Minimum distributions are removed, though now there is a 10 year limitby Howard Hook, CFA, CPA is affiliated with the wealth management firm EKS Associates. Visit eksassociates.com.
Prior to the passing of the SECURE Act in December 2019, non-spouses who inherited an IRA or other retirement plan were required to take minimum distributions from the retirement plan annually. The minimum amount required was in part based on their age as of the December 31 following the date of death and the account value at that same date.
These minimum distributions were required annually for the rest of the life of the person inheriting the account. He or she could choose to take only the minimum each year, which meant that the likelihood was that for a period of time the account would continue to grow and get larger. They could also choose to take larger amounts if they wanted to.
Along came the SECURE Act, which changed the rules for many beneficiaries. Now most non-spouse beneficiaries no longer have to take a minimum amount each year. That’s the good news. However, they can no longer stretch the account out for their entire lifetime. Instead, the account must be completely liquidated by the tenth year following the year the original account owner died.
So now, many people are faced with questions on whether to take withdrawals each year or wait until the last year, or how much to take each year.
The Tax Burden
There are tax consequences to the above questions.
A second issue is for retirement accounts left in trust for one’s benefit. The trustee now is faced with those same questions. How much to take? When to take it? Unfortunately, the trustee is often a friend or family member, rather than a professional advisor, and may not be equipped to make these decisions. Trustees of course are held to a fiduciary standard when it comes to managing the trust assets and can be open to scrutiny if they do not make the correct decision or are not aware of the options.
I was doing some planning for a client who wanted to leave her large IRA assets in trust for her daughter. I raised the issue with her and her estate attorney that the trustee needed to be aware of the responsibility they would have in regards to the trust and the retirement account. What used to be mostly an administrative function prior to the SECURE Act, now involved much more planning and thought.
Ultimately, the client chose a trustee she thought would be well equipped to deal with the issue and the attorney built in some protections for the trustee including suggesting the use of an advisor for the trust.