As explained in our previous Facebook post and Blog article, the SECURE Act brought major changes in how retirement plans are handled in a person’s estate plan.  One of the most significant changes is that, after the death of the retirement plan owner, the entire account balance in the plan must be distributed out to most designated beneficiaries within 10 years.  (In the remainder of this article, we will use “IRA” as a short-hand reference to various types of retirement plans.)

Generally, under most circumstances naming a trust as a beneficiary of an IRA will not be beneficial under the new law.  Here are some other ideas to consider:

  1. Spouse as beneficiary. Change the beneficiaries of the IRA from children or grandchildren to a surviving spouse or other “eligible designated beneficiary” (EBD) under the new law—such as a disabled individual under IRC 72(m)(7), a chronically ill individual under IRC 7702B(c)(2), or a sibling or friend who is not more than 10 years younger than the IRA owner.
  2. Roth conversions. Gradually draw down funds in a taxable IRA and convert them to a Roth IRA, which in turn can be left to a discretionary trust.  The Roth IRA can continue to accumulate tax-free during the 10 years after the owner’s death and then be distributed tax- free to the trust.  While not solving all problems, this can still provide some protection for trust beneficiaries who are spendthrifts, or subject to manipulation by others, or employed in risky professions where they might be sued.
  3. Charities. For persons who are charitably inclined, funds from taxable IRAs can be used annually by the IRA owner or beneficiaries who are age 72 or older, to make a “qualified charitable distribution” which is excluded from income.
  4. Life insurance. IRA owners can withdraw money gradually from taxable IRAs, at lower tax rates, and use it to purchase permanent cash-value life insurance, which can, in turn, be left to a discretionary trust for distribution to beneficiaries who need certain protections.

SECURE Act affects all types of qualified plans [i.e. §§401(k), 403(b), 457(b), 401(a), ESOPs, Cash Balance plans, lump sums from defined benefit plans and IRA.

Disclaimer:  Zolton Law Offices is not a licensed financial advisor and would urge individuals with retirement accounts to consult with their financial advisors in light of the new SECURE Act.