualified retirement plans, but the key to success with an IRA trust is to revoke the existing trust and create a new one, as well as an updated beneficiary designation, in order to be compliant with the 10-year rule and other requirements of the Act. If you are considering implementing an IRA Trust, be sure that the drafting attorney incorporates the 10-year rule provisions instead of the RMD rules.
*It is noted that the SECURE Act provides for limited exceptions to the application of the 10-year rule for certain designated beneficiaries: (i) surviving spouses, (ii) children who have not reached the age of majority, (ii) and those disabled and chronically ill.