This year, a new federal law went into effect that could have a significant impact on the estate plans of many retirees. Prior to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, individuals were permitted to pass their IRA funds to non-spouse beneficiaries, who were then allowed to stretch out their withdrawals over time. However, under the terms of the new changes, beneficiaries are required to withdraw funds from a qualified plan before a specific deadline. To learn more about how this new law could affect your own estate planning decisions, please contact a member of our dedicated estate planning legal team today.
Designating a Non-Spouse Beneficiary for IRA Funds
Before the recent amendments to the SECURE Act were enacted, retirees could choose to designate a non-spouse as the beneficiary of their IRA funds, who could then withdraw funds as they wished, essentially creating a lifetime income stream for the named beneficiaries. This, however, is no longer permitted under the terms of the new statute. Instead, non-spouses who have been designated as a person’s IRA beneficiary are required to withdraw all of the funds from that inherited qualified plan within 10 years of the original owner’s death.
There are a few important exceptions to this 10-year rule, which apply to:
● Assets left to a surviving spouse;
● Assets left to a minor child;
● Assets bequeathed to a disabled or chronically ill beneficiary; and
● Beneficiaries who are less than 10 years younger than the deceased.
In either case, the beneficiary does not have to abide by a set withdrawal schedule. Rather, he/she must deplete his/her IRA funds within 10 years of the decedent’s death.
Alternatives to IRAs
These changes could have a significant impact on estate planners who have left the bulk of their savings in individual retirement accounts, especially for those whose beneficiaries are high earners, as the distributions in question would be taxed as ordinary income at a much higher tax rate. Fortunately, there are alternative estate planning approaches to help those most affected by these changes. For instance, some testators may want to consider converting their IRAs into ROTH accounts, as a conversion could reduce the estate’s tax exposure.
A testator whose funds are primarily held in IRAs may also want to consider using distributions from an IRA to pay for a life insurance policy because the death benefits of these types of policies are not included when calculating a beneficiary’s income for tax purposes. Finally, testators could use IRA assets to fund a charitable remainder trust, thereby creating an income stream for their heirs with the remainder being sent to a charity and allowing the assets in the trust to grow tax free.
Schedule an Initial Consultation with a Chicagoland, IL Estate Planning Lawyer
To speak with an experienced estate planning attorney about alternatives to leaving IRA accounts to non-spouse beneficiaries, please call Orlowsky & Wilson, Ltd. Attorneys at Law at 847-325-5559 today.
