The Secure Act Explained | How Does the Secure Act Affects Legacy Estate Plan or Castle Trust?

How does the Secure Act affect legacy or castle trusts? And really what we’re getting at here is stretch rules.

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Episode Transcript

Building Legacy Inheritance Trust

We have in our office is three different types of estate plans. We have what we call a basic revocable living trust, and this is a trust that avoids probate, outright distributions to the beneficiaries, so it’s a great plan that avoids probate, we take care of the financial power of attorney, medical power of attorney, et cetera.

Our second level of planning is what we call our legacy estate plan, and this is where we build in what we call legacy inheritance trust. So whatever we’re leaving to the next generation is protected for their lifetime from divorces, lawsuits, creditor actions, bankruptcies.


Castle Plan

And then the third type of plan is what we call our castle plan. Castle plan avoids probate, protects the kids, but most importantly protects you from creditors, lawsuits, and most importantly long-term care costs.

So the question is, how does the Secure Act affect these types of trusts that build in the opportunity for lifetime of asset protection? Well, what the Secure Act did, and this passed December 20, 2019, which seems like a lifetime ago, right? We were doing workshops on the Secure Act in early January and February, and even into early March before the pandemic hit. Yeah, and it seems like a lifetime ago.

But what the Secure Act did is two things. First of all is it pushes back the RMD age, so the age you have to take out from your IRAs from 70 1/2, now it’s at 72. And the second thing that it did is that it said that if you inherit an IRA, not as a spouse but as a beneficiary, a non-spouse beneficiary, so a child or anyone else other than a spouse, instead of being able to stretch out the benefits over their lifetime, at most all the taxes would have to be paid within 10 years. So really what the Secure Act did is to a certain extent it killed off the stretch IRA. So now if you inherit an IRA you can only stretch it up to 10 years, okay? So prior to this you could stretch it out over your lifetime.


How Secure Act affecting Legacy and Castle Trust

And now the question is how does that affect legacy and castle trusts? So if we build in stretch out language inside of a trust, what does that mean? Well, it means that we can still stretch it to the full 10 years. So the Secure Act says that no matter whether you named a trust as a beneficiary, you name a child outright as a beneficiary, at most you can stretch it 10 years, okay? With the language that we build into these trusts we say that it still qualifies as a designated beneficiary, so you still get that full 10 year stretch. If we did include that language, then you would be stuck with a five-year stretch. So what the Secure Act did is no matter whether we name the trust as a beneficiary, or we name the beneficiary outright, at most they’re going to have a 10 year stretch, okay, which means that all the taxes have to be paid within 10 years. So that’s the Secure Act.


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