SECURE act updates Affect Your IRA
- January 3, 2020
Effective January 1, 2020 the law pertaining to inherited IRAs have changed significantly. The Setting Every Community Up for Retirement Enhancement Act (SECURE) has caused material changes to the treatment of IRAs which may require a review of your estate plan and the documents there under. It is always good to review estate plans every five years as the laws are constantly changing.
Under the SECURE Act, the stretch IRA is no longer permitted. Previously, a person who inherited an IRA from a non-spouse was permitted to receive annual distributions for their lifetime. Under the new law, an inherited IRA must be distributed to the beneficiary within 10 years of the date of death.
The receipt of the IRA distribution is subject to income taxation and can result in a significant income tax liability. The “new” law is a return to the rules of IRA distributions in the 1980’s.
Two techniques to avoid the family’s catastrophic income tax liability are as follows:
- During your lifetime, you increase the distributions you receive and use the extra income to acquire a survivorship life insurance policy. This does not reduce the income tax on the IRA’s upon your death, but it provides your children or other beneficiaries with the economic ability to address the tax liability without a significant diminution in remaining assets.
- You may name a Charitable Remainder Trust as a beneficiary of your IRA. The Charitable Remainder Trust (CRT) is a Trust in which you reserve for your beneficiaries for their lifetime or for a stated period of time not to exceed 20 years, the right to receive a percentage of income and upon the expiration of the Trust term or upon their death, the remainder will transfer to one or more charities selected by you.
The Charitable Trust is exempt from income tax and therefore the distribution of your IRA to the Trust is free from tax liability. The annual income distributed to the beneficiaries, however, is subject to income tax depending upon the nature of the gain of the Trust. The advantage of the CRT is the postponement of the recognition of the income tax until distributions are received allowing the initial contribution to continue to grow free from tax diminution.
Effectively, your beneficiary will receive the annual distributions identical to how they would have under the stretch IRA achieving the same result.
We look forward to discussing these options with you, please contact us today to schedule an appointment.