If you haven’t learned by now, the Setting Every Community Up for Retirement Enhancement Act (known as the “SECURE Act”) was signed into law on Dec. 20, 2019, and went into effect on Jan. 1, 2020. With bipartisan support, it is expected to generate about $15.7 billion in tax revenue over the next decade on the changes to the “Stretch” IRA and $16.4 billion overall, according to theCongressional Research Service.

This means that previous advice your attorney, accountant and financial adviser gave you is most likely outdated — or incorrect — and a revision will be needed. Those with IRA trusts will need to plan as soon as possible before the unexpected can — and will — go wrong.

Let’s take a look at some key points to address going forward and planning opportunities now that the SECURE Act is in force:

‘Stretch’ IRAs are eliminated, but there are exceptions

“Stretch IRAs” for years were a way of reducing the tax bill non-spouse beneficiaries pay when they inherit IRAs. These beneficiaries could stretch out their required minimum distributions (RMDs) over their lifetimes, taking smaller payments along the way, and thus paying less in taxes. That has now changed with the SECURE Act.

While it is true that “stretch” IRAs have been eliminated, this only applies to those not deemed “eligible designated beneficiaries.” Eligible designated beneficiaries, who can still stretch their RMDs, include:

• Spousal beneficiaries
• Beneficiaries not more than 10 years younger than the decedent
• Certain minor children of the original retirement account owner, but only until they reach the age of majority
• Disabled beneficiaries as defined by IRC Section 72(m)(7)
• Chronically ill beneficiaries as defined by IRC Section 7702B(c)(2) with limited exception

With beneficiaries who are not deemed eligible, the retirement accounts will have to be depleted by the 10th year after the account owner passes.

Removal of RMD stretch provisions will complicate certain types of trusts — known as conduit IRA trusts or “pass-through trusts” — drafted prior to this bill. Simply put, a conduit IRA trust without appropriate language holds back the beneficiary from making additional distributions and can cause a tax nightmare. Going forward, these trusts need to be aligned with current SECURE language that doesn’t restrict access to funds in order to take distributions in excess of the RMD.

For example, an individual age 69 leaves their $500,000 IRA to a conduit IRA trust with the beneficiary being a child age 29. Before the SECURE Act went into effect, RMDs would be based on the beneficiary’s life expectancy (which is 53.3 according to IRS Life Expectancy Tables). However, after Jan. 1, 2020, the 10-year rule is in place (unless they are an eligible designated beneficiary) and the beneficiary would have to deplete the IRA in 10 years or less. Since the conduit IRA trust is based on old language using life expectancy, the beneficiary will have smaller distributions in the first nine years but an enormous one in the last year.

Before the SECURE Act, Stretching Benefits Out

Let’s assume the balance was $500,000 on Dec. 31, 2019, and the account earns 3% each year. Here’s a breakdown of withdrawals and balances BEFORE the SECURE Act went into effect:

Those withdrawals would continue for years more, thanks to the stretch IRA provision the beneficiary enjoyed prior to the SECURE Act.

After the SECURE Act, a Big Tax Bomb in Year 10

And here is a breakdown of what this beneficiary’s account balances might look like if they inherited AFTER the SECURE Act went into effect. The beneficiary is now a year older and is still earning 3%, with his withdrawals looking somewhat similar … until Year 10. Here’s a breakdown after Jan. 1, 2020:

Although the beneficiary is one year older, the significant difference is the mandatory depletion of the IRA in Year 10.

Again, make sure the conduit trust has the appropriate language or use an accumulation trust to retain RMDs with possibly more flexibility. In my opinion, one of the most overlooked factors for beneficiaries is asset protection, with distributions subject to creditor’s claims.

Consider Roth conversions under current tax rates

Currently, our tax rates are at historic lows at least until the end of 2025. With that being said, those contemplating leaving sizable amounts of their retirement accounts to children or grandchildren should reconsider a Roth conversion.

While 37% is the highest tax rate in 2020, one should consider how a 10-year distribution can considerably increase a beneficiary’s tax bracket.