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How The SECURE Act May Affect You and Your Beneficiaries

By David E. BowersWilliam G. SmithErica R. Haft

On December 20, 2019, President Trump signed legislation that contains provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (referred to as the “SECURE Act”). We have summarized below some key considerations and consequences.

Significant Changes

The SECURE Act alters how Individual Retirement Accounts (“IRAs”) are transferred upon the IRA holder’s death.

Effective January 1, 2020, the SECURE Act changes IRA provisions, as it:

  • Sets a 10-year distribution requirement. An IRA holder’s entire IRA balance must now be distributed to their non-spouse designated beneficiary within 10 years of their death (whether or not distributions of the IRA holder’s interest have begun);
     
  • Increases the age minimum required distributions from IRAs must begin from age 70½ to age 72 (applicable to distributions required to be made after December 31, 2019, with respect to individuals who turn 70½ after such date); and
     
  • Repeals the maximum age for traditional IRA contributions made so long as the IRA holder has earned income.

Beneficiary Considerations

This 10-year distribution requirement has critical consequences to a beneficiary inheriting a large IRA. If an IRA holder dies after December 31, 2019, with very few exceptions, a non-spouse beneficiary must receive the entire IRA balance and pay income tax on that amount within 10 years of the IRA holder’s death.

Now more than ever, IRA holders should consider establishing a trust to hold these post-death IRA distributions. A trust will enable their beneficiary to invest the IRA assets for growth, spread the taxable income across multiple beneficiaries, keep the IRA assets and future growth outside of the beneficiary’s taxable estate, and protect the IRA assets from the beneficiary’s potential creditors.

Exceptions to the 10-Year Distribution Rule

In addition to a surviving spouse, there are exceptions to the 10-year distribution rule if the IRA beneficiary is:

  • A minor child of the IRA holder
  • A disabled individual
  • A chronically ill individual
  • An individual not more than 10 years younger than the IRA holder

These types of beneficiaries are referred to as “Eligible Designated Beneficiaries.” Instead of being subject to the new 10-year distribution rule, an Eligible Designated Beneficiary may receive IRA distributions over the remainder of their lifetimes. To calculate their required amount of distribution per year over the remainder of their life, an Eligible Designated Beneficiary uses an IRS uniform actuarial table that measures their remaining life expectancy. This method is how IRAs were distributed to a non-spouse beneficiary before the SECURE Act was passed.

Since some Eligible Designated Beneficiaries may not have the capacity to handle the receipt of the IRA distributions (e.g., a disabled, chronically ill, or minor child Eligible Designated Beneficiary), an IRA holder should consider establishing a trust for their benefit.

The SECURE Act makes clear, however, that only specific types of trusts will qualify to receive life expectancy distributions for an Eligible Designated Beneficiary. If a non-qualifying trust is established to receive the IRA distributions for an Eligible Designated Beneficiary, the Eligible Designated Beneficiary will lose its special life expectancy distribution treatment and be subject to a 5-year distribution rule.
 

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