A new law means big changes for this common estate planning tool

| Apr 29, 2020 | Estate Planning, IRAs, Life Insurance

The rules for stretch IRAs have changed. That means if you’d hoped to use an IRA to pass your wealth down to future generations, you may need to revisit your estate plan.

The Secure Act, which was recently signed into law, places limits on retirement disbursements that mostly kill stretch IRAs. With just a few exceptions, beneficiaries now have just 10 years to empty any IRAs or 401(k) accounts they inherit. Previously, a beneficiary could elect to take distributions from an inherited IRA or 401(k) account over their own life expectancy.

How does this change your estate plan?

When you looked to the future and took stock of your assets, you might have realized you could afford to help more people than just your spouse and children. You might have seen an opportunity to strengthen your family’s future generations.

If so, you might have worked with an estate planner or financial advisor to stretch your retirement plan. By naming your grandchild or another young person as your beneficiary, you could shrink the RMD, the minimum amount your beneficiary would need to draw out of the account every year. That meant more money would remain in the account—to continue growing and enjoying some choice tax advantages.

But the new 10-year cap on disbursements effectively puts an end to this strategy. People who had planned to use stretch IRAs may now need to find alternate tactics.

What can you do instead?

Estate planning attorneys and other financial advisors had often recommended the use of stretch IRAs because they were among the best tools available. However, they weren’t the only options available to you. The remaining choices may not be as good, but with some solid planning, you should still be able to find an agreeable workaround.

Some of the better options include:

  • Converting your traditional IRA to a Roth IRA. Your beneficiaries will still need to drain the Roth IRA within 10 years, but they’ll be able to do so tax-free. The downside is that you’ll need to pay your taxes up front, albeit at a lower rate.
  • Use your IRA to feed a charitable trust. You can leave a charitable legacy. You may also be able to bypass the 10-year rule by naming your children or grandchildren as beneficiaries of the trust.
  • Life insurance. Certain life insurance policies may also allow you to avoid excess taxes as you seek to hand down your wealth. If you combine the insurance with a trust, you might also stretch the payments.

What best suits your needs?

Since the stretch IRA is no longer the tool it was, you want an alternative. An experienced estate planning attorney can help you identify the option that best helps you achieve your goals.

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