IRA Trusts the SECURE Act

Submitted by Richard Ernst on Mon, 2020-05-04 14:50

We recommended a husband ( 72 ) & wife ( 66 ) meet with an Elder Law Attorney to discuss the benefits of establishing a Revocable Living Trust.

The house will be re-titled to the Trust, & the Trust will become the benefactor ( Primary or Contingent ) to all Bank Accounts, Brokerage Accounts & Life Insurance Policies.

The attorney also recommended an IRA Trusts ( Accumulation language ) for the IRA’s ( husband has $ 800,000.00 & the wife has $ 200,000.00 ). With the SECURE Act’s new 10 years rule, are IRA Trusts still a popular planning tool?



Submitted by Alan - IRA critic on Mon, 2020-05-04 17:30

  • It depends on the objectives of the trusts. If the spouses leave their IRAs to each other, the surviving spouse can do the spousal rollover and continue to stretch the IRA over the Uniform Table life expectancy. Or they can convert to a Roth IRA, perhaps at a lower tax rate in their final year to file a joint return. If a qualified trust for the surviving spouse inherits, the RMDs will be much higher due to using Table I and the spouse’s individual remaining life expectancy. If RMDs are accumulated in the trust, they will be taxed at the much higher trust tax rates. If the trust fails qualification for any reason, the RMDs will be the same as if the estate inherited the IRA, being the 5 year rule for death prior to RBD, and the remaining LE of the decedent if death occurs after the RBD.  Once the last spouse passes, the 10 year rule will apply to the non spouse beneficiary. Note that the IRS still needs to issue guidance on several aspects of trust beneficiary RMDs under the Secure Act. This guidance may have been deferred due to pandemic issues. Unless there is a urgent element in this situation, perhaps the decision on the IRA beneficiary can wait for the IRS guidance.
  • Generally, the benefit of a trust beneficiary is creditor protection for the surviving spouse (including from spouses should the surviving spouse remarry), or control over distributions in cases where the surviving spouse may have spendthrift or dementia issues. These benefits may not be needed or may not justify the higher RMDs and tax rates incurred by not leaving the IRA to the surviving spouse outright.
  • The main negative effect of the Secure Act is that most non spouse trust beneficiaries will lose the LE stretch in favor of the 10 year rule, although some that qualify as “eligible designated beneficiaries” will still receive the stretch as before. 

 

Submitted by Bruce Steiner on Wed, 2020-05-06 21:27

  • While there’s some overlap, for the most part trusts and estates (which included estate planning and estate administration) and elder law (mainly Medicaid and guardianships) have become separate practice areas.  This matter would probably have been better for a trusts and estates lawyer.
  • Revocable trusts make sense in some cases and in some states (mainly California).  But they’re overhyped and oversold, and for most people in most states aren’t necessary, and tend to be a distraction.  Was there a particular reason for one in this case?
  • Our clients generally provide for their children in trust rather than outright.  That keeps the children’s inheritances out of their estates for estate tax purposes, and protects their inheritances from their creditors and spouses.  The same reason for leaving other assets in trust rather than outright apply to IRAs.

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