How Does the SECURE Act Affect the Tax Benefits of Trusts?

A man sits on a couch smiling at a woman who stands behind him with her arm on his shoulder; both appear happy in a bright living room.

Estate planning is a critical process for anyone looking to ensure that their assets are passed down to their heirs efficiently and with minimal tax implications. Trusts have long been a vital tool in this process, providing not only a way to manage assets but also to achieve significant tax benefits. However, with the passing of the SECURE Act in December 2019, there are important updates that affect how trusts function within the realm of estate planning.

Robert Turner of Turner Law explores the implications of the SECURE Act for trusts and how he can help you choose the best trusts for your estate planning needs.

The Importance of Trusts in Estate Planning

Trusts serve many valuable purposes in estate planning. They allow individuals to manage their assets during their lifetime and specify the distribution of those assets upon their death. Trusts can help avoid probate, offering a more streamlined process of transferring assets. They also provide privacy and can protect beneficiaries from creditors or legal disputes.

Moreover, certain types of trusts can offer significant tax advantages, such as charitable trusts or irrevocable life insurance trusts. By strategically using trusts, families can reduce estate taxes, ensuring more of their wealth remains intact for future generations.

The SECURE Act Explained

The SECURE (Setting Every Community Up for Retirement Enhancement) Act brought numerous changes to retirement savings and tax laws, particularly affecting inherited retirement accounts. Notably, one of the most significant changes was the elimination of the “stretch IRA” provision. Previously, beneficiaries of inherited IRAs could “stretch” the distributions over their own lifetimes, thus minimizing their tax burden. Under the SECURE Act, most non-spouse beneficiaries are now required to withdraw the entire amount of an inherited IRA within ten years of the account holder’s death.

This change is especially relevant for trusts that are designed to receive benefits from retirement accounts.

How the SECURE Act Affects the Tax Benefits of Certain Trusts

The SECURE Act has significant implications for various types of trusts that are commonly used in conjunction with retirement accounts.

  1. Revocable Living Trusts: These trusts allow individuals to maintain control over their assets during their lifetime. While they provide many benefits, any tax advantages typically associated with these trusts remain essentially unchanged post-SECURE Act. However, if an estate plan relied heavily on the stretch provision, it may need to be revisited.
  2. Conduit Trusts: This type of trust directs any inherited IRA distributions to be passed through directly to the beneficiary (the trust’s income recipient). With the SECURE Act, if these distributions can no longer be spread out over the beneficiary’s lifetime, the tax burden could become more significant in a single year, potentially pushing the beneficiary into a higher tax bracket.
  3. Accumulation Trusts: Unlike conduit trusts, accumulation trusts can retain IRA distributions within the trust itself. This can help delay taxes; however, the SECURE Act still mandates that distributions must be fully withdrawn within ten years. While it offers some flexibility, it’s crucial to plan carefully to mitigate the tax impact on the trust’s income.
  4. Charitable Remainder Trusts (CRT): The SECURE Act does not significantly change the structure or benefits of CRTs, which remain a powerful tax planning tool. These trusts allow for tax-deferred growth and can enable larger charitable donations while providing income to beneficiaries during their lifetime.
  5. Special Needs Trusts: The SECURE Act also impacts how inherited assets are handled for beneficiaries with disabilities. While the overall framework remains largely intact, it’s essential to navigate the rules carefully to ensure compliance and protection of benefits for the intended recipient.

Trust FAQs

What is the primary benefit of using a trust in estate planning?

Trusts provide control over asset management, help avoid probate, protect asset privacy and can reduce tax liabilities.

How does the SECURE Act impact beneficiaries of inherited IRAs?

Most beneficiaries must now withdraw the inherited IRA within ten years, increasing the potential tax burden in a single year.

What is a conduit trust?

It is a trust that directs inherited retirement account distributions to be immediately passed on to the beneficiary, which can impact their tax situation under the SECURE Act.

What are accumulation trusts?

These trusts retain IRA distributions within the trust, potentially delaying taxes, but must still comply with the SECURE Act’s ten-year withdrawal requirement.

Can trusts help with tax planning?

Yes, certain trusts can provide considerable tax advantages and asset protection, but strategies must be adjusted in light of the SECURE Act.

GA Estate Planning Trust Lawyer

The SECURE Act significantly altered the landscape of estate and tax planning. Individuals planning their estates should consider consulting with experienced estate planning trust attorney Robert Turner at Turner Law in Decatur, GA, who can guide them through these changes and help them develop a robust estate plan that protects their assets and minimizes tax liabilities. With over 25 years of legal experience and a deep understanding of tax law, Robert Turner is well-equipped to navigate these complexities and ensure that families in Georgia secure their legacies for future generations.

Posted on the behalf of Turner Law, LLC