By Libby Banks, the Law Office of Libby Banks, PLLC
A new law governing beneficiaries of your retirement accounts could create a tax disaster or result in large distributions to beneficiaries (like minors, young adults and irresponsible heirs) who are ill-equipped to manage the funds.
That law, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became effective January 1, 2020. This law may upset your estate plan because the Act requires most designated beneficiaries (other than spouses) to withdraw the entire balance of your retirement account within 10 years of inheriting the account.
For anyone who has their trust as the beneficiary of their retirement account, it is imperative to have a trust review and evaluate the options for their beneficiaries.
Under the old law, all beneficiaries of inherited retirement accounts could stretch out distributions over their individual life expectancy, meaning your younger beneficiaries would take smaller distributions usually over a long time period, resulting in lower taxes. Under the SECURE Act, most beneficiaries (not including spouses) must withdraw the entire IRA over a period of 10 years. That shorter 10-year time frame for taking distributions will result in the acceleration of income tax due.
Your old trust needs a review and a possible change because a trust created while the old law was in place took into account the ability to stretch retirement account distributions out over a beneficiary’s lifetime. With that option eliminated, that same helpful trust could now result in much higher taxes, and large distributions to the ultimate beneficiaries, which may not be what you want.
This change in law means that a proper analysis of your estate planning goals, and a review of your estate documents is needed to be sure you have properly planned for your beneficiaries.
Just as important, if you haven’t had a review of your estate plan in a while, you should make an appointment with an attorney to go over it. I recommend a review at least every three years. I’m happy to help! Just call our office at 602-375-6752 or schedule an appointment via our website: LibbyBanks.com/schedule-estate-planning-meeting.