June 25, 2025

Retirement Accounts and Trusts

16 minutes

In this episode, Angela discusses the implications of the SECURE Act and its amendments on retirement accounts, particularly when trusts are named as beneficiaries. She emphasizes the importance of reviewing trusts written before July 2024 to ensure compliance with the IRS's final RMD regulations and to avoid unintended tax consequences. The episode aims to educate listeners on the complexities of tax laws and the need for professional guidance in estate planning.

Key Takeaways 💡

Naming a trust as a beneficiary of a retirement account can be beneficial for several reasons, such as managing inheritances for underage children, protecting assets from spendthrift heirs, creditors, or divorces, and ensuring that assets are distributed according to your wishes even if your heirs predecease their spouses or face financial difficulties.

Updating an estate plan without updating the titling of assets and beneficiary designations can lead to unintended consequences, as retirement accounts are contract property that are paid out per their beneficiary designation; therefore, integrating trust updates with beneficiary designations can simplify estate planning and ensure that assets are distributed according to your wishes.

The IRS released its final RMD regulations on the Secure Act 2.0 of 2022 and Secure Act of 2019 in July 2024, which requires a review of trusts named as beneficiaries of IRAs, and it is important to be aware of these rules to avoid potential tax implications and ensure compliance with the latest regulations.

The SECURE Act eliminated the ability to stretch inherited IRAs over the beneficiary's life expectancy, mandating that the account be fully distributed within 10 years, which can result in significant tax implications for beneficiaries, especially those with high incomes, and there are still planning strategies available to mitigate these tax consequences.

If an IRA is left to an estate, a charity, or certain trusts, the distribution timeframe is reduced to five years, which can significantly increase the tax burden on the beneficiaries, and this highlights the importance of carefully considering beneficiary designations and trust language to avoid unintended tax consequences.

To qualify for the more favorable 10-year distribution rule, a see-through trust must allow the trustee to identify the beneficiary to the IRS, treating them as if they inherited the IRA outright, and the trust must also contain language allowing for the division of subtrusts before the grantor's death and specifically state the percentage of the retirement account allocated to each subtrust.

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