After passing in the House earlier this year, the SECURE Act stalled in the Senate. The SECURE Act is now expected to clear Congress and be on the President's desk for signature by the end of this week. Among many profound changes to how retirement plans work, the most significant for estate planning is the loss of the stretch-out for IRAs. After the bill is signed it will go into effect on January 1, 2020.
Stretch-out IRAs to be a thing of the past.
The most significant change for many of our clients will be the removal of RMDs for IRA beneficiaries. Many beneficiaries of IRAs will choose to "stretch" retirement accounts they receive as an inheritance for a couple reasons. First, this allows the account to continue to grow for a longer period of time. Second, the beneficiary pays tax on the amount received from the account in the year received. The more the beneficiary receives, the greater the tax will be. In place of the stretch-out, retirement account beneficiaries will be required to draw down the account over a period of 10 years. Losing the stretch-out means the beneficiary will need to take higher distributions over a shorter period of time. Compounding this is the fact that many beneficiaries of retirement accounts are people in their prime earning years, pushing them into a higher (or even the highest) tax brackets.
Stretch-out IRA trusts should be reviewed
In some instances, clients may have established trusts for IRA accounts. Typically, this is done as a protective measure to ensure that the beneficiary will not liquidate the account immediately so that it can serve its intended purpose as a long-term investment. These trusts have stretch-out IRA language in them that allows the IRA custodian to look through the trust and treat the beneficiary as an individual instead of a trust while prevent the individual from drawing the entire account down. These types of trusts will need to be reviewed and potentially reformed to be consistent with the new SECURE Act.
This is a tax revenue generator
The impact of requiring tax-deferred retirement accounts to be drawn over a period of 10 years instead of over the beneficiary's life expectancy is, ultimately, higher taxes in the form of income taxes. However, in my view, this portion of the law is in effect a middle class death tax. This law will be result in much greater tax revenue generated from inherited assets, most of which will be paid by the middle class.
Attorneys and other advisors will need to learn more about how the SECURE Act will impact these types of trusts and review estate planning goals with their goals.
You can read more about our analysis of the SECURE Act here.