Trust Beneficiaries and the SECURE Act

In our newsletter from the first quarter of 2020 we covered some important provisions of the SECURE Act, the congressional measure passed in December 2019 that altered the way IRA’s receive contributions and require distributions.  For instance, the Act raised the beginning age for required minimum distributions (from 70 ½ to 72) and removed the age limit for contributing to an IRA (as long as you are still working). 

One of the aspects of the SECURE Act that didn’t garner as much attention as it should have was the altering of the distribution rules for IRA beneficiaries.  With all that 2020 has served up since, that oversight has only been exacerbated.  However, given the significant estate planning implications for many IRA owners, we want to take this opportunity to give the provisions their due.

Prior to the SECURE Act, beneficiaries could “stretch” distributions out over their remaining life expectancy, as long as they took an annual minimum distribution.  The new rules substantially alter the playing field, requiring beneficiaries to withdraw the inherited funds at a much faster rate.  Specifically, inherited retirement accounts must be fully distributed to the beneficiaries by the end of the 10th year following the account owner’s death, with limited exceptions for spouses, minor or disabled dependents and beneficiaries not more than 10 years younger than the account owner.

One of the more common beneficiary designations is to name a Trust as the receiving entity.  You may choose to name a Trust as your beneficiary for a number of reasons, including protecting the funds from creditors, divorce, a financially unreliable heir and/or bankruptcy.  These reasons remain valid, but the new rules surrounding Trust beneficiaries create a handful of potential pitfalls depending on the specific language used.

The rules are complex, and estate planning attorneys have been working diligently to review the standard language used in documents to avoid these unintended consequences.  If you have named a Trust as your beneficiary, we strongly encourage you to speak with your estate planning professional to confirm that your document is compatible with the SECURE Act and will still accomplish your wishes.

Even in the absence of a major piece of new legislation, it is good practice to review your beneficiary designations on a regular basis.  If you have any questions about your current beneficiary designations on your Buttonwood accounts and/or would like to make changes to your designations, please contact us and we’ll be happy to review/update your account(s).