In late December of 2019, Congress passed legislation known as Setting Every Community Up for Retirement Enhancement Act. The SECURE Act significantly changed how retirement accounts, including IRAs, will be handled after your death. As you might have anticipated, the legislation increased the tax burden on American families.
Under the law prior to this new legislation, many families established specific trusts that would be the recipient of their retirement plans following family members’ deaths. The purpose of these trusts was to allow for the most effective “stretch out” of the income tax deferral benefits of their retirement plans and reducing the total tax the family would pay as the retirement plan was withdrawn.
These trusts also provided significant protections for family members against the loss of the inheritance in the event of a divorce, attachment by their creditors, or being forced to spend the inheritance to pay for a catastrophic illness.
Unfortunately, the changes dictated by the SECURE Act can have the effect of causing this type of planning to increase the taxation your family will face. If you’ve taken the time to implement this very useful strategic tool, it is very important that you review and modify your plan to address the changes in the law.
Continuing to use a trust to receive your retirement plan assets remains an effective tool. The language contained in the trust, and how you implement the trust, simply needs to be adjusted to continue to provide the benefits you expect. Because of the nuances of the legal change, the trust can — once adjusted — reduce the taxation your family will face, and allow your family to benefit from the significant protections that leaving the assets in trust provide.
While many advisers see trusts as a barrier to the use and enjoyment of the assets by your family, other advisers understand how trusts can be an effective tool to allow your family to control, use and benefit from their inheritance, while reaping all of the tax advantages and protections available to them. This can be accomplished while your family retains all practical control over how the assets are managed and used. If your retirement account is a large portion of your assets, you should thoroughly investigate the tax advantages and protection benefits of leaving those assets in trust to the next generation.
If your advisers are telling you that leaving assets in trust to your family members is not an effective tool, you should consider seeking a second opinion. Your advisers may not be aware of the latest planning techniques and/or the advantages that they provide.
Dolan, an attorney, is the principal of Dolan & Associates P.C. in Brighton and Westminster, Colo. Learn more on his website, estateplansthatwork.com.