Estate Planning Alert: Beneficiary Designations Should Be Reviewed

By J. Grant Coleman
Legal Insights

IRA beneficiary descriptions being reviewed due to SECURE ActAt the end of last year the SECURE Act, which contained a number of changes applicable to retirement plans for both individuals and businesses, became law. Most of these changes were favorable, with one main exception, which was included to pay for the favorable changes. Under the SECURE Act, individuals inheriting IRAs or retirement accounts following December 31, 2019, are required to withdraw the entire balance of the account within ten years of the account owner’s death except for beneficiaries who are:

  • Spouse of the owner;
  • Minor child of the owner;
  • Disabled or chronically ill; or
  • An individual less than 10 years younger than the owner.

Previously, all individual beneficiaries could elect to withdraw the balance over their life expectancy. 
All beneficiary designations should be reviewed to ascertain the effect of this new requirement, but particular attention should be given in situations where a trust is the designated beneficiary. A common technique has been to establish a revocable trust (so-called “conduit” trust) and name the trust as designated beneficiary. Such a trust was eligible for the life expectancy distribution election and likewise provided for identical matching life expectancy distributions from the trust to its beneficiaries. Under the new law, such a trust generally will have to withdraw the entire balance of the account within ten years of the owner’s death and distribute all of its receipts from the account to its beneficiaries in the year of the withdrawal(s).

In light of these new rules, those with a trust listed as a beneficiary will need to determine if that arrangement is still the most favorable for their estate planning goals. It may make sense to change the beneficiary from the trust to an individual, or to amend the trust from a conduit trust to a trust which does not have a required withdrawal timeframe. Not surprisingly, these options will have different income tax ramifications which should be considered carefully.

If you have any questions regarding this issue, please contact me.

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