How SECURE Act 2.0 Could Affect Your Estate Plan
The SECURE Act updated many rules governing how Americans save money for retirement, but it also altered some aspects of estate planning, too. Perhaps most notably, using IRAs as a vehicle to pass wealth onto beneficiaries became less attractive.
Before the SECURE Act, beneficiaries who inherited an IRA had the rest of their lives to withdraw the funds. Assets could be left in the IRA where they would continue to grow tax-deferred for the remainder of the beneficiary’s life—a very compelling benefit. The SECURE Act, however, eliminated this possibility for certain beneficiaries and stipulated that they would be required to withdraw the entire balance from their inherited IRA within 10 years of receiving it.
Withdrawing funds from an IRA can drastically affect a beneficiary’s tax bill, so timing those drawdowns suddenly became very important. Yet, the original SECURE Act was unclear about whether the 10-year payout rule required beneficiaries to receive a minimum distribution every year or whether they could receive lump sums on certain years while taking no distributions in others. Passed at the end of 2022, SECURE Act 2.0 clarified this issue and stipulated that beneficiaries must receive at least a minimum distribution from their inherited IRA each year and that they receive the full payout by the tenth year.
Leaving IRA assets outright versus in trust
To avoid the tax consequences that come with an inherited IRA, you should consider whether a trust is the right option for your estate plan. Many people assume—incorrectly—that trusts are only appropriate or necessary for the very wealthy. But this isn’t true. A trust offers many compelling features that make it suitable for a range of circumstances. With a trust, you can provide explicit instructions about when and how your assets will be distributed.
Assets in a trust are also shielded from creditors, so you can rest assured that the funds will remain protected in times of financial difficulty. Additionally, a trust enables you to centralize asset management, rather than spreading that function across multiple accounts and investment vehicles. These are just some of the reasons why you might opt to create a trust, and we encourage you to talk to your advisor specifically about how a trust could align with your needs and your goals.
Your estate plan is dynamic
The initial SECURE Act, as well as SECURE Act 2.0, ushered in many changes surrounding investment vehicles, wealth management, and estate planning. Even if you feel your estate plan is well settled, you should view the passage of these new laws as a catalyst or a reminder to revisit your estate plan with your advising team, including portfolio managers, estate planners, and tax accountants, and make sure it still meets your objectives.
If you’re a Truepoint client, you don’t need to coordinate with multiple offices and professionals to enact this review. Your entire team works side-by-side every day to make sure your plan is up to date and serving yours and your family’s needs.