Do Your IRA Beneficiaries Align with the SECURE Act?

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KS and MO Attorney Kyle E Krull

Written by Kyle Krull

Attorney & Counsellor at Law Kyle Krull is president of the Law Offices of Kyle E. Krull, P.A., an Estate Planning Law Firm located in Overland Park, KS. Estate Planning Attorney Kyle Krull has provided continuing education instruction to attorneys, accountants, and financial professionals at local, state, and national programs.

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POSTED ON: April 16, 2024

The SECURE Act took away the option for a lifetime stretch IRA in estate planning.

The SECURE Act changed how inherited IRAs are handled.

As an estate planning attorney admitted to practice in Kansas and Missouri for over three decades, I have witnessed how many legislative changes have affected my clients.

Understanding the legal landscape at the federal and state levels is a critical component of my work in helping members of my "client" family protect everything they have and everyone they love.

One of the most significant recent changes to the estate planning landscape occurred in 2019, with the passage of the "Setting Every Community Up for Retirement Enhancement" Act of 2019, otherwise known as the SECURE Act.

As discussed in a recent Think Advisor article titled "9 Things to Know About IRA Beneficiaries Under the Secure Act," the law altered tax and withdrawal rules for inherited IRAs.

Specifically, it ended the lifetime "stretch" for IRAs.

What does this mean?

Unless the beneficiary was a spouse or fell into another specific category outlined by the legislation, all funds from IRAs inherited in 2020 or later would have to be emptied within ten years.

The legislation initially left room for interpretation regarding the distribution rule.

Experts interpreted this as giving allowances for beneficiaries to withdraw as much or as little as they wanted over the ten years, as long as the money was drained at the end of ten years.

The IRS issued regulations in 2022 requiring minimum distributions from accounts throughout the ten years.

Because the regulation was delayed, the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023.

Accounts inherited through 2022 were subject to this waiving of RMDs.

The SECURE Act changed the rules governing inherited IRAs.

Surviving spouses have the most options for inherited IRAs under the SECURE Act.

How does the SECURE Act Handle Charitable Entities and Non-Qualified Trusts as Beneficiaries?

These entities must make withdrawals dependent on the decedent's age at death.

If the owner of the traditional IRA dies before the age for required minimum distributions, the funds must be withdrawn within five years of the owner's death.

If this IRA owner died at or after the age of required minimum distributions, withdrawals must be made according to the original owner's single life expectancy.

Estate planning attorneys can provide directions for reducing penalties or avoiding unexpected taxes.

What Options do Surviving Spouses have Under the SECURE Act?

Surviving spouses have the most flexibility when inheriting an IRA.

One option is to make withdrawals according to the solo beneficiary framework.

Another option is to elect to take a spousal rollover.

The surviving spouse can also use life expectancy numbers in distributions or take a single lump-sum distribution.

Although these options are available, they are not all equally beneficial.

Surviving spouses should evaluate their needs and circumstances to determine the best option.

For example, the spousal rollover option is only available if the spouse is the sole beneficiary of the IRA.

By transferring the funds into a new or existing IRA, the spouse will be able to have these funds continue to grow.

If the surviving spouse is younger than 59 ½, the spouse will be subject to regular IRA distribution rules.

When a surviving spouse is more than ten years younger than the original IRA owner, the spouse will have to use the IRS joint and last survivor table.

There will be no 10 percent early distribution penalty if they withdraw funds.

For this to apply, the account must have the deceased owner's name to qualify it as a "beneficiary" or "inherited" IRA.

What Should Minor Beneficiaries Expect?

The beneficiary will be considered a minor for inherited IRAs until age 21.

Minors who inherit can only be the children of the original owner.

This excludes nieces, nephews, grandchildren, or a family friend.

Once minor beneficiaries turn 21, they must withdraw the funds within ten years.

How are IRAs Handled if Inherited by a Disabled or Chronically Ill Beneficiary?

These individuals are subject to separate rules if they have a condition rendering them unable to live a "normal" life.

By definition, "normal" life involves the ability to work or accomplish two activities of daily life.

This disability or condition must also be expected to either result in death or have a long and indefinite duration.

Can Trust Inherit IRAs Under the SECURE Act?

Do not automatically assume you can put IRA assets into a trust.

Trusts cannot own IRAs while the original owner is still alive.

Additionally, certain trusts will not qualify as non-eligible or eligible designated beneficiaries.

When making plans for your IRA, work with an experienced estate planning attorney to ensure they align with your goals and meet current legislation and regulations.

This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.

Reference: Think Advisor (March 11, 2024) "9 Things to Know About IRA Beneficiaries Under the Secure Act"

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