Significant changes were made to the post-death required minimum distribution rules under the SECURE Act, which was signed into law on December 20, 2019. Under the new law, the general rule is that all IRA funds must be distributed to the beneficiary of the IRA within 10 years. There are several exceptions to this general rule; for example, a surviving spouse is not subject to the 10-year rule. The new law was designed to accelerate distributions from an inherited IRA, which has the effect of limiting income tax deferral opportunities previously available to IRA beneficiaries (and speeding up the recognition of taxable income).
The new rules regarding IRAs may significantly affect your estate plan. For example, if you named a conduit trust for the benefit of your child as the beneficiary of your IRA, the trust may now be required to pay out the IRA funds to your child much sooner than previously anticipated. For some individuals, the shortened distribution period may change their outlook regarding how the IRA funds should be owned. For example, an individual with a significant IRA may not be comfortable with the beneficiary receiving all IRA funds outright and free of trust within 10 years (rather than over the beneficiary’s life expectancy, which was allowed under prior law). In that case, the individual may want to direct the IRA to a trust for the beneficiary that will remain protected from creditor claims and divorce after the 10-year period.
The SECURE Act represents a significant change to the rules regarding your IRA. It is important that you understand the impact of the new laws on your estate plan and address any changes that are necessary to ensure that your documents continue to meet your estate planning goals.