Tax and Estate Planning Considerations for Retirement Accounts

After the SECURE Act passed, retirement account withdrawal rules changed dramatically.

Spouse’s can still stretch withdrawals or required minimum distributions (RMDs), and there are still some exceptions that allow extended withdrawal periods (e.g., minor or disabled children or individuals less than 10 years younger), but for the most part the question is whether you have a designation or non-designated beneficiary.

A non-designated beneficiary of a retirement account needs to withdraw within 5 years, whereas a designated beneficiary has 10 years to withdraw from the retirement account.

It’s important to note that those who fall under the 5 or 10 year rule do not need to take minimum distributions each year. In other words, the beneficiary could theoretically take a full withdrawal in year 5 or 10 depending on which category they fall into. The problem with that approach is you are likely to see a major tax hit since the withdrawal from a non-Roth tax-deferred account will be classified as ordinary income. In other words, talk to your tax accountant to determine the best way to time your withdrawals if you are a beneficiary under the new retirement account rules.

How does this apply to trusts?

First, the trust has to be a see-through trust. See-through trusts come in two flavors: conduit and accumulation. Conduit means that whatever withdrawal the trust receives from the retirement account must be paid out to the beneficiary in the same tax year. Accumulation means the money doesn’t have to be paid out in the same year (hence it may accumulate in trust), but the beneficiary has to be an identifiable human being (i.e., not a business entity or charity). 

So what does this mean for you?

Unless you have a blended family situation, most people opt to avoid putting their trust as the primary beneficiary and just keep their spouse (named directly) as the primary beneficiary in retirement accounts. If you have adult children and have no issue giving them the retirement account outright (in other words, if the adult child is financially mature, emotionally stable, no disability, etc.) then you are generally better off avoiding the hassle of naming the trust as the contingent beneficiary for their benefit and instead just name your adult children (in whatever proportions meet your subjective preferences - usually equally among them ). If your children are minors, have other financial issues/considerations, or if you are naming grandchildren as beneficiaries, then you will still generally want to name the trust as the beneficiary and make sure it has the see-through trust provision in there to get the max withdrawal period (10 years beginning at age of majority under current law).

If you have any questions about how to set up your retirement accounts for your own estate planning purposes, give me a call at 781 202 6368 or click here to schedule your free personal consultation.

I’m always happy to help,

Joseph M. Lento, J.D.

Your Local Estate Planning Attorney

www.PerennialEstatePlanning.com

477 Main Street

Stoneham, MA 02180