On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020, has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of retirement accounts: The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.
The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than originally anticipated.
Review/Amend Revocable Living Trusts or Retirement Plan Trusts
If an estate plan included a revocable living trust or retirement plan trust, that trust may have included a “conduit” provision, and, under the old law, 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. With the SECURE Act’s passage, a conduit trust structure will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of the account owner’s death. It’s important to review plans and discuss the benefits of an “accumulation trust,” 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.
Consider Additional Trusts
For most Americans, a retirement account is the largest asset they will own when they pass away. A simple beneficiary designation forms, naming an individual or charity to receive the funds, does not take into consideration estate planning goals and the unique circumstances of beneficiaries. A trust can address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance.
Review Intended Beneficiaries
With the changes to the laws surrounding retirement accounts, now is a time to review and confirm retirement account information. Whichever estate planning strategy is appropriate for you, it is important that beneficiary designation forms are filled out correctly. If the intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If the primary beneficiary is an individual, ensure they are named and ensure that contingent beneficiaries are listed as well.
Although this new law may be changing the way we think about retirement accounts, we are here and prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill these charitable desires. If you are concerned 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 explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death.
Since inherited retirement accounts will not provide the same benefits post-SECURE Act, it might be important to review existing planning documents or explore new planning opportunities under the Act. Proper estate planning provides us with peace of mind while we are living and ensures we leave a loving legacy.