Many Americans hold a large part of their wealth in their retirement accounts. The SECURE ACT passed on December 20, 2019 really changed the way people with retirement accounts could leave those funds to their beneficiaries.
People walking happily thinking their retirement accounts could be stretched out over the oldest beneficiary’s life expectancy - until SECURE ACT was passed!
In short, a lot of people freaked out over the change.
NOTE: There are a few classes of people who can get around this 10 year requirement and have different rules apply. These people are called Eligible Designated Beneficiaries (EDB’s.) EDBs include a spouse, disabled,/chronically ill beneficiary, minor child, and a person not-more-than 10 years younger. They are NOT the focus of this article.
This was how things worked BEFORE SECURE:
You had a retirement account. You would make your IRA payable to either “designated beneficiaries” (or a see-through trust) and the designated beneficiary or trust could leave the plan in its tax-deferred status for years or decades after you died.
Example: You pass away in your 80’s. Your oldest child, Amy, is in her 50’s. Amy’s life expectancy was about 34 years. Amy could now withdraw the IRA over these 34 years - a little bit at a time. The income tax on this long or “stretched out” withdrawal was so negligible that it was very attractive to clients. Clients and planners LOVED this!
Then, it was taken away from us :(
NEW RULE - now, with the exception of five special types of beneficiaries (“eligible designated beneficiaries”) the life expectancy rule or the “stretch” has been eliminated. Now, it is 10 years in most cases.
What does this mean in real life?
This means that Amy now has to withdraw the entire IRA within 10 years of her mom’s death. This is made worse by the fact that most people in their 50’s are at their peak earning years so they tend to be in a higher tax bracket.
So, theoretically, people are now getting taxed at their highest income tax bracket. High taxes in a short amount of time - this does not make people happy.
You know what else does NOT make people happy? When they hear that it is best to leave their IRA outright, or directly to their beneficiaries without any control or protection whatsoever.
What if?
What if your kids are not the most responsible with money?
What if your child is fantastic but his spouse - not so much?
What if your child has substance abuse issues?
What if your child is a spendthrift and blows through money like it is going out of style?
So, you spend your whole working life building up this retirement account. Most people would like for those assets to last and be protected.
However, many people are told that they have to choose between saving taxes and protecting their hard-earned money for their beneficiaries. This is not entirely accurate!
There are ways that we can structure trusts so your retirement accounts can pass to your beneficiaries and you can still protect those funds for your beneficiaries by leaving retirement funds in trust.