As you read in my first blog in this series, the SECURE ACT passed and we are learning how it impacts financial and estate planning. This blog will focus more specifically on changes made to the beneficiaries that receive your IRA dollars in the future, after your death. I want to give you a snapshot of some issues so you can explore them in greater depth.
Of course, if you do not have retirement benefits, or you plan to leave all of your money to charity, you need not worry about these tax changes. Along the same lines, your current plan may continue to work just fine if your designated beneficiary is the surviving spouse, disabled/chronically ill person, or someone less than 10 years younger than you. That is because there are certain exemptions for certain individuals made by the tax code. Finally, if a person simply plans to leave their IRA outright to their adult kids, the changes will likely have zero impact.
Others may find the need to tweak, or at times overhaul, their previously well-thought out plans. Just keep in mind that if retirement benefits are a significant part of your estate plan, you must review your existing plans. And if you have not yet drafted your estate plans, make sure the future plans you draft (especially in next few months), contain updated provisions to address the SECURE Act. As an estate planning attorney that talks with many colleagues on a daily basis, I can tell you that we are all trying to decipher the changes. Most of us do not yet have our language together, but we are working feverishly on coming up with drafting solutions.
Where are the red waving flags?
Some “hot button” issues to consider depend on what your plan looks like now, and who it benefits. The red flag waves for the following so a closer look is warranted:
- Estate plans that benefit future generations, involving a long “stretch period.”
- Plans leaving benefits to an IRA “conduit” Trust may not work as the beneficiary will have to receive entire plan within 10 years of death, which may not have been contemplated.
- Plans leaving high amounts to children who are already in high tax brackets.
- Plans leaving funds to supplemental needs trusts must be reviewed to make sure they qualify as Eligible Designated Beneficiaries.
What can I do?
One idea is to leave more money in your ROTH IRA instead of the traditional IRA. With a Roth, the distributions are tax-free. This may be a good idea when the beneficiary will be in a lower tax bracket than the IRA owner.
How have beneficiaries changed under new tax laws?
Before the SECURE Act, the tax code set forth two types of beneficiaries—either designated beneficiaries or non-designated beneficiaries. Now there are three kinds of beneficiaries.
- Non-Designated Beneficiary (the estate, charity)
- Designated Beneficiary (individuals). This type of beneficiary must withdraw the IRA assets within 10 years of the IRA owner’s death.
- Eligible Designated Beneficiary. These beneficiaries receive the life expectancy payout method that is now somewhat changed.
- Surviving Spouse
- Minor Child
- Chronically Ill
- Less than 10 years younger beneficiary
I hope this blog gives you a picture of the things you need to consider. I encourage you to seek out expert advice to learn more about how the changes apply to your particular situation.
Stay tuned for more blog articles on the SECURE Act as it pertains to IRA’s as we continue to learn more and decide how this impacts our estate planning.
Based out of Tampa, Florida, Lori is mom to a fantastic 5-year-old boy. They love to go on local adventures, travel and play with matchbox cars for seemingly endless hours. Lori enjoys reading classic novels, organic gardening, and studying languages with her son. She considers herself well-versed in Seinfeld and welcomes any trivia!
Disclaimer: The Law Office of Lori Vella’s website contains general information directed to Florida residents. This firm does not intend to give legal advice through its pages and/or blog. If you need legal advice, we encourage you to find an attorney licensed in your state. This language on this website does not create an attorney-client relationship between you and this firm.