In a previous post, we explored the SECURE Act and how it affects inherited retirement accounts. Before the SECURE Act, retirement beneficiaries could spread out taxable distributions from the account over their lifetime. In fact, the government, at a minimum, required these distributions to the beneficiaries annually. However, beneficiaries sometimes elected distribution amounts greater than that required and paid tax on the additional distribution. This created scenarios where less prudent, less responsible beneficiaries withdrew inherited retirement all at once. They would then proceed to squander the proceeds leaving less security for their own retirement. If retirement account holders wanted assurances that the beneficiaries would not make such irresponsible decisions, they could establish trusts as beneficiaries. These trusts, often called “Stretch IRA Trusts” allowed the ultimate inheritor receipt of only the required minimum yearly distributions from trust and nothing more. The SECURE Act guts the effectiveness of these Stretch IRA Trusts.
Under the SECURE Act, retirement beneficiaries cannot spread distributions over their lifetime. They instead must remove and pay tax on the entire amount of inherited retirement within 10 years of inheriting. Furthermore, the only required distribution is the final distribution that occurs in year 10. Multiple annual minimum distributions are no longer part of the equation. This clearly complicates the terms of some stretch trusts. Imagine the trust only allows for the beneficiary receiving the required distributions. This means the stretch trust beneficiary gets a balloon payment for the entire account in year ten as the only required distribution. This would create immense tax implications for the beneficiary and would fail in creating long-term security for the beneficiary.
An easy solution to this problem does not exist. However, you can take steps to minimize the consequences by updating any Stretch Trusts previously established. If you are interested in exploring updates to your retirement and associated trusts, call Legacy Law Center at (504) 274-1980 in Metairie, New Orleans, and surrounding areas or call (985) 246-3020 in Mandeville, Covington, Slidell, Houma, and Thibodaux.