How SECURE 2.0 Changes Your NY Estate Plan
For decades, retirement accounts like IRAs and 401(k)s have become the primary savings vehicle for many New Yorkers, often representing their largest asset aside from their home. For just as long, the rules governing how these assets were passed to the next generation were relatively stable. That stability has been completely upended. The passage of the original SECURE Act in 2019, followed by the comprehensive SECURE Act 2.0 in late 2022, represents the most significant legislative overhaul of retirement and estate planning in a generation.
As an attorney with over 30 years of experience, I can state unequivocally: if your estate plan was created before these acts and it involves leaving retirement accounts to your loved ones, it is dangerously obsolete. The strategies that were once the gold standard for protecting inherited IRAs are now, in many cases, ticking time bombs that could lead to massive, unexpected tax bills for your beneficiaries. The fundamental assumption that your heirs could “stretch” distributions over their lifetimes is, for most people, no longer true.
At Morgan Legal Group, we are at the forefront of interpreting these complex new federal laws and applying them to the specific landscape of New York estate planning. This guide is designed for New Yorkers who are grappling with what these changes mean for their hard-earned retirement savings. We will break down the new rules, explain the profound consequences, and outline the modern strategies required to protect your legacy in this new era. To assess how these laws impact your specific plan, we urge you to contact our firm for a review.
Part 1: The Death of the “Stretch” IRA – The Game-Changing 10-Year Rule
The single most dramatic change introduced by the SECURE Act was the elimination of the “stretch IRA” for most beneficiaries. This change fundamentally alters the transfer of generational wealth in America and requires a complete rethinking of how we plan for our retirement accounts.
The Old World: Life Expectancy Payouts
Before this legislation, most non-spouse beneficiaries who inherited a retirement account could take distributions over their own life expectancy. A 30-year-old child inheriting an IRA could “stretch” the withdrawals—and the tax deferral on the account’s growth—over 50+ years. This was an incredibly powerful tool for building generational wealth. The account could continue to grow tax-deferred for decades, with only small Required Minimum Distributions (RMDs) taken out each year.
The New World: The 10-Year Rule
The SECURE Act replaced this system with a blunt instrument: the “10-Year Rule.” This new general rule mandates that most designated beneficiaries must withdraw the *entire balance* of the inherited retirement account by the end of the tenth year following the original account owner’s death. There are no annual RMDs within this 10-year period; the only requirement is that the account be empty by December 31st of that tenth year.
The Expensive Consequences for Your Heirs
This accelerated payout has severe financial consequences that your old estate plan is likely not designed to handle.
- Massive Tax Bills: The previous system allowed beneficiaries to spread their income tax liability over their lifetime. The 10-Year Rule forces a “bunching” of this taxable income into a much shorter window. This can easily push your children or other heirs into their peak earning years’ highest marginal income tax brackets, causing a significant portion of the inheritance to be lost to taxes.
- Loss of Tax-Deferred Growth: The magic of the stretch IRA was its long-term, tax-deferred compounding. By forcing a full withdrawal in just 10 years, the law eliminates decades of potential growth, significantly reducing the ultimate value of the inheritance.
The planning implication for 2025 is stark: any plan that assumes a life expectancy payout for your children is built on a foundation that no longer exists. New strategies are required to manage this accelerated timeline and its tax consequences.
Part 2: The Exceptions – Who Are “Eligible Designated Beneficiaries”?
While the 10-Year Rule is the new general standard, Congress created a special class of beneficiaries who are exempt and can still use a life expectancy payout. These are known as “Eligible Designated Beneficiaries” (EDBs). Identifying whether your heirs fall into this category is now a critical first step in any modern estate plan involving retirement assets.
Deep Dive into the Five EDB Categories
There are five types of individuals who qualify as EDBs:
- The Surviving Spouse: Spouses continue to have the most favorable options, including the ability to roll over an inherited IRA into their own IRA, treating it as their own and deferring distributions until their own retirement.
- Minor Children of the Account Owner: A minor child can take distributions based on their life expectancy. However, this is a temporary exception. The moment the child reaches the “age of majority” (which is age 21 for these purposes, regardless of state law), the 10-year clock begins to tick. This requires very specific planning to manage the transition.
- Disabled Individuals: An individual who is disabled, according to the strict definitions provided by the IRS, can take distributions over their life expectancy. This is a powerful exception that makes specialized trust planning essential.
- Chronically Ill Individuals: Similar to disabled individuals, those who are certified as chronically ill can also benefit from a life expectancy stretch.
- Individuals Not More Than 10 Years Younger than the Account Owner: This typically applies to a sibling or a partner who is close in age. They can also use their own life expectancy.
If your beneficiary does not fall into one of these five categories, they are subject to the 10-Year Rule. This includes adult children, grandchildren (if their parent is still alive), and other relatives.
Part 3: The Crisis for “Conduit” Trusts – Why Your Old Trust May Fail
For years, a primary strategy for protecting inherited IRAs was to name a trust as the beneficiary. Specifically, attorneys used “conduit” or “pass-through” trusts. The SECURE Act has turned these once-brilliant tools into potential disasters.
The Old Strategy: How Conduit Trusts Worked
A conduit trust was designed to receive the annual Required Minimum Distribution (RMD) from the inherited IRA and immediately pass it out to the trust beneficiary (e.g., your child). This allowed the bulk of the IRA to remain protected within the IRA, growing tax-deferred, while the child received a small, manageable annual payout. It was the perfect way to “stretch” the IRA while protecting the principal from the beneficiary’s creditors or poor spending habits.
The New Problem: The Conduit Trust and the 10-Year Rule
The 10-Year Rule creates a catastrophic failure point for a conduit trust. For most beneficiaries subject to the rule, there are no annual RMDs. The only requirement is that the account be empty in year 10. The legal terms of a conduit trust state that it only distributes what it receives from the IRA. This means the trust could receive *nothing* for nine years. Then, in the tenth year, the entire IRA balance must be withdrawn and, per the trust’s mandatory distribution terms, be paid out in one massive, unprotected lump sum to the beneficiary.
This outcome completely defeats the purpose of the trust, exposes the entire inheritance to the beneficiary’s creditors, and triggers a monumental tax bill. This is a critical issue for anyone in New York with an older trust named as an IRA beneficiary.
The 2025 Planning Solution: Shifting to “Accumulation” Trusts
The modern solution is to use an “Accumulation Trust.” Unlike a conduit trust, an accumulation trust can receive distributions from the inherited IRA and *accumulate* them inside the trust. The trustee can withdraw the entire IRA balance over the 10-year period, but then hold and manage those assets according to the long-term protective rules you established. Distributions to the beneficiary can be made at the trustee’s discretion over the beneficiary’s entire lifetime.
This strategy provides the asset protection that the conduit trust has lost. However, it requires careful planning, as income retained in the trust is taxed at highly compressed trust tax rates. A sophisticated analysis is needed to balance asset protection with tax efficiency. Our team of experts in wills and trusts can model these outcomes for you.
Part 4: Key Provisions from SECURE 2.0 Affecting Your 2025-2026 Plan
The SECURE Act 2.0 went far beyond the inherited IRA rules, introducing dozens of provisions that create new planning opportunities.
- New RMD Age: The age for beginning Required Minimum Distributions has been increased to 73 and will rise to 75 in 2033. This allows your retirement funds to grow tax-deferred for longer.
- 529 Plan to Roth IRA Rollovers: Starting in 2024, a new provision allows beneficiaries with leftover funds in a 529 college savings plan to roll over up to $35,000 (lifetime limit) into a Roth IRA, tax- and penalty-free, subject to certain conditions. This is a powerful new tool to give your children or grandchildren a head start on retirement savings.
- Enhanced Charitable Giving: The rules for making Qualified Charitable Distributions (QCDs) from an IRA have been expanded, allowing for new strategies to fulfill your philanthropic goals while meeting your RMD requirements.
- The Importance of Special Needs Trusts: Since a disabled individual is an EDB, using a properly drafted Special Needs Trust as the beneficiary of a retirement account is now more critical than ever. It allows the funds to be paid out over the beneficiary’s lifetime for their care without disqualifying them from essential government benefits. This is a core focus of our elder law practice.
A consultation with an attorney like Russel Morgan can help you integrate these new rules into your overall financial and estate plan.
Conclusion: The Laws Have Changed. Has Your Plan?
The landscape for retirement and estate planning has been fundamentally reshaped. The strategies that worked for your parents, or even the ones you put in place just a few years ago, are likely no longer effective. An estate plan that does not specifically account for the 10-Year Rule, the nuances of Eligible Designated Beneficiaries, and the new dynamics of trust planning is a plan that is poised to fail your heirs.
As we approach 2026, the need to review and update your plan is not just advisable; it is urgent. You have worked a lifetime to build your retirement savings. It is essential to ensure that your legacy is passed on as intelligently and efficiently as possible under this new set of rules. Do not let outdated documents dictate your family’s financial future. Schedule a consultation with Morgan Legal Group for a comprehensive SECURE Act review of your estate and retirement plans. Let us ensure your legacy is protected for the modern world.
For official information directly from the federal government, you can visit the IRS page on the SECURE 2.0 Act of 2022.
