Newman Law Group

New legislation's impact on estate assets in retirement accounts

Families in California with considerable assets have multiple options when creating an estate plan. One of these is how Individual Retirement accounts (IRA) allow one to distribute the asset to one's heirs after one's death. The heirs are required to take a minimum distribution from the asset that is based on their life expectancy. A new law being considered, known as the Secure Act, would require that the estate assets held in the retirement account be distributed over 10 years.

Typically, taxes are paid on an IRA when the funds are withdrawn and if the proposed law passes the tax bill of the recipient could increase. Under current law, a 22-year-old who inherited a $1 million account would be required to take a minimum disbursement (RMD) of $164,000, or 1.64% of the value, in the first year. Taxes would be due on the disbursed value. At 40 years of age, the recipient would be required to take an RMD of only 2.32%. If the new law passes, the account will need to be fully disbursed by the time the recipient is 32 and this will have a far more significant impact on the tax liability of the recipient.

IRA accounts that are designed to benefit the recipient over a long period are known as stretch IRAs. While the new law may affect the long-term benefit to the recipient, there is one option that can help reduce the tax burden. A charitable remainder trust enables a person to bequest an IRA to a beneficiary for a period of time and then the remainder of the trust would go to a designated charity.

A person in California who is establishing a new plan or reviewing an existing one may wish to consult with an experienced estate planning attorney for information on how the new law would affect one's final wishes. There are steps that can be taken to protect estate assets. It is also worth noting that the new law would impact only non-spouse heirs.

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