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The Rules Have Changed, Directing Tax-Qualified Accounts to Heirs May Not Be the Best Idea

SECURE Act Limited “Stretch” Provisions for Inherited Assets
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed by Congress and signed into law in December 2019, included several notable provisions.[i] For high net-worth investors, the changed rules regarding the tax treatment of retirement assets means it may be time to review and adjust beneficiary designations for tax-qualified accounts. Effective January 1, 2020, the SECURE Act essentially eliminated the ability for individual designated beneficiaries of retirement plan assets to “stretch” their inherited assets, taking distributions over their own life expectancies and allowing funds to continue to grow tax-deferred during that time, subject to Required Minimum Distribution rules.[ii]

Narrow Definition of Eligible Designated Beneficiary
Under the new provisions, there is a new, narrowly-defined category of “eligible designated beneficiaries” (EDBs) who may take advantage of the ability to stretch distributions over the beneficiary’s lifetime.[iii] EDBs now include only the account owner’s spouse, certain disabled or chronically ill individuals, individuals not more than ten years younger than the account owner, and minor children of the account owner (but not grandchildren.) Beneficiaries who do not fall into one of these categories must now take their inherited assets (and pay taxes on them) no more than ten years after the original account owner’s death.[iv] And, for minor children named as beneficiaries who qualified as EDBs, once they reach the age of majority, the ten-year limitation will come into play for them as well. For investors who created and named conduit or “see-through” trusts as beneficiaries for their retirement accounts, these rule changes may necessitate revisiting estate plans, especially if the ultimate trust beneficiaries are not categorized as EDBs under the SECURE Act.

Using Tax-Qualified Assets in Charitable Planning
For an investor who intends to leave a portion of their estate to charitable beneficiaries, the SECURE Act’s changes provide another reason to revisit estate planning and beneficiary designations. Naming a non-charitable beneficiary of retirement plan assets means the beneficiary will be subject to potentially-accelerated taxation under the SECURE Act as discussed above due to the new ten-year rule, unless the beneficiary is an EDB.[v] In addition, naming non-charitable beneficiaries means the retirement account assets are also potentially subject to estate tax. Directing assets in tax-qualified accounts to one or more charitable beneficiaries instead of individuals, including public charities, private foundations, and potentially even donor-advised funds, may allow the estate to take advantage of charitable income and estate tax deductions. The charitable beneficiary will receive the full value of the gift, without being subject to taxation.[vi] And, your non-charitable beneficiaries’ tax obligations may be lessened in the process.[vii]

To learn more about the SECURE Act, review your beneficiary designations, and discuss potential charitable gifting and other planning strategies for your investment portfolio, contact your financial professional today.

Important Disclosures:
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.