As of this year a new law – the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) – has impacted not only us individually but also our heirs who will inherit qualified funds (retirement funds such as (401(k)s, IRAs, etc.). For us, notable changes are extending the required beginning date for the Required Minimum Distributions (RMDs) to age 72 (instead of age 70 ½) and to eliminate the prohibition on making contributions to an IRA after this date.
However, for estate planning purposes the major issue is the now inability to stretch the RMDs for our children in order to protect them from financial mismanagement, creditors, divorce, or even their own immaturity. The SECURE Act now mandates a limited ten (10) year maximum payout period for such funds; five (5) years if the owner/participant dies before receiving his/her first RMD. Exceptions are for spouses, disabled/chronically ill or minor children, although the ten (10) year payout period begins when the child no longer is disabled or a minor.
It is imperative to have your trusts and beneficiary designations reviewed to determine if you have designated your trust as a beneficiary (or successor beneficiary) and if so, the trust provision handling such qualified funds. Trust provisions must be reviewed and changed given this new law. Options we now are forced to consider are:
1) Distribute such funds outright to children, despite such assets now being vulnerable to abuse or attach by creditors.
2) Hold such funds in trust (with Conduit provisions) for the benefit of children but have distributions according to the new ten (10) year distribution period. In such case the income tax liability on the distributions may be passed to the child/beneficiary who presumable has a lower applicable margin income tax rate.
3) Hold such funds in trust (with Accumulation provisions) for the benefit of children longer than the ten-year period. Such RMDs from the retirement plan still must be withdrawn within the ten (10) year period but, with appropriate trust provisions, they may be held in trust for longer periods of time. This option subjects the RMDs not distributed to the beneficiary (as with conduit provisions) to an income tax at the trust’s income tax rate – the highest marginal rate.
Careful thought and discussion on the flow of these assets upon death is critical given this new Act as many former conduit trust provisions may result in a lump sum distribution and corresponding big income tax liability to the beneficiary.
If you have or believe you have trust provisions that involve holding qualified funds in your trust, or any estate planning needs, please contact Attorney Vincent A. Liberti, Jr.