What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed by President Donald Trump on December 20, 2019 to address some fundamental aspects of the retirement savings system. The Act is considered to be one of the most impactful pieces of legislation affecting retirement accounts in decades.
When does the SECURE Act become effective?
The SECURE Act became effective on January 1, 2020.
How will the SECURE Act affect my estate plan?
Below is a summary of some of the most important provisions of the Act that can affect your estate planning goals.
(1) Elimination of the Age Restriction for Contributions
Prior to 2020, individuals were not allowed to contribute to their Individual Retirement Account (IRA) accounts once they reached the age of 70½. Beginning in 2020, the SECURE Act allows individuals to contribute to a traditional IRA as long as they have compensation, regardless of their age. The SECURE Act eliminates the previous age restriction of 70½., which can serve as a positive change for Americans working longer.
(2) Increase in Required Minimum Distribution Age
Prior to 2020, those with a retirement plan or owners of an IRA were generally required to begin taking their Required Minimum Distributions (RMDs) in April 1 of the year following the year they reached the age of 70½. The SECURE Act increases the Required Beginning Date (RBD) for RMDs from 70½ to 72 years of age. This 1½ year increase can provide a beneficial boost to overall retirement savings for many working seniors.
(3) Beneficiaries of an Inherited Retirement Account
Arguably the most significant change of the SECURE Act is the affect it will have on beneficiaries of an Inherited Retirement Account. Prior to 2020, non-spouse beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. By doing so, non-spouse beneficiaries were able to stretch out the tax deferral advantages of the plan (commonly known as a Stretch IRA). Under the SECURE Act, most designated beneficiaries are required to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death. For existing inherited IRAs, the SECURE Act rules do apply. The new rules apply only to deaths after December 31, 2019.
Exceptions to the Mandatory Ten-Year Withdrawal Rule
The SECURE Act does provide some exceptions for certain Eligible Designated Beneficiaries (EDBs). EDBs include: (1) Spouses, (2) Beneficiaries who are not more than ten years younger than the account owner, (3) The account owner’s children who have not reached “the age of majority,” (4) Disabled individuals, and (5) Chronically ill individuals. These individuals who qualify as an EDB are not subject to the ten-year rule.
Will the ten-year rule have any tax consequences?
Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated. However, the SECURE Act does provide for some flexibility of the ten-year rule. There are no required RMDs during the 10-year period. Therefore, as long as the entire balance is withdrawn within the ten years, beneficiaries can make withdrawals during periods that best fit their tax situation.
The SECURE Actchanges will greatly impact the use of trusts for IRA’s and qualified plans. To ensure your estate planning goals will align with the new law, it is best to review your retirement account beneficiaries and review any previous trusts. Below are some of the considerations that should be taken into account to protect your hard-earned retirement account and the ones you love.
Revisiting your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT).
Depending on the value of your retirement account, it is possible that we may have addressed the distribution of your accounts in your RLT or created an SRT to handle your retirement accounts at your death. Prior to 2020, only certain trusts could be considered designated beneficiaries for distribution purposes. Your trust may have included a “conduit” provision, and, prior to 2020, the trustee would only distribute required minimum distributions (RMDs) to the trust beneficiaries, allowing the continued “stretch” based upon their age and life expectancy. A “conduit” trust protected the account balance, and only RMDs–much smaller amounts–were vulnerable to creditors and divorcing spouses. Now, under the SECURE Act, a conduit trust set in place for a non-EDB requires the entire plan to be distributed within 10 years and places the funds in the hands of the beneficiary (instead of a trustee). Therefore, not only would the beneficiary would be required to pay income tax during that period, but those funds would now be available to creditors. An existing conduit trust should be revisited, because it is likely the plan owner had the intent that the proceeds would be distributed over the beneficiary’s life expectancy. One alternative to consider is an “Accumulation trust.” An accumulation trust is an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries. We should discuss the benefits of an accumulation trust.
Should additional trusts be considered?
A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance. For most Americans, a retirement account is the largest asset they will own when they pass away. If not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary.
Revisiting Intended Beneficiaries
Because of the new changes to retirement accounts under the SECURE Act, it is a great time to review and confirm your retirement account information. Regardless of your estate planning strategy, it is paramount that your beneficiary designation is filled out correctly. If your wish is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If your wish is for the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.
Keep Your Plan Up to Date
If you have recently divorced or married, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been. It is important to keep your plan up to date to include appropriate changes.
Although the SECURE Act may change how we view retirement accounts, we are prepared to help you properly plan for your loved ones and protect your hard-earned retirement accounts. If you have charitable desires, now is the perfect time to review your planning and possibly use your retirement account to successfully fulfill your charitable intentions. If there is any concern about the amount of money available to your beneficiaries and the impact that the accelerated income tax may have on the ultimate amount, we can discuss different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death. Call today – we are here to help! (954)999-9683.
If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. § 1.401(a)(9)-3, Q&A (4)(a)(2) and 1.401(a)(9)-5, Q&A (5)(b).
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