Estate planning to address the Secure Act and its impact on IRAs

On Behalf of | Jul 8, 2021 | Estate Planning

For Northern Californians who are preparing or updating their estate plan, it is important to keep track of new laws that might impact their decisions. The obvious goal is to provide for loved ones in the future. That can be hindered or helped by changes that are made by lawmakers. Understanding laws such as the Secure Act of 2019 is imperative for those who are leaving an individual retirement account (IRA) to beneficiaries. From both perspectives, it is wise to know the details of the tax implications and what to do about it.

Secure Act of 2019 warrants different strategies in estate planning

Depending on the circumstances, some heirs who are receiving an IRA could receive less because the time for which they can make withdrawals has been reduced. Before the Secure Act, beneficiaries could “stretch” their distributions to last for their entire lives. This law, however, means that some beneficiaries need to exhaust the IRA that was inherited from the start of 2020 and it must be done within a decade from the time it was inherited. This is called the “10-year rule.” If they do not empty it, they could be obligated to pay fees for those distributions. Those who are well-off may be confronted with heftier taxes.

Strategies to effectively deal with the new law

There are people who will be obligated to adhere to the 10-year rule and those who can still stretch their withdrawals for their lifetime. Among those who can still extend the withdrawals are spouses, minor children, those who are disabled, those who are ill and beneficiaries of specific types of trusts. Others will need to clear the IRA in those 10 years or face the levies. Converting the IRA to a Roth IRA can be a useful strategy as the funds will still need to be removed in the 10-year period, but the inheritance will not be taxed. Beneficiaries can also take certain steps such as tactically splitting distributions based on need.

Estate plans may need modification based on circumstances

With estate planning, the goal will be to ensure the testator’s desires are achieved. That can be upended with legal changes. Being aware and alert to how changes like the Secure Act can warrant adjustments to an estate plan is important. Failure to adequately adapt could leave loved ones with unwanted challenges that neither the testator nor the beneficiaries expected. For assistance with creating and updating an estate plan, it is useful to have professional assistance throughout the process.