Your Inherited IRA Just Got Nerfed

Every few years the federal government passes last-minute legislation that totally messes up your estate plan. On December 20, 2019 President Trump signed Congress’s “Setting Every Community Up for Retirement Enhancement Act of 2019” into law. On top of the fact the government paid a 12 year old to sell the rights to his treehouse password in order to create a nitwitty acronym, the “SECURE Act” makes radical changes to how your post-mortem beneficiaries receive your retirement plans that might actually make you feel less secure.

When your parent, family or friend dies and leaves you their IRA account you use to receive an “Inherited IRA”, meaning the original owner’s name remained on the account, but the account was change to be for your benefit [“F.B.O.”]. That benefit was that you used to be able to “stretch” distributions from the Inherited IRA over the span of your life expectancy, much like you do when you take required minimum distributions from your own IRA. This allowed you to take relatively small distributions on a set timescale, and defer the remaining distributions to slowly be metered out the rest of your life so you only had to pay nominal income taxes.

Well Merry Freakin Christmas elves, because that’s now gone. You now must take out any funds from an Inherited IRA over the span of 10 years. White the benefit is that you can choose which years to take this out (I.e. all in on year, gradually over 10 years, whatever, as long as it is within 10 years), this means that you will be withdrawing more taxable money on average than you would have under the stretch rules. In addition, since most parents still pass away right as their children are at their peak earning years, your 10-year window will likely take place right as you are already paying the highest income taxes of your life.

This is also problematic for trusts for minors, spendthrifts and drug addicts. You used to be able to have small stretch distributions deposited into trusts where the funds would be protected from the wayward beneficiary. This is still permissible. However, irrevocable trusts pay income taxes at a dramatically higher rate than individuals do, meaning the $500,000 Inherited IRA for your granddaughter that used to be distributable slowly at low income tax rates will now pay the max 37% income tax rate almost every year for a 10 year period. So (basically) everyone who has an IRA “see-through provision” in their Will or Trust just had that aspect of the trust blotted out of existence, so make sure to call your estate attorney and give him some Holiday Cheer when he informs you your documents need to be redrafted and amended.

Lastly, while the age for initial RMDs has now gone up from 70 ½ years old to 72 (whippedy dippedy doo), ostensibly based on the fact people live forever now so we may as well not force them to withdraw their life savings at a young age, the actual percent of the account that must be withdrawn remains based on the same life expectancy that your great grandfather had to withdraw finds.

I would think that the 10-year window may benefit people who are at the right age and smart enough to work with an accountant and financial planner who can crunch out the most-efficient distribution amounts each year, but for most people the SECURE Act is a tax liability, a detriment to your control and protection of loved ones, and yet another year-end surprise that should make your estate attorney a bit more wealthy.

And so, on behalf of myself and my fellow Estate Attorneys: Happy New Year, may you have as profitable a 2020 as we will!




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