The SECURE Act made sweeping changes to IRA distributions affecting estate plans for decedents dying on or after January 1, 2020.

What Changed?

The new law changed the required minimum distribution rules for IRAs. Under the old rules, a beneficiary could elect to treat the IRA as an inherited IRA and stretch distributions over that beneficiary’s lifetime. Under the new law, that stretch IRA is no longer an option for most beneficiaries.

In most circumstances, an adult child, for example, will be required to take all distributions from the IRA within 10 years of the death of the account owner. This means that long-term income tax deferral is no longer available. The assets will be taxed in the year they are withdrawn and again, all assets must be withdrawn within 10 years. However, required minimum distributions are not required during this period, and the beneficiary can choose when to take the distributions.

Who are “Qualified Designated Beneficiaries”?

“Qualified Designated Beneficiaries” are exempt from the 10 year rule. These include a surviving spouse, the account owner’s minor children, an individual that is chronically ill or disabled, or any individual who is not more than 10 years younger than the account owner.

The SECURE Act also changed the age when an account owner must begin taking required minimum distributions. The age was changed from 70 1/2 to 72.

These changes are important because many estate plans are based on the assumption that the IRA can be inherited over the beneficiary’s lifetime. Certain trusts such as conduit trusts may no longer be a good idea. For example, if you created a trust designed to pass all IRA distributions to the beneficiary, this trust will now be required to pay out the full amount to the beneficiary within 10 years. This can defeat the advantages for using a trust in the first place. If you name a non-spouse as beneficiary, you should take another look at your estate plan and see if it still accomplishes your objectives.