01072020

IRA’s and the SECURE Act

Employees and IRA owners should review their planning in light of the changes made by the SECURE Act to the rules governing retirement plans and IRAs.

In the past conduit trust language was often used to permit the IRA to pass into a trust for a child for various reasons. This technique mandated that IRA distributions would be distributed to children in accordance with their life expectancies. By using that language, the stretch IRA rules afforded inherited IRAs to be mimicked by a children’s trust.

According to the new SECURE Act, most inherited IRAs must be distributed from the IRA within ten years after the death of the IRA owner. In other words, instead of being able to stretch IRA income over a child’s lifetime, they will have to recognize it over a much shorter period. The popular conduit trust language requires that same distribution.

Under the SECURE Act’s new provisions, distributions of IRA benefits will be required irrespective of a child’s creditor situation and exposes the distributed money to such child’s and spouse, as well as including it in his or her estate for estate tax purposes. As a result, many situations will now call for a different clause to be inserted into a trust allowing for accumulation of retirement benefit payments if that is best for the child at that time.

To summarize, the new law generally requires the distribution period from an IRA to be limited to ten years. With a conduit trust, all IRA benefits will follow that same distribution time frame and be distributed to the child beneficiary within ten years from the date of passing of their parent. Even IRA owners who were willing to have IRA benefits distributed to a beneficiary free of trust over a long period of time may not be willing to have IRA benefits distributed to them within ten years. For these reasons, IRA owners should examine their plans to determine the impact of the new law within their families.

If you have a conduit trust or do not have your IRA passing to a trust for your children and want to discuss the SECURE Act’s impact on your plan, please call our office to schedule an appointment.