A new law affecting IRAs is the biggest change to estate planning in recent years. With the Secure Act much of retirement planning remains the same, but a lot has changed too. Enough to warrant a review of your current estate plan.
The biggest change is that all IRA plan assets must now be paid out to a Designated Beneficiary in 10-years. No longer is there a “stretch-out” of distributions (an income tax) over the lifetime of a beneficiary of an inherited IRA. The practical difference is that beneficiaries may be claiming a lot more on their income tax returns. Just how much tax they will pay will depend upon how much they receive and their income tax bracket for the year in which they receive it. Therefore you might want to “crunch some numbers” now to see if any additional life-time planning is warranted.
Fortunately, the government has made a few exceptions to this rule by creating a new classification of individuals called Eligible Designated Beneficiaries. These folks may keep their inherited IRA stretched over their lifetime as before the Secure Act. This special class of individuals consists of: surviving spouses, beneficiaries less than ten years younger (sibling), individuals who are chronically ill or disabled, and minor children (not grandchildren).
Saving taxes but losing asset protection
But there are some conditions attached to this perk. To qualify, Eligible Designated Beneficiaries must receive their IRA payments directly. This can undo estate plans concerned about: Long-term care costs (Medicaid spend-down), Lawsuits, Remarriage (surviving spouse), Divorce (children), Spendthrifts (those who struggle managing money). These estate plans counted on payments being made to the beneficiary’s trust rather than the beneficiary outright. Without such protections inheritances taking a lifetime to accumulate may be lost very quickly.
At Godfrey Law Offices we always integrate retirement assets with estate plans through special “look-through” trusts which qualify as a Designated Beneficiary, (rather than most trusts which are subject to a 5-year payout rule). And we will continue to do so, but now with an eye towards getting the most asset protection for the least amount of cost. And here the cost is the amount of additional tax that one might pay for keeping it in trust and not stretching payments out over a lifetime. How much will this asset protection cost? It depends, and whether it is worth it also depends upon your beneficiary’s circumstances. Again, another good reason to talk with your professional advisors to see if you are still “all set” after this new law change.
