New Legislation Impacts Retirement Planning

Jeremiah H. Barlow

JD, Head of Family Wealth Services


With the SECURE Act now signed into law, you may want to review your estate plan, especially if you are leaving retirement assets behind.

Legislation Impacts on Retirement

With the SECURE Act now signed into law, it is critical to understand how this may impact your estate plan, especially if you have been using a “stretch” individual retirement account (IRA) strategy to pass on your retirement assets to your beneficiaries. Before the SECURE Act, beneficiaries who inherited retirement accounts could choose to take these distributions during their lifetime. The “stretch” strategy provided multi-generational planning opportunities. For example, if a grandparent left a retirement account for her grandchildren, her grandchildren presumably would have several decades in which to take these payouts.

The SECURE Act now requires that beneficiaries empty out all inherited retirement accounts within 10 years of the account owner’s death. There are no annual required minimum distributions (RMDs) so there is some flexibility on when your beneficiaries can take these distributions. Check with your advisor as there are exceptions to the 10-year rule for spouses, minor children, and chronically ill or disabled beneficiaries, as well as beneficiaries not more than 10 years younger than the account owner (often a significant other or sibling).


Reevaluate Revocable Trusts

Why is this change such a big deal? This law affects how we plan for the wealth transfer of retirement accounts to beneficiaries. Revocable trusts will need to be reviewed to ensure they do not produce unintended consequences. This is especially true for named beneficiaries on the retirement account. If you want to protect your beneficiaries from receiving outright distributions of retirement assets, such as if your beneficiary is a minor, spendthrift, works in a litigious profession (as a doctor, lawyer, engineer, real estate, etc.), or you have other reasons for protecting your retirement assets.

For example, revocable trusts with conduit provisions, meaning annual RMDs have to be immediately distributed to the trust beneficiary, will need to be reviewed. Through the lens of the new law, the trust may distribute the entire balance in one year (the 10th year), leaving your beneficiaries with potentially a large tax bill and loss of any asset protection.


Protect Assets with a Retirement Trust

A retirement trust is designed specifically to protect retirement assets for a beneficiary by navigating the nuanced retirement laws, such as the 10-year rule, and its various exceptions. At its core, a retirement trust allows a trustee to keep retirement assets in the trust. As a result, when the trustee receives distributions from a retirement account, they can determine when and how much of the funds are to be distributed to a beneficiary. This discretion allows a trustee to protect the assets when a beneficiary is going through a time of turmoil, such as a divorce, bankruptcy, or any other creditor issue.


Reduce the Tax Impact with a Charitable Trust

If you are less concerned about asset protection but want to reduce the negative tax impact from the 10-year rule, a charitable trust may work. A charitable trust is perfect for those who want to minimize taxes for their beneficiaries and provide for charity down the line. It allows the retirement assets to continue growing tax-deferred, even once the assets are distributed from the retirement account into the trust. Tax is paid only when the trust distributes income to the beneficiary (often a child or other non-charitable beneficiary). Essentially, the charitable trust creates the ability to regain the stretch IRA.

When does the charity come into play? Generally, the charity receives the balance of the trust assets when the initial, non-charitable beneficiary dies or at the end of a term (for example, 20 years from the account owner’s passing). The only requirement is that the trust is designed to leave 10 percent of the initial contribution to charity.

You can also give your retirement assets directly to charity upon your death. While this method achieves charitable giving and avoids taxation, it can result in non-charitable beneficiaries losing out on inheritance. You can provide for your other beneficiaries by utilizing life insurance to replace the retirement assets given to charity. This strategy is beneficial because the life insurance funds are income-tax-free, and they can be sheltered in a trust to protect the assets for your beneficiaries.


Utilize a Roth IRA for Wealth Transfer to Beneficiaries

Finally, a Roth IRA conversion is a powerful wealth-transfer tool, as it creates a tax-free bucket of inheritance for beneficiaries. While traditional retirement accounts are subject to income tax upon distribution, Roth IRA distributions are tax-free. A beneficiary inheriting a Roth IRA may still be subject to the 10-year rule, but the beneficiary will not have to pay taxes on any of the Roth distributions. Combining a Roth IRA with a retirement trust could create a tax-free, asset-protection vehicle that is perfect for beneficiaries.

The SECURE Act brought about significant changes to estate and trust planning. We encourage you to speak with your advisor about reviewing your wealth management plan to avoid any unintended consequences for your beneficiaries.

Visit our resource center to learn more about the significant retirement changes that may impact you and your financial plan.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
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