Question: I have heard that there are some changes in the laws with respect to individual retirement accounts that go into effect this new year. Can you describe them? And can you tell me how that will impact most of us?

Answer: The new year always brings in changes. While most news has been focused on the changes in state law classifying “gig economy” workers as employees rather than independent contractors, the estate planning world is contending with a new federal law that may cause some problems in some estate plans.

Congress overwhelmingly passed, and the president signed into law a few weeks ago, the “Setting Every Community Up for Retirement Enhancement Act” or “SECURE Act.” The Act makes many changes to tax-deferred retirement plans (IRA, 401(k), 403(b), and 457 plans). The law seeks to make tax-deferred retirement plans more accessible to smaller businesses, and it makes provisions for different types of financial products. But what most estate planners are concerned about is the Act’s significant changes to the rules regarding inherited tax-deferred retirement accounts or “inherited IRAs.”

At the death of the tax-deferred retirement account holder, the account is transferred pursuant to the account holder’s choices on the designated beneficiary form. The plan administrator (i.e. Charles Schwab, Fidelity, etc.) sends to each designated beneficiary a packet of papers asking how the designated beneficiary would like to receive his or her share. The options will usually include a “lump sum” or taking the account as an “inherited IRA.”

During the life of the account holder, withdrawals from an IRA are taxable to the recipient as income, and withdrawals for an inherited IRA beneficiary are taxable as income as well. Taking a lump sum distribution results in the entire sum being taxed as income to the beneficiary. Under the prior law, if the beneficiary took the account as an inherited IRA, the beneficiary was only required to take a required minimum distribution or “RMD” from the account pursuant to a schedule promulgated by the IRS.

Only the RMD would be taxed as income, and the remainder could continue to grow tax-free. Also, under the previous law, the RMDs could be “stretched” over the lifetime of an individual. This meant that any significant withdrawal, and the tax on that withdrawal, could be deferred to a time when the inherited IRA beneficiary was earning less from other sources and thus in a lower tax bracket (i.e. the beneficiary’s retirement years).

Now, under the SECURE Act, the inherited IRA beneficiary must draw down the entire account within 10 years of the account holder’s death, resulting in the payment of higher taxes. Unless the beneficiary, as described further below, qualifies for exclusion from the new law’s ten-year distribution provision, there will not be any annual RMDs. Simply put, the entire account must be distributed by the tenth year.

The law will result in a beneficiary paying higher income tax on the inherited account. Assuming that the average American will be in his or her 40s or 50s when the last parent passes away, the average American will be in his or her prime earning years during the time period when he or she must draw down the entire account.

The government is in search of revenue, and it has chosen those folks who are fortunate enough to receive a tax-deferred retirement account as inheritance to pay the bill. If you are more fortunate and inherit money outside of a retirement account, you will be pleased to know that the estate-tax exemption amount has increased to $11.58 million per person for 2020. We should all be so lucky.

The real headache will occur in some estate plans where the settlor of a trust has named the living trust as the beneficiary of an IRA. Typically, estate planners advise a surviving spouse to name his or her children as individual beneficiaries of a tax-deferred retirement account. But sometimes, a person may want to restrict a beneficiary’s access to the funds.

For example, a parent may seek to control the distribution of retirement assets to a spendthrift child. So, the answer was to have the settlor of the living trust designate the living trust as the beneficiary. The trust would be a “conduit” for the IRA distributions, and it would require that the successor trustee pay only the RMD to the beneficiary each year.

Following the terms of a living trust, a trustee, under today’s law, may not make any distributions of RMD, given that the SECURE Act does away with RMDs. Then in year 10, the trustee will be required to distribute the entirety of the account to the beneficiary, resulting in an enormous tax hit to the beneficiary.

The 10-year mandatory distribution period has some exceptions. It does not apply to a surviving spouse, those who are disabled or chronically ill, minor children, or those within 10 years of age of the decedent. But the new SECURE Act provisions will apply to most adult-age beneficiaries who are inheriting an account from a parent.

If this is all too confusing, this should stand as a reminder to review an estate plan with your attorney at least every five years, including your designated beneficiaries on any tax-deferred retirement account. If you know you have designated your living trust as a beneficiary, then you should certainly see your attorney sooner rather than later.

Making simple changes to an estate plan now could save beneficiaries from having to make costly modifications to the trust after death. Add it to your list of new year’s resolutions.

Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at

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