Stretch IRAs refer to an estate planning strategy that was utilized to extend the tax-deferred status of an inherited IRA when it passed to a non-spouse beneficiary. Stretched IRAs allowed for continued tax-deferred growth. The SECURE Act, which was passed by the Senate on December 19, 2019, however, will end stretch IRAs.
The most direct impact of this legislation is that it will change how IRAs are administered beginning January 1, 2020, by both eliminating the maximum age at which a person can make contributions to a traditional IRA. This change will also delay the starting date for required maximum distributions from age 70 and a half to 72. It is important for everyone who plans on utilizing an IRA to understand how the changes that will likely occur as a result of the SECURE Act.
Changing Landscapes
Before the SECURE Act, a designated beneficiary was able to receive distributions from an IRA over that beneficiary’s life. Designated beneficiaries include any individual who is designated by the IRA holder and includes trusts provided that certain conditions are satisfied. Other beneficiaries were often required to receive inherited benefits over a several-year period.
After the SECURE Act, however, a new category of “eligible designated beneficiaries” was created. An eligible designated beneficiary constitutes any one of the following categories:
- The surviving spouse
- A minor child of the IRA holder until the child reaches the age of majority
- A disabled individual
- A chronically ill person
- An individual who is not more than 10 years younger than the IRA Holder
For both eligible designated beneficiaries as well as non-designated beneficiaries, IRA laws have not changed. For any other designated beneficiary, the payment period from an inherited IRA is prohibited from exceeding 10 years from the date of the death of the IRA holder. This limitation holds even if the participant reached their required “beginning date” and have begun to take payments during their lifetime.
Consider Creating Types of Trusts
If you own a trust and would like the trust to qualify as a designated beneficiary, the SECURE Act requires the trust to fall under one of two types:
- Accumulation trusts. Trusts of this nature can both protect the beneficiary as well as protecting the trust from leakage. In exchange, there is a risk of higher income taxes being owed. Regardless of whether a trust qualifies as a designated beneficiary, funds are permitted to remain in the trust indefinitely after they have been distributed from the IRA.
- Conduit trusts. Conduit trusts require the trustee to immediately distribute to a beneficiary any IRA distributions received by the trust. Under previous law, a long stretch meant that the payout was relatively small and that an IRA would not be required to distribute principal until the beneficiary reached retirement age. Under the new laws, conduit trusts involving designated beneficiaries will force the entirety of an IRA to be paid to the beneficiary in as little as ten years. Consequently, these trusts are not a good option if a person wants to protect a beneficiary.
Speak with a Knowledgeable Estate Planning Attorney
Properly utilizing IRAs requires an understanding of complex estate planning laws. If you need the assistance of an experienced estate planning attorney, do not hesitate to contact Ettinger Estate Planning today to schedule a free case evaluation.