SECURE Act and Estate Planning: What You Need to Know

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), signed into law in 2019, changed how retirement accounts are treated after the account holder’s death, significantly affecting estate planning strategies. One of the biggest changes relates to how beneficiaries inherit and distribute retirement accounts, such as IRAs, which can result in a more significant tax burden if not properly managed.

In this article, we’ll explain the changes brought by the SECURE Act and how Texan Wills and Trusts has developed solutions, including conduit trust language, to maximize the benefits for your heirs, specifically stretching inherited IRA distributions over the longest period available under the law.

Key Changes Under the SECURE Act

Prior to the SECURE Act, non-spouse beneficiaries of inherited retirement accounts were able to “stretch” required minimum distributions (RMDs) over their lifetimes, allowing retirement assets to continue growing tax-deferred. However, the SECURE Act now requires most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years of the original account holder’s death. This 10-year rule can significantly compress the timeline for distributing retirement account assets and may lead to higher taxes if withdrawals aren’t strategically managed.

While the 10-year rule applies to most beneficiaries, certain exceptions still allow some beneficiaries, like spouses or disabled individuals, to stretch distributions over a longer period. But for most heirs, navigating the new 10-year withdrawal rule is key to minimizing tax exposure.

The Importance of Conduit Trusts in Estate Planning

For individuals incorporating retirement accounts into their estate plan, the trust structure plays a crucial role in determining how and when beneficiaries receive the funds. Many trusts, especially those not updated to reflect the SECURE Act, only allow a 5-year stretch for IRA distributions. This can significantly reduce the time beneficiaries have to manage their inheritance and may lead to a faster depletion of assets, as well as a higher tax burden due to larger distributions over a shorter period.

In contrast, the Texan Estate Plan includes carefully crafted conduit trust language that enables your beneficiaries to take advantage of the full 10-year stretch allowed by the SECURE Act. This ensures that your beneficiaries can withdraw the inherited IRA funds over a longer period, allowing the assets to continue growing tax-deferred for up to 10 years, instead of the shorter 5-year timeline found in some trusts.

Managing Qualified Retirement Account Proceeds for Young Children

One of the most significant challenges for parents is planning how retirement assets will be managed if they pass away while their children are still minors. Because children under the age of majority cannot manage retirement accounts themselves, it’s crucial to have provisions in place to protect their inheritance.

The Texan Estate Plan includes specific language that addresses the unique needs of minor beneficiaries, ensuring that qualified retirement account proceeds are managed by a trusted guardian or trustee. This structure guarantees that your children’s inheritance is responsibly managed and used for their benefit—covering needs such as education, healthcare, and support—until they are old enough to manage the funds on their own.

Maximize Your Beneficiaries’ Inherited IRA Benefits

With the SECURE Act requiring most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years, many estate plans need updates to reflect these changes. Trusts that haven’t been updated may only allow for a 5-year withdrawal period, resulting in larger distributions that can significantly increase the beneficiary’s tax liability.

However, Texan Wills and Trusts offers plans that specifically include conduit trust language, which ensures beneficiaries can spread out the inherited IRA distributions over the full 10 years. This approach allows your heirs to take smaller, more tax-efficient distributions, preserving more of the retirement account’s value over time. It also enables the assets to continue growing tax-deferred for the maximum period allowed, helping beneficiaries make the most of their inheritance.

How the SECURE Act Affects Your Estate Plan

The changes brought by the SECURE Act mean it’s more important than ever to update your estate plan if you intend to leave retirement accounts to your heirs. Whether you’re leaving your assets to a spouse, children, or other beneficiaries, a properly structured plan can minimize taxes and protect your legacy for years to come.

At Texan Wills and Trusts, our estate plans are designed to incorporate the latest changes in the law, including the SECURE Act’s provisions. By including conduit trust language and provisions for managing retirement account proceeds for young children, our plans provide the flexibility and protection your family needs. Whether your goal is to ensure a smooth inheritance process for your loved ones or to maximize the tax-deferred growth of your retirement accounts, we have a solution tailored for you.