IMPORTANT CHANGES TO COME FOR IRA BENEFICIARIES… SECURE ACT SIGNED DECEMBER 20, 2019
The “Setting Every Community Up For Retirement Enhancement” (“SECURE ACT”) was signed by President Trump on December 20, 2019. The SECURE ACT was discussed in a previous blog so the same information will not be repeated here as the SECURE ACT was passed substantially in the same form that it went to the Senate. An important change is noted below. The final SECURE ACT is here (pages 1640-1650) and is included in the “Further Consolidated Appropriations Act, 2020”.
ADVICE: The SECURE ACT reduces the distribution period for most beneficiaries (other than eligible designated beneficiaries) of individual retirement accounts (“IRA”) from a beneficiary’s life expectancy to a period not exceeding 10 years. Thus, clients and their professionals must review beneficiary designations to be sure that they are are comfortable with the new distribution period for their beneficiary.
Further, IF a trust is a beneficiary of an IRA then it is CRITICAL to review the ramifications of the SECURE ACT on such a beneficiary designation. For example, you may have created a “conduit” trust for a minor expecting small distributions over the minor’s life expectancy. Under the SECURE ACT however, once the minor reaches the age of majority (with a small exception until age 26), the IRA MUST be paid out at least by the tenth year after reaching the age of majority. This result could be disastrous for a young person, not only because they would receive a large sum of money subject to immediate income tax, but also for the exposure to creditors or a divorcing spouse.
Results may be better if an accumulation trust is a beneficiary of an IRA but results depend on the trust document and the trust beneficiaries.
If you represent an estate for a decedent who died recently and the IRA is payable to a surviving spouse with contingent beneficiaries being the children or more remote descendants, then consider having the spouse disclaim to take advantage of the extended payout as the SECURE ACT generally applies to distributions with respect to employees who die after December 31, 2019.
As the SECURE ACT was signed only a few weeks ago and over the holidays, professionals are scrambling to understand the 400 plus page SECURE ACT and understand the changes that will affect documents, beneficiary designations and planning.
WORD OF THE WEEK: Eligible Designated Beneficiary “(EDB”) is a new term under the SECURE ACT. These are the individuals that still receive the benefit of the stretch IRA. EDBs are the IRA owner’s spouse, the IRA owner’s minor child UNTIL they reach the age of majority, a disabled beneficiary (at the last minute, the SECURE ACT added a provision allowing a trust which has as its sole lifetime beneficiary a disabled beneficiary to be an EDB), a chronically ill individual and an individual less than 10 years younger than the IRA owner.
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