• Attorney Andrew Steiger

Is Your IRA Inheritance SECURE?

A growing trend in estate planning is the importance of individual retirement accounts (IRAs) in the overall estate plan and maximizing the after-tax value of these accounts to heirs. These accounts are now one of the most valuable assets in a decedent's estate and are an important source of wealth for future generations. The recently enacted SECURE Act, passed into law and signed by President Trump in December of 2019, may impact who clients designate as the beneficiary of an IRA that may be inherited. Clients should review the impact of the new SECURE Act and determine if a change in beneficiaries is required.


Background


Prior to the passage of the Secure Act, a beneficiary of an IRA would be subject to certain required minimum distribution (RMD) rules under federal tax laws. Many practitioners would consider the prior law of inherited IRAs to be generous because the RMD factor would consider the beneficiary's expected lifespan when calculating the RMD of the beneficiary. The RMD factor calculation is based on age, so the younger the beneficiary the longer period of time and smaller initial distribution requirements of the inherited IRA. As a result, the federal taxable income inclusion for a beneficiary would be smaller the younger the beneficiary is. If the beneficiary were very young, like a minor child, the RMD would be very small, which would allow the benefit of tax deferred growth of the inherited IRA and the ability to maximize wealth accumulation. This strategy was often referred to as the "stretch IRA".


The SECURE Act Impact


The SECURE Act eliminates the ability to stretch out inherited IRA income inclusions over a period of many years, sometimes many decades or even an entire lifetime. The general rule is a beneficiary of an inherited IRA must include the full amount of the IRA in the beneficiary's taxable income within ten years of inheriting the IRA. There are a number of exceptions to the ten year rule, but generally the ability to "stretch" the IRA out indefinitely is lost for beneficiary's who are more than one generation below the decedent. If you have questions or would like a complimentary estate plan review in light of the recent passage of the SECURE Act, please contact Attorney Andrew M. Steiger at Steiger Tax Law.

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