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IRA Financial Blog

Accumulation Trust to Replace Stretch IRA

accumulation trust

The SECURE Act may have eliminated the Stretch IRA, but IRA holders can still harness the “stretch” concept with the accumulation trust.

Death of the Stretch IRA

In late Dec. 2019, the SECURE Act legislation was passed as part of the Further Consolidated Appropriations of 2020. The SECURE Act, or Setting Every Community up for Retirement Enhancement, is the most important piece of retirement legislation in over ten years. Many of its provisions have positively impacted the retirement community, such as increasing the RMD age from age 70 1/2 to age 72. Furthermore, the SECURE Act has worked to make it easier and more affordable for small businesses to establish a 401(k) plan.

However, there is one provision that has IRA holders worked up: the elimination of the Stretch IRA.

Prior to the SECURE Act, upon death of an IRA holder, if the IRA is passed to a non-spouse beneficiary, such as a child, the non-spouse beneficiary was able to take annual RMDs based off of their life expectancy. The new rules instruct non-spouse beneficiaries to pay the entire account balance within ten years of death. This is regardless of whether death occurs before or after the required minimum distribution has begun.

The new rules are reshaping the tax and estate planning of many IRA holders. Prior to the SECURE Act, IRA holders would employ a trust as beneficiary of their IRA for tax and creditor protection. As a result, this would give the IRA holder more control over the distribution of his/her IRA funds.

The “Accumulation” Trust

Wealthy IRA owners have created a practice of naming a trust as the account beneficiary. Often called the “see-through” trust, the main advantage is that the IRA owners can stretch the IRA distributions over the life of a beneficiary as opposed to paying out the inherited IRA over five years.

In order to be treated as a “see-through” trust and qualify as a beneficiary, the trust must meet four specific requirements, as stated in the IRS Treasury Regulations. If the four requirements are met, the trust qualifies as IRA beneficiary and the RMDs associated with the inherited IRA can be stretched, based upon the life expectancy of the oldest trust beneficiary of the trust.

Accumulation Trust Strategy

With the accumulation trust, the IRA would be fully distributed to trust within ten years. When the trust receives the IRA funds, the trustee will then have greater control over how the trust funds are distributed. As a result, the stretch concept behind the Stretch IRA remains intact. However, there are no more tax advantages. All trust income on the former IRA funds would be subject to tax at the trust tax rate, which is 37%.

If you have a Roth IRA, the distributions should be tax-free to the trust beneficiary.


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