The answer to this question may have changed over the last few years. The monumental changes to RMD’s(required minimum distributions) brought about by the 2019 Secure Act, have had considerable impact on the estate planning choices attorneys and their clients make, as the opportunity for those who inherit IRA’s to stretch out the required minimum distributions according to their life expectancies has been severely curtailed. The stretch provisions, previously available under the former law, are now only available to those defined as “designated individuals” which includes, the surviving spouse, a beneficiary who is disabled and a chronically ill individual.
Thus, most individuals, and most eligible trusts, will now be required to withdraw all of the assets of the inherited IRA by the 10th year following the death of the plan owner. Furthermore, when the law was originally introduced, planners had initially believed that the new law did not require any minimum distributions until the 10th and final year, when all of the assets of the plan would have to be distributed to the beneficiary.
Unfortunately, the IRS has recently released regulations providing that minimum distributions are in fact required each year. Obviously, these changes to the stretch provisions brought by the Secured Act regarding RMD‘s from retirement accounts will have a significant impact on estate planning and the choice of beneficiaries chosen for clients’ retirement plans, including the types of trusts which can and should be utilized. Accordingly, the income tax repercussions to beneficiaries of these plans brought about by the law changes must not be overlooked
Under the previous law, planners often preferred the use of conduit trusts, in which all of the income distributions from the IRA would be distributed to a beneficiary immediately upon receipt by the trustee. In a conduit trust, there is only one eligible beneficiary and the trust can’t accumulate any of the IRA distributions. Under the previous law, if all of the requirements for establishing a see-through conduit trust were established, the sole beneficiary of the trust would be considered a designated beneficiary and the life expectancies of remainder beneficiaries would not impact the ability of the primary beneficiary to stretch the IRA distributions according to his or her life expectancy. This was a benefit of using conduit trusts as opposed to accumulation trusts, where the life expectancy of the oldest countable beneficiary was used to calculate the time-table for distributions (thus shorter distribution period).
As this impediment to using accumulation trusts is no longer relevant, accumulation trusts may prove more attractive vis-a-vis conduit trusts, as they may afford more protection from creditors of a beneficiary as a result of the discretionary powers given to the trustee to distribute the income received from the IRA. The importance of creditor protection obviously becomes a greater priority with the condensed 10-year withdrawal periods under the Secure Act. Beneficiaries of conduit trusts with judgment problems will now be more vulnerable under the accelerated distribution periods Because of this, accumulation trusts may be utilized more often than conduit trusts in the future. Accumulation trusts, as before, are still required for a client who needs to utilize a special needs trust for a beneficiary, as a conduit trust’s mandatory distribution requirements would disqualify a recipient from receiving Medicaid/SSI benefits.
As a result of the Secure Act’s condensed IRA distribution periods, it may be appropriate for clients to re-examine the beneficiary choices they have previously made after considering not only the income tax consequences to the beneficiary, but also to the entire estate.
If you have any questions regarding your IRA or other estate plan matters, please contact our Fort Lauderdale or Boynton Beach office today for a free consultation.
Retirement Plan Fort Lauderdale and Boynton Beach
