The Elimination of The Stretch IRA Impacts Estate Plans

By: Marty Bodnar, Estate Planning Attorney at Pear Sperling Eggan & Daniels, P.C.

Congress passed the Setting Every Community Up for Retirement Enhancement Act (“SECURE” Act or “the Act”) implementing a major change to retirement plans, effective January 1, 2020.

The Act expands the options for you to save for retirement, but in the process, it greatly impacts estate plans by eliminating the stretch IRA. 

The stretch IRA allowed a beneficiary of an inherited IRA to stretch the payout over his or her lifetime. Also, if you have a large IRA you could have named a trust for the benefit of a child or grandchild and spread the pay-out over 50 years or more depending upon the age of your child or grandchild. A client could also name a trust as beneficiary of a large IRA to keep the payout out of the hands of an imprudent beneficiary or spouse of a beneficiary due to possible divorce.

The Act eliminated this stretch IRA and replaced it with a 10-year pay-out period. This means a beneficiary can no longer stretch the pay-out over his or her lifetime. Instead, the entire IRA must be “emptied” by the end of the 10th year after death. Therefore, the IRA gets into the hands of child or grandchild or imprudent beneficiary much sooner than anticipated.

The Act still allows the stretch IRA for a surviving spouse, minor children, disabled and chronically ill individuals and anyone not more than 10 years younger than the IRA owner. Elimination of a stretch IRA for other such beneficiaries will require one to review their estate plan to avoid unintended consequences. 

You may want to look into other options for giving an IRA to beneficiaries, such as Roth conversions for tax-free inheritance, a charitable trust as a way to regain the stretch IRA and combining charity giving and the use of life insurance to give tax-free assets to your children.

If you’re interested in learning more about the SECURE Act and how it might impact your estate plan, please call Marty Bodnar, estate planning attorney in Ann Arbor at 734-665-4441 or email him at mbodnar@psedlaw.com.