How a Retirement Account Trust Can Protect an Inherited IRA or 401(k) Affected by the SECURE Act

retirement trust

A recent federal law called the SECURE Act has potentially catastrophic consequences for owners of an IRA or 401(k) and their beneficiaries. If the owner names individual beneficiaries for those accounts, or names certain types of trusts as the named beneficiary, the recent law could significantly alter distribution of assets. In some situations, setting up a retirement account trust for the beneficiary can minimize SECURE Act impacts and ensure that the beneficiary receives the maximum possible benefit from your hard-earned retirement savings.

If you have assets in an IRA or 401(k), you should take action as soon as possible to avoid potential adverse effects of the recent law. At Asset Protection & Elder Law of Georgia, our experienced estate planning attorneys assist clients with addressing the implications of the SECURE Act for a new or existing estate plan.

What Is the SECURE Act?

SECURE Act is an acronym for a federal law named the Setting Every Community Up for Retirement Enhancement Act of 2019. The law went into effect on January 1, 2020.

The statute contains numerous complex provisions. For inherited IRAs and 401(k)s, the most significant new rule mandates full distribution of all account assets within 10 years of the account owner’s death for many beneficiaries. Previously, beneficiaries inheriting retirement accounts could spread distributions over their life expectancy. For many IRA owners and their beneficiaries, the mandatory 10-year distribution rule can have devastating consequences.

Tax and Other Consequences of 10-Year SECURE Act Rule

An inherited retirement account subject to the 10-year mandatory withdrawal rule means larger annual distributions for many beneficiaries. In some cases, those distributions will increase the beneficiary’s marginal tax rate on all their income, not just the retirement distributions, which could significantly increase the beneficiary’s overall tax liability. Higher annual withdrawals over a shorter period also result in losing the benefit of deferred growth of assets in the account over the lifetime of a beneficiary.

Greater assets received by a beneficiary sooner than previously also means increased exposure to claims of creditors or others, such as divorcing spouses. A financially irresponsible beneficiary also will be more likely to spend the inheritance quickly with increased distribution amounts.

Exceptions to the 10-Year Rule

The SECURE Act does provide exceptions to application of the 10-year rule for certain categories of beneficiaries. There are five categories of eligible designated beneficiaries (EDBs) exempted from the rule, which are:

  • The decedent’s surviving spouse
  • A “disabled” beneficiary who is unable to engage in “any substantial gainful activity”
  • A “chronically ill” beneficiary who meets specific criteria in the law
  • A minor child of the account owner, who is exempted only the child reaches the age of majority (age 18 in Georgia)
  • A beneficiary not more than 10 years younger than the IRA owner

The exemptions provide limited exceptions to the 10-year rule. Many beneficiaries (such as grandchildren, who may inherit retirement assets from their grandparents) will not fall into any of the EDB categories and will be subject to mandatory distribution within 10 years.

How to Address SECURE Act Implications

Fortunately, estate planning strategies and options are available to address concerns and issues arising from the impact of the mandatory withdrawal distributions. A retirement account trust is an option that works well for some owners of retirement accounts.

A retirement account trust is a trust established solely to hold the assets of a retirement account for the beneficiary on the account owner’s death. A retirement account trust cannot hold the account while the account owner is living, but the trust receives the assets when the owner passes away. This strategy uses a trust to manage the assets for the beneficiary, instead of designating the individual as the direct beneficiary of the IRA or 401(k). Using a retirement account trust as part of an estate plan can minimize the tax and other consequences of the SECURE Act for inherited retirement accounts, as well as provide asset protection for the beneficiary.

A retirement account trust must be carefully and properly drafted by a knowledgeable estate planning lawyer in order to account for the impact of the SECURE Act and comply with all other federal and state tax and trust laws. To establish any type of trust, assistance from an experienced attorney is absolutely essential.

Whether a retirement account trust is right for your estate plan depends entirely on your personal and financial circumstances, on your estate planning goals, and on the provisions of your current estate plan (if you have one). Your estate planning lawyer helps you determine the best structure for your estate plan based on all the relevant considerations.

Anyone whose estate includes assets in an IRA or 401(k) plan should consult with a lawyer at the earliest opportunity to resolve issues created by adoption of the SECURE Act, as well as other concerns relating to inherited retirement plans. If you currently have individual named beneficiaries, or your retirement accounts are designated for inclusion in a trust created before the SECURE Act became effective, you may need to make changes in your estate plan structure or create a new estate plan (if you don’t have one) to ensure that you protect your retirement assets to the maximum extent possible.

Talk With a Trusted Georgia Estate Planning Attorney

Our Cartersville estate planning practice at Asset Protection & Elder Law of Georgia focuses on helping clients find solutions for many challenging circumstances involving their assets, families, and estates. Our work includes assisting in estate plan modifications necessitated by significant changes in the law, such as the new distribution rules impacting inherited IRAs and 401(k)s of the SECURE Act.

We provide a broad range of legal services to clients throughout the communities northwest of Atlanta, including in Bartow County, Cobb County, Cherokee County, Gordon County, Floyd County and Paulding County.

To schedule a consultation, call us at (770) 382-0984 or contact us through our online form.

Categories: Estate Planning