Many people have revocable trusts and are thinking about making their trust the beneficiary of their IRA. Even before new laws were proposed, the idea was problematic. If your relationship of trust is not specifically formulated using a so-called conduit design, the trust may be a poor choice for an IRA, 401k, 403b, or TSP beneficiary.
The House of Representatives passed a new bill with 417-3 votes entitled "The Pillar of Pensions Improvement Act for Every Municipality of 2019". The law is known by its initials, the SECURE Act. It is expected that the SECURE Act will unanimously pass the Senate (if they ever work again to pass meaningful legislation). So it's not a law yet, but if you're an owner of an IRA or a Qualified Plan, you have to be. You need to be aware of how that might affect your future estate planning decisions.
Under current rules, non-spouse beneficiaries could "stretch" their IRA payouts to achieve significant savings in income tax. For example, according to the old (and still up-to-date) rules, Ryan would have been able to extend the 52.1 life expectancy allocations if Jane had owned a $ 1 million IRA and left it to her 30-year-old grandson Ryan would have. This prevented a potentially large tax burden from a lump sum.
The idea of Stretch IRA has been popularized by many consultants and journalists over the years. The Stretch IRA was promoted to enrich the next generations with a lifelong income after your death (courtesy of you). What consultants often ignored at steak dinner workshops was that inherited IRAs could be subject to the claims of the recipient's creditors. To circumvent this problem, many IRA owners, through their lawyers, established "IRA Conduit Trusts" to ensure that beneficiaries receive only the required minimum distributions and that the assets in the IRA are protected.
The once adopted SECURE law would change all that. Most future beneficiaries will lose the "stretch" rules and the beneficiary will have to deduct the entire IRA balance within 10 years of the death of the owner of the IRA. The old five-year rule is gone, and the non-spouse rule is pretty much gone. There are exceptions to the 10-year rule, including:
A spouse may transfer the deceased's IRA to their own IRA and extend the distribution over the life of the deceased
Children under the age of majority would not start the clock until they had reached the majority. At this time, they must make distributions in accordance with the 10-year rule. A beneficiary with disabilities or a chronically ill beneficiary may also be treated differently.
It's more important than ever to meet with a qualified estate planning lawyer and a CPA to see how the SECURE Law affects your estate and tax planning ideas.
As it used to be
Legacy planning for IRAs under the SECURE Act was about designating individual IRA beneficiaries to create an inherited IRA for each of them. The beneficiary then simply distributes according to the age-related minimum distribution requirements (RMD).
The mention of a revocable trust fund as a beneficiary meant that the RMD was based on the age of the oldest beneficiary, which was a complication and not always optimal. Lively IRA owners with vibrant trusts have teamed up with their lawyers to change or rewrite their confidence and include a review that allows the IRA to be spread across the trust while retaining the benefits of Stretch IRA , The failure to designate individual beneficiaries led to the introduction of a five-year rule requiring all IRA credits to be distributed within 5 years of the death of the IRA holder.
An important point is to make sure that your IRA or qualified plan is up-to-date if your primary and secondary beneficiaries have died before you. If a qualified plan or IRA owner does not designate a beneficiary or the nominated beneficiary does not survive the owner, the IRA goes into the deceased's estate and must be reviewed and disbursed within 5 years.
The new rule applies to ALL qualified plans (like 401ks), not just IRAs.
The 10-year rule applies to all eligible plans with credits. This would include all defined contribution plans, including 401 (k), 403 (b), 457 (b), 401 (a), ESOP, cash balance plans, profit sharing plans and lump-sum distributions from defined benefit plans. Most people eventually transfer these plans to self-directed IRAs.
Spouses can still take over the property of the IRA after the death of a spouse
In general, it is common for spouses to refer to each other as main beneficiaries of their IRAs. After death, they can easily take full ownership of the deceased spouse's IRA. That's true, but the secondary beneficiaries are now affected by the SECURE Act. Example: If Pete has a $ 600,000 401 (k) and rolls him into an IRA, then he dies, and his wife Elaine takes over the property as their IRA. One day Elaine walks by. All IRA credits can be given to children over the age of the majority, the 10-year rule applies.
Many owners of IRA and qualified plans designate their spouse as their main beneficiary, while their trust is considered a second beneficiary. Former estate attorney (and now Estate Planning Attorney) Libby Banks, said the following: "If it is a couple with responsible adult children, I usually suggest the children as the second beneficiary. You can treat it as an inherited IRA (since the Secure Act has not yet passed). "Perhaps you would like to discuss with Libby what their recommendation will be after the bill is passed (if Congress can ever reconcile anything!). )
As a general rule for the purposes of distribution in the event of death, a trust can not be considered a designated beneficiary, which means a living natural person. However, until the date of adoption of the SECURE Act, the law provides for an exception known as the "see-through rule". If the trust meets certain requirements, including a conduit designation in the trust, the tax law will "look through" the trust for the trust beneficiary.
An IRA owner may also wish to designate a trust as an IRA beneficiary in the following situations:
1) The IRA beneficiary is a minor child. Individuals under the age of 18 or 21 may not legally make certain decisions regarding IRA distributions, depending on the state. As a result, a guardian would probably be appointed by a probate court if a minor was the named beneficiary at the time of the death of the holder of the IRA. However, the entire IRA would be owned by the child once it reaches the age of majority, with no restrictions on the use of those assets.
2) The IRA beneficiary is physically or mentally handicapped. A trust may be required to ensure that a disabled or incompetent beneficiary is properly served after the death of an IRA holder.
3) The IRA beneficiary may need help managing the IRA assets. If a beneficiary may need help managing an inherited IRA, especially if it is very large, then a trust can help trustees and other professional advisors manage the assets in a prudent manner in a fiduciary manner.
4) To protect a non-demanding beneficiary from creditors. What if this beneficiary does a risky business or owes money to people? That's a real problem. In that case, it may be useful to create a trust that forces the beneficiary to make distributions in accordance with the instructions of the trustee under the direction of the successor trustee you have selected.
5) The owner of the IRA is married for the second time and wants to give his income to a spouse for life. The remainder goes to THE OWNERS 'CHILDREN (and not to the heirs of the surviving spouse) from the previous marriage. This was usually done with a so-called qualified terminable trust (Q-TIP).
My recommendation: Beware of cheap, simplified trusts that you can buy online, especially if you have one of the above complications. A good lawyer will usually give you 30 minutes to let you know if you need help. In general, investing in the services of a qualified, caring lawyer can save you many thousands of dollars and prevent unexpected bad results.
Steve Jurich, Scottsdale Financial Planner, AIF® is a Kiplinger employee, investment adviser and founder of IQ Wealth Management in Scottsdale. He helped hundreds of families with their financial and estate plans. You can hear Steve every day at 8:00 am and 11:00 am on KFNN Money Radio (AM 1510 on the dial). Podcasts are available around the clock RetirementRadioUSA.com
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