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I was pleased to host IRA expert Ed Slott so you could hear his insights on how the SECURE Act works and, most importantly, the strategies you should consider for clients. What follows is a summary of what we learned, to include Ed’s recommendations.   


Many owners of large IRAs have utilized an estate planning strategy known as a “stretch IRA” in order to help heirs save taxes on inherited IRAs. With a stretch IRA, heirs could stretch the payout of inherited IRA funds out as long as they wanted — 50, 60 or even 70 years or longer. This allowed heirs to also stretch out the payment of income taxes for decades.

Unfortunately, legislation that was signed into law late last year has effectively killed stretch IRAs. The SECURE Act now requires that all funds from inherited IRAs be withdrawn by beneficiaries within 10 years of the account owner’s death, except when beneficiaries are exempt.

This provision became effective on January 1, 2020, so it applies to the IRAs of anyone who dies after this date. Original beneficiaries who inherited IRAs from account owners who died before this year can still utilize stretch IRAs — they are essentially grandfathered in. Once the original beneficiary dies, however, the new 10-year payout schedule will apply to successor beneficiaries.

Exempt Beneficiaries: Five Categories

The legislation creates five categories of beneficiaries who are exempt from the 10-year payout schedule:

  1. Surviving spouses
  2. Minor children
  3. Chronically ill individuals
  4. Disabled individuals
  5. Beneficiaries who are less than 10 years younger than the account owner

In reality, most people leave their IRAs to their surviving spouses and the new rules don’t apply to them. This means that surviving spouses can continue to reap the benefits of stretch IRAs. And these other categories are relatively rare. For example, if an account holder dies of natural causes in his 70s or 80s, he probably doesn’t have any minor children.

One important category of beneficiaries that isn’t exempt is grandchildren up to the age of majority. In most states the age of majority is 18, although it’s 21 in a few states. The age of majority is 26 for grandchildren who are still in school.

On the positive side, there are no longer any required minimum distributions (RMDs) for beneficiary withdrawals from inherited IRAs. Previously with stretch IRAs, a small amount had to be withdrawn from the account each year, though this could stretch out for decades. Now the only requirement is that the account balance be zero by the end of the 10th year after the original account owner’s death.


Who is Affected the Most?

Since most people leave their IRAs to their surviving spouses and the other exemption categories are fairly rare, this begs the question: Who will be affected the most by the elimination of stretch IRAs?

According to Ed, the answer is individuals who have very large balances in their IRAs, or what Ed calls XXL IRAs that are worth at least $1 million. This is because most of these account holders don’t need all of their IRA money to live comfortably in retirement and plan on leaving a large chunk of it to their heirs. These are the people who need to adjust their estate plans in light of the elimination of stretch IRAs — and to do so quickly.

Individuals with XXL IRAs usually have two main goals when it comes to passing on their accounts to heirs: They want to minimize taxes on beneficiaries, and they want to exert some level of post-death control over the funds. In other words, they want to ensure that minor children don’t blow through the money in just a few years, or that the money isn’t lost in a divorce or lawsuit.

This goal is usually met by placing the IRA in a conduit trust. However, traditional IRA funds held in the trust for 10 full years would now be taxed at very high trust tax rates, so Ed believes this strategy is no longer viable.

Five Viable Strategies

Ed identified five viable estate planning strategies for clients who will be affected by the elimination of stretch IRAs:

1. Reevaluate beneficiaries — For example, which beneficiary would have a longer payout schedule: a 25-year-old son or a 65-year-old wife? The son will be subject to the new 10-year payout schedule, but the wife can potentially stretch out the payout much longer.

2. Manage tax brackets — The idea here is for the original account owner to do everything possible to bring the balance of the IRA down during his or her lifetime to minimize the tax consequences on heirs. This is especially true while tax brackets are low between now and 2025.

3. Perform a Roth IRA conversion — The SECURE Act makes Roth IRA conversions much more valuable for individuals with XXL IRAs. It might be smart to perform a series of small annual conversions instead of converting the entire balance all at once — preferably before 2025 when the tax brackets are currently set to rise to pre-tax reform levels.

4. Utilize life insurance — The tax exemption for life insurance is the single biggest benefit in U.S. the tax code. Life insurance proceeds are tax-free to beneficiaries, so life insurance can replicate all the benefits of a stretch IRA and a conduit trust.

5. Utilize a charitable remainder trust (CRT) — This strategy is best for clients who are charitably inclined because once the beneficiary dies, whatever funds are remaining in the IRA will go to the designated charity. There is no payout to a successor beneficiary.

Ed’s Advice: Contact Affected Clients Now!

Given the drastic and immediate impact of the SECURE Act on estate planning strategies, it’s critical to reach out soon to clients who might be affected. Let them know that the new rules are in effect right now and they may need to adjust their estate plan in light of them.