Texas estate planning attorneys have been buzzing about the SECURE ACT and how it affects clients’ estate plans, especially those Texas trusts.
If you haven’t met with your estate planning attorney lately to review your trust agreement, the SECURE ACT gives you a good reason for a checkup.
Here’s how the SECURE ACT impacts your Texas Trust:
The SECURE Act does many things that are not related to estate planning. However, the BIG REASON you should talk with your estate planning attorney is due to how the Secure Act changes the rules for Inherited IRAs.
Over the years, we have typically recommended that qualified accounts, such as IRAs, 401(k)s and 403(b)s, be left out of our client’s trust. This recommendation stems primary from tax reasons. Plus, it’s often more trouble than in it’s worth to have your qualified accounts flow through your trust to your beneficiaries. Most times, it’s best to simply name your beneficiaries on qualified accounts directly instead of having the inherited accounts flow through the trust.
However, sometimes clients insist on flowing the inherited qualifed accounts through trusts for some very good reasons. Maybe the beneficiary is a spendthrift. Maybe the client is worried about the beneficiary’s spouse. The list goes on. These clients want input on how and when distributions from the qualified account (through the trust) flow to the beneficiaries.
Now more than ever, though, you should talk with your financial advisor and estate planning attorney about whether or not it’s “worth it” to have your qualified accounts flow through your trust.
The big change for qualified accounts relating to trusts is the change to the “stretch rules.”
What Is A ‘Stretch’ When We’re Talking About Your IRA?
Before the SECURE Act, an IRA beneficiary could elect to ‘stretch’ his inheritance IRA distributions over his entire life expectancy. In other words, instead of taking a one-time lump-sum distribution, the beneficiary could stretch out the distributions. This ‘stretch’ carried tremendous income tax benefits. See, IRAs haven’t ever had income tax deducted, so the beneficiary would have to pay income tax as distributions are made. If the beneficiary takes a one-time lump-sum IRA distribution, then this sudden influx of income could create a hefty income tax bill. Spreading out the distributions meant that the IRA beneficiary could both spread out the income tax burden and minimize the overall amount of income tax.
Then came along the SECURE ACT.
Under the SECURE ACT, in most cases, the IRA beneficiary can no longer stretch out the IRA distributions for his entire life expectancy. Now, the IRA beneficiary can only stretch for ten years. In other words, the the IRA beneficiary must now withdraw the entire inherited IRA within ten years of the original IRA owner’s death.
Are There Exceptions to the 10-Year Stretch Limitation?
Like most governmental regulations (especially those dealing with tax!), we have a rule and then we have exceptions. The rule is that an inherited IRA must be totally withdrawn within ten years. What are the exceptions to the rule? It’s a little complicated.
The SECURE Act separates IRA beneficiaries into three types. The stretch rules differ for each type.
Type 1: Non-designated Beneficiaries
A “non-designated beneficiary” is a non-person entity, which includes charity beneficiaries and also some types of trusts. The rules regarding required distributions for these Non-Designated Beneficiaries are largely unchanged from the Pre-SECURE Act Rules. In short, non-designated beneficiaries must receive distributions of all the IRA contents within five years IF the original plan participant died before the “Required Beginning Date.” The Required Beginning Date is the date on which the original plan participant must have begun required minimum distributions from the IRA, which is often the plan participant’s 72nd birthday.
This so-called “Five-Year Rule” does not apply if the original plan participant died after his Required Beginning Date. If the original plan participant died after the Required Beginning Date, then the non-designated beneficiary must receive distributions of the inherited IRA funds over the course of original plan participant’s life expectancy.
Type 2: Eligible Designated Beneficiaries
Eligible Designated Beneficiaries are exempted from the perils of the new SECURE Act. In other words, if you are an eligible designated beneficiary, you can still ‘stretch’ your inheritance via a deceased person’s IRA. For these lucky individuals, it’s as if SECURE Act doesn’t even exist!
Who is an eligible designated beneficiary? It is a beneficiary designated by the original plan holder who is one of the following:
– The surviving legal spouse of the deceased person
– A “disabled” person as defined by Internal Revenue Code Section 72(m)(7)
– A “chronically ill” person as defined by Internal Revenue Code Section 7702B(c)(2)
– Anyone who is not more than 10 years younger than the deceased plan holder
Type 3: Non–Eligible Designated Beneficiaries
The non-eligible designated beneficiary is the class that gets walloped. In other words, this is the class that can no longer ‘stretch’.
The non-eligible designated beneficiary is any individual not described above in this article.
So, this is the BIG NEWS with the new SECURE Act… A ‘non-eligible designated beneficiary’ must withdraw all of the inherited IRA funds within 10 years of the original plan holder’s death. This is becoming known as the new “10-Year Rule.”
To ask a legal question or get legal help from Texas wills and Texas estate planning attorney Isaac Shutt, use the online contact form to the right or call (214) 302-8197. If you prefer to meet at the office in person, the attorneys will gladly offer a free consultation.
Visit www.ShuttLawFirm.com for more information on Texas estate planning documents, Texas revocable trusts, irrevocable trusts, a power of attorney or other estate planning document, contact Richardson Estate Planning Attorney Isaac Shutt at email@example.com.
Shutt Law Firm’s office is conveniently located just north of Dallas, Texas, and just South of Plano. The law office is near the intersection of highway 75 and Arapaho Road in Richardson, TX.
You can also call Shutt Law Firm at (214) 302-8197 for more information on the topic discussed in this article or to discuss a different legal matter.
Please consider the Shutt Law Firm if you want to know about how to get a trust in Texas, more about a Texas Last Will and Testament, or you need Dallas Estate Planning Attorneys serving Richardson, Plano, Allen, McKinney, Garland, Addison, Rockwall, TX, Collin County, Dallas County, or surrounding North Texas area.
DISCLAIMER: Nothing in this brief article constitutes legal advice. The information provided herein is merely provided in the spirit of education and is believed to be accurate as of the time it was originally prepared, and laws change. If you have a legal question, you should consult a lawyer for your specific legal situation. Further, nothing in this article shall be construed to have started an attorney-client relationship. No such relationship exists until both you and and an attorney at Shutt Law Firm sign an engagement letter.