New Laws – IRA Beneficiaries

There now is a maximum 10-year post death payout for most retirement funds.

Let me start with a Happy Children’s Fairytale: “Once upon a time, estate planners had a wonderful surprise gift for their clients. When the client showed up with a large IRA asset, an “ugly duckling” that came laden with indebtedness for unpaid income taxes, the planner could turn the ugly duckling into a swan called the “Stretch IRA”— deferring those taxes for decades after the client’s demise, with a life expectancy payout to the client’s children or grandchildren.”

And the client, the family, and the estate planner lived happily ever after!

Disappointingly, the rest of this Tip contains the story of how the happy ending was taken away by the SECURE (Secure Every Community Up for Retirement) Act. When this law passed in December 2019, it radically changed the estate planning client’s ability to effectively use his or her retirement benefits for their posterity long term. Except for a few types of beneficiaries, (listed below) the life expectancy payout is “gone with the wind,” replaced by a maximum 10-year post death payout period. (This information comes from Estate Planning for Retirement Benefits in a Post-SECURE Act World, by Natalie B. Choate. Esq.)

There are five categories of eligible designated beneficiaries who are exempt from the 10-year SECURE ACT rule:

  • A surviving spouse
  • A minor child until he is 18
  • A disabled person
  • A chronically ill person
  • A person who is not more than 10 years younger than the plan participant

The options for leaving benefits to the persons listed above vary, but there still may be the ability to do lifetime payouts for some of these beneficiaries. It is incumbent, then, when designating beneficiaries for IRAs, to understand the different payout rules for the different categories.

So what can you do? If you have an IRA, all pre-2020 plans need to be reviewed in light of the SECURE Act’s changes. Many of those plans will not work as intended.

In addition, it is recommended that you check your beneficiaries from your financial institutions annually, or if any significant life changes occur.

View our “Senior’s Guide to a Well-Planned Future” on our website! Packer Elder Care Law – with you for life!

Tom Packer is an Elder Law Attorney serving all Southeast Idaho. As part of his law practice, Tom offers Life Care Planning to deal with the challenges created by long-term illness, disability and incapacity. If you have a question about a Senior’s legal, financial or healthcare needs, please call us.

September 2021