Sunday, February 09, 2020

Retirement Accounts and Conduit Trusts and SECURE Act. What Do I Need to Do???

The recent passage of the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) in December 2019 created some significant changes to retirement accounts.  One big change of SECURE resulted in changes to allowing what is commonly referred to as “stretch” IRA’s. Previously, beneficiaries such as children and grandchildren, were able to have funds withdrawn from an inherited retirement account over the rest of their expected life. That allowed younger beneficiaries to extend (or stretch) the IRA distributions over several years, or potentially decades for very young beneficiaries. The result was that the taxable income was spread over a long period of time that allowed the account to continue to grow (hopefully). With a few exceptions, the stretch IRA is no longer an option and funds from a traditional IRA/401k must be withdrawn within ten (10) years of your passing.

Many clients incorporated provisions in your estate plan that used the “conduit” trust as a way for your trustee to control those IRA/401k distributions for certain beneficiaries.  For example, if you had a young beneficiary or a beneficiary that had some concerns over financial management or financial maturity, you may have listed your trust (whether a revocable living trust or trust established under your Will) as the beneficiary of your IRA/401k with the intention of stretching those distributions out over many years.  To accomplish that goal, trust provisions provided the required “conduit trust” language.

Now, with the SECURE Act provisions (starting January 1, 2020), those same conduit trust provisions may result in some undesired results where instead of stretching distributions out, the most we can do is a ten year window.  

So what does this mean for you? My favorite answer: “it depends”. More specifically, it depends on your beneficiary designation on that retirement account and it depends on the personal situation with your beneficiaries.

If you have a trust named as a beneficiary of your IRA/401k, you should review your trust to determine if the “conduit trust” language is present in your trust and whether that is appropriate.  If you would like to set up a meeting to review your situation and your trust language, please feel free to contact our office to arrange a meeting.

Conversely, if your IRA/401k does NOT list a trust as a beneficiary, then it is not necessary to modify your trust. (Although it might be a good idea to review your estate plan regardless.) 

If you have minor beneficiaries, the conduit trust provisions can remain and we can still stretch those distributions out until they reach age eighteen, and then the new ten year withdrawal period starts once they reach age 18.

The first step is to check your beneficiary designation. You should have that information with your files, otherwise your financial planner or HR representative should be able to help you out. Then, if a trust is the beneficiary, the second step is to examine your estate plan documents (will or trust) to confirm the conduit trust language is present. If it is, the next step is to examine your beneficiary’s situation to determine if you are comfortable with that beneficiary getting access to all of those funds in that ten year window after your death.  

If you want to limit your beneficiary’s access for a longer period of time (e.g., beneficiary with creditor problems, marital concerns, addiction issues, etc.) we can still utilize a different structure to control those funds beyond a ten year window. However, changes to your plan will be necessary.

If you aren’t sure what if anything you need to do, or just want an excuse to come see me, we would be glad to visit with you about your current estate plan and any necessary changes for this issue or any other changes.

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