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SECURE Act Can Have Big Impact on your Estate Plan & Trusts

Authored by Logan Philipps, Esq. and Anne Zavaglia, CFP®

When President Trump signed the SECURE Act at the end of 2019, it could easily have escaped your notice during the holiday season. While time will tell if this law aimed to encourage greater retirement savings achieves its aims, there’s no question it has a direct impact on many taxpayers.

If you’re someone whose estate plan deals with the proceeds of an Individual Retirement Account or a retirement plan’s required minimum distribution, you definitely should follow up. SECURE, which stands for “Setting Every Community Up for Retirement Enhancement,” made significant changes in how such distributions are treated.

Before the SECURE Act, beneficiaries of these proceeds could stretch them over a lifetime if structured properly.

For those utilizing the common practice of distributing proceeds through revocable trusts, a structure called “conduit provisions” were frequently utilized to stretch the proceeds over a beneficiary’s lifetime, thereby combining the benefits of the stretch and the benefits of a trust. Such provisions require the distribution of income generated by either the IRA or the RMD to be distributed from the trust to the beneficiary.

Under the new law, an inherited retirement account no longer has any RMD, but the funds must be the distributed by the end of the 10th calendar year after death of the decedent. As a result, these distributions can be higher, potentially much higher, than what would happen if stretched over a lifetime beyond the 10 years.

The tax consequences are obvious. This change increases the odds that the income moves or keeps a beneficiary in a higher tax bracket. One helpful aspect is that under the law a beneficiary can distribute different amounts in different years as long as the amount zeroes out after the 10th year.

Trust treatment changed, too. An existing conduit provision in a trust would require any distribution received by the trust (from an IRA or 401k) to be distributed to the beneficiary.  Not only could there be an issue from a tax standpoint but the amount of distributions flowing directly to the beneficiary could be potentially much more than the trustmaker would have wanted or believed was prudent. Trusts may need to be amended so trustees can be given discretion to either distribute funds to the beneficiary or take a distribution to be taxed at the trust level, keeping all or a portion of distributions in taxable accounts the trust holds.

So, what specific actions should you take beyond the overall need to see how your estate plans conform to the new law?

We think that many IRA account owners with larger balances should seriously consider conversions of distributions into Roth accounts, because distributions from inherited Roth IRAs are tax-free.

Those with trusts that have conduit provisions should update their documents if the trust grantor wants the trustee to have more flexibility on fund distribution. That likely will be the case in many individual circumstances.

At Beacon Hill, we’re ready to help you figure out what these changes mean for you. Don’t hesitate to contact us.

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