Lawmakers recently upended a tax strategy for wealthy Americans who want their loved ones to inherit sizable retirement accounts.
Luckily, taxpayers have a workaround at their disposal that could help accomplish their goal.
“Your trust won’t work anymore the way you thought it did,” said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York. “This is an emergency planning situation.”
The Secure Act, which President Donald Trump signed into law in December, changed rules around the “stretch IRA.”
Prior rules let people who inherited an individual retirement account “stretch” withdrawals from the account over their lifetime.
Now, the money must come out within 10 years of the owner’s death. (There are a few exceptions, such as a surviving spouse.)
The new rules, which apply to any IRA whose owner died after 2019, are wreaking havoc on the financial plans of Americans with large retirement accounts.
One category of individuals affected by the change are those who name trusts as beneficiaries of their IRAs. Under this arrangement, a trust — rather than an individual — inherits the retirement account.
Trusts are typically used for estate planning. Since trusts let individuals specify how and when heirs can receive inherited money, they are useful for those who want control over their bequests (say, by preventing a drug-addicted or financially irresponsible child from getting control over an account immediately and blowing the money). Trusts also provide asset protection from creditors.