The SECURE Act’s Impact on Trusts as IRA Beneficiaries

FSKS Explains the SECURE Act’s Impact on Trusts as IRA Beneficiaries

Many workers depend on their IRAs, 401(k)s, and other retirement accounts for the future. These accounts allow you to save for your retirement and secure the financial future of your loved ones upon your passing.

Major changes for IRA beneficiaries under the SECURE Act may affect your estate planning strategy, and it’s time to make sure your documents are up to date. Learn how your beneficiaries are impacted and how an experienced estate planning attorney can help you strategize for your future.

What is the SECURE Act?

The Setting Every Community Up For Retirement Act of 2019, also known as the SECURE Act, took effect on January 1, 2020. The goal of the SECURE Act was to increase access to tax-advantaged retirement accounts and help prevent retirees from outliving their saved assets.

However, the SECURE Act also brought about changes that could negatively affect some IRA beneficiaries.

Changes to Trusts as IRA Beneficiaries Under the SECURE Act

The SECURE Act eliminated the Stretch IRA for most beneficiaries. The Strech IRA allowed beneficiaries to stretch out the required minimum distributions of the account over their lifetime, letting the IRA’s value grow tax-free over time.

Under the SECURE Act, beneficiaries must receive the entire distribution of the retirement assets within 10 years of the original account owner’s death. Failure to distribute the IRA within this time will result in a penalty of 50% of the undistributed amount. This change affects not only IRAs but 401(k)s and Roth IRAs too.

If your Trust has not been updated since the passage of the SECURE Act, naming your Trust as the beneficiary of your retirement benefits may have unintended consequences. Without the right language and safeguards in your Trust document, your beneficiaries may face higher required minimum distributions, more taxable income each year, and unexpected income tax burdens.

Not all beneficiaries are affected by the changes brought about by the SECURE Act. Surviving spouses are not subject to the 10-year rule and can still stretch the assets over their lifetime.

Other exceptions to the SECURE Act rules include:

• The minor child of the deceased IRA owner
• Disabled or chronically ill beneficiary
• A beneficiary who is no more than 10 years younger than the deceased IRA owner

What the SECURE Act Means for Trusts

Listing your Trust as an IRA beneficiary allows you more control over account distributions and affords your beneficiaries protections under the terms of the Trust. The SECURE Act still allows Trusts to be beneficiaries of IRAs and other retirement accounts, but the 10-year rule now applies.

Qualifying Trusts can be designed to distribute IRA funds to Trust beneficiaries immediately or gradually over time. It is important to work with your Estate Planning attorney to ensure the right language is in your Trust based on your goals and the needs of your loved ones.

FSKS is on Your Side

At FSKS, we understand the importance of estate planning and administration for securing your family’s financial future. Our legal team can help you understand your retirement and legacy planning options so you can find the best fit for your individual needs. Contact FSKS now to speak with one of our Estate Planning attorneys about your concerns, questions, or needs.

• Jim Shepard, Esq.: jshepard@fskslaw.com or (973) 796-2069
• Jennifer Holowach, Esq.: jholowach@fskslaw.com or (973) 867-4539