Conduit Trust

How Does the SECURE Act Change Your Estate Plan?

The SECURE Act has made big changes to how IRA distributions occur after death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.

Some of the changes include revising wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive.

Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.

Rethinking and possibly completely restructuring the planning for the IRA account may need to occur. This may mean making a charity the beneficiary of the account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.

Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch an IRA out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the IRAs continued to grow tax tree.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs and disabled heirs. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the IRA and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

Should I Designate a Trust as Beneficiary of my IRA?

There are many pros and cons to naming a trust, rather than an individual as a beneficiary of the IRA. However, there are some complex rules. You need to get it right, because this may be your biggest asset.

Name a Trust as Beneficiary of my IRA
Naming a trust as beneficiary of your IRA has many benefits.

Investment News’ recent article on this subject asks “Should you name a trust as an IRA beneficiary?” The article explains that individual retirement account assets can’t be put into trusts directly during a person’s lifetime, without destroying the IRA’s tax shelter. Therefore, a trust may only be named as the beneficiary of the IRA. The trust would inherit the IRA upon the owner’s death, and beneficiaries of that trust would have access to the funds.

Asset protection is one rationale for making this move, because some trusts shield IRA assets from lawsuits, business failures, divorce and creditors. Taxpayers enjoy state and federal protections for IRA assets during their lifetime. However, heirs who inherit an IRA directly—not through a trust—don’t receive those protections, unless provided by state law. Trusts also allow for some control over the assets. The terms of a trust can stipulate the way in which distributions are made if an heir is a minor, disabled, financially unreliable, incapacitated or vulnerable.

Naming a trust as an IRA beneficiary may not be practical for people who plan to bequeath their IRA to a spouse, rather than their children, grandchildren or others. Spouses are allowed roll over the decedent’s IRA assets into their own IRA tax-free.

There are some technical rules to follow, like the IRA beneficiary form must indicate before a person’s death, that the trust is the primary beneficiary. After death, the IRA must be retitled as an inherited IRA. Required minimum distributions (RMDs) would still also be required for the IRA. This is an area where using the right type of trust is important. A “see-through” or “look-through” trust may be the best bet.

Structuring a trust this way maintains the IRA’s preferential tax treatment. That allows a trust beneficiary to spread the RMDs over a long period based on his life expectancy. This is called a “stretch IRA.” The RMD amount would be based on the oldest beneficiary of the trust. However, beneficiaries with separate trust shares would have different RMDs.

In addition, the trust’s language must also state that distributions from the IRA can only go to “designated beneficiaries,” not to pay expenses. The risk of not creating the trust as a see-through or including this language, is that the IRA assets are distributed and the resulting tax paid within a much shorter time frame—potentially five years.

Trusts may also be set up as “conduit” or “discretionary” trusts. With a conduit trust, the annual RMDs pass through the trust to beneficiaries, who pay tax at their individual rates. Discretionary trusts don’t distribute the RMDs out of the trust and they pay tax at the more punitive trust tax rates. However, they keep the most post-death control over assets.

Talk to an experienced estate planning attorney about these trusts and how they can work with your IRA.

Reference: Investment News (February 22, 2019) “Should you name a trust as an IRA beneficiary?”

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