4. How will beneficiaries be taxed on inherited retirement accounts?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, P.L. 116-94, introduced significant changes that affect estate planning for retirement accounts. Beneficiary designations should be reviewed to be sure they reflect the intended income tax consequences, especially if the account is left to a trust. The income tax consequences and period over which minimum distributions must be taken may vary depending on the type of account, the age of the decedent, and the type of designated beneficiary (e.g., surviving spouse, trust, or charity).

The estate and income tax consequences of these retirement accounts can make them an ideal asset to leave to a charity if charitable planning is part of the overall estate plan. This shifts the income tax burden from both the estate and heirs to an entity not subject to income taxes.

Roth conversions have also become increasingly popular, as they allow the taxpayer to convert the account from a pretax account to an after-tax account, with the income tax liability for the conversion being borne by the taxpayer. This strategy avoids income tax consequences for the estate or beneficiary.

Planning point: Review existing estate plans to ensure wishes will still be fulfilled in light of recently enacted legislation, proposed legislation, and pending IRS regulations. Many planning strategies are available for taxpayers who hold retirement plan assets. Due to the rules’ complexity, it is important to work with a professional familiar with the law in this area.