The New Secure Act Not So Secure For Inherited IRAS

The new Secure Act recently signed by Trump will have an impact of tax increases on Inherited IRAs and took effect on January 1, 2020.

1. Who does it effect?
2. What does it mean?

Who does it effect?

The new tax legislation impacts non-spouse beneficiaries and Trusts which designate such individuals as beneficiaries. It also carves out an exception for minor or disabled beneficiaries as long as they are so determined. So for clarity, you will not be affected by the new law tax effect if you are any of the
following beneficiaries of an Inherited IRA:

(Continued from Establishing Trust Together Newsletter)

1. Spouse;
2. Minor beneficiaries, during minority;
3. Disabled beneficiaries, as long as you are determined as disabled;
4. Roth beneficiaries as their distributions are non-taxable.

What does the law mean?

ira new regulationsIt means that the stretch IRA for those beneficiaries is dead in the water, over, thing of the past, kaput. All beneficiaries affected MUST receive all of the inherited IRA within ten (10) years of the date of death of the owner of the IRA.
Previously we could stretch the IRA out over the life expectancy of the beneficiary. For example, a forty year-old child who received an Inherited IRA could stretch distributions in excess of forty years. As a result, less IRA was distributed annually, meaning less tax over the forty years. Under the new law, a forty year-old will have to receive the entire IRA fund by age fifty. This means more distribution over the ten year period resulting in more taxes at potentially a higher tax rate. If more of the IRA is distributed annually it is added to ordinary income. This additional ordinary income could push the recipient into a higher tax bracket.


What about IRA Trusts?

I have created IRA Trusts since I authored a book called Avoiding Tax Traps In Your IRA in the late 90s. The two main purposes of such Trusts are to:

1. Stretch IRAs to reduce taxation;
2. Provide Asset Protection and financial security from the beneficiaries’ creditors, lawsuits, divorces.

There are two types of IRA Trusts, Accumulation and Conduit. A client could have their distributions accumulated in the Trust for the beneficiaries education, first home purchase, financial security until they reached an age of financial sophistication, etc. The Trustee of the IRA Trust had discretion to use the accumulated funds for the benefits of the beneficiaries.
The Conduit arrangement required that minimum required distributions be distributed annually to the beneficiary. However, when done over the life expectancy of the beneficiary it provided for “stretch” treatment. Additionally, the beneficiary had no ability to accelerate or increase the distribution as only the Trustee held this authority. When children are named individually as beneficiaries, they have the authority to accelerate distributions and deplete the IRA which creates more taxation.

With the new law in effect, the IRA Trust still has its purposes, but the Trustee no longer has the ability to stretch the IRA over a beneficiary’s lifetime.



If you have created an IRA Trust in our office, we will need to amend the Trust to comport with new law. Also, we need to determine your current desires and objectives in applying the new law.

Please contact the office at (858) 792-0909 to arrange the appointment. Or if you have an interest in arranging an IRA Trust, I will be happy to meet with you to discuss how the Trust can be of benefit.

– Jack E. Stephens, J.D., LLM.