Each February when the President releases his Budget for the following year, Treasury releases the General Explanations of the Administration's Revenue Proposals (also known as the Greenbook). In this year’s Greenbook, the President has proposed significant changes for inherited IRAs.

Under current law, if an IRA owner passes away after reaching age 70 ½, a non-spouse beneficiary can extend required minimum distributions over the beneficiary’s lifetime. This is often referred to as a lifetime stretch. As a result, a popular planning strategy is to name young beneficiaries as the pay-on-death beneficiary of IRAs and allowing them to stretch out the required minimum distributions and tax deferred growth over their lifetimes. This can result in a significant tax-preferred way to grow and transfer wealth.

The downsides to the lifetime stretch have always been that minors cannot inherit and the lack of asset protection. However, the tax advantages of the lifetime stretch were usually enough to overlook the lack of asset protection.

However, the President’s proposal would limit the tax benefits of deferral by requiring non-spouse beneficiaries to take distributions over no more than five years.

If this change were to become law, then naming a trust as the designated beneficiary of an IRA may become a more popular planning technique. The trust not only preserves the asset for minors, but a properly prepared trust can also provide asset protection.

To learn more about estate tax planning strategies can help protect your family, visit our video tips page here.

Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker
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