As important, because the account must be distributed over a 10-year period, it'll be taxed at higher rates than if the distributions were spread out over 30 years. This is because many beneficiaries will be in their peak earning years when taking the distributions and adding large taxable distributions from IRAs onto their current income might bump them into a higher tax bracket.
Many attorneys have used these trusts as a one-size-fits-all estate planning tool, often wrapping the IRA into the trust. The trusts fit some planning needs because they've allowed for favorable required minimum distribution rules in the past, as well as some creditor protections. According to the language in these trusts, beneficiaries receive an RMD each year.
But the RMD rules in the SECURE Act state that the beneficiary has to take a lump sum distribution by year 10 — there are no RMDs from years one to nine. Taking a lump sum distribution in one year would create a messy tax situation.
If the SECURE Act passes, RMD planning will need to be reviewed, estate plans updated, and some clients will need to buy more life insurance or do Roth conversions to help decrease taxes, experts said.
As Congressional staff worked through the weekend to put the finishing touches on the nearly $1.4 trillion spending bill for FY 2020--likely the last legislative vehicle for 2019-– prospects looked promising for the Setting Every Community Up for Retirement Enhancement (SECURE) Act to be attached to the package.
Brian Graff, CEO of the American Retirement Association, who was tracking the negotiations through the weekend, said the SECURE Act will help millions of Americans save and save more for retirement.