On January 1, 2020, the most impactful retirement account legislation in decades became law.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) will have a positive impact for many older Americans but could have negative tax consequences for many beneficiaries of their retirement accounts.
The Good and the Bad (and the Confusing)
The SECURE Act makes several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) to be distributed from individual retirement accounts from 70½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts.
However, the most significant change will affect the beneficiaries of the retirement accounts: The SECURE Act requires most designated beneficiaries—with some exceptions for 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—to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.
Under the old law, “designated beneficiaries” of inherited retirement accounts (i.e. beneficiaries who are individuals) 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 your beneficiaries to be bumped into a higher income tax bracket and receive less than you anticipated.
What Should You Do?
In addition to the tax considerations stemming from the SECURE Act, you might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. An estate planning attorney can help you think through strategies, including the following options, to help you achieve your estate planning goals:
Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
Depending on the value of your retirement account, you may have addressed the distribution of your accounts in an RLT or created an SRT to handle your retirement accounts at your death which included “conduit” provisions. 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. The conduit trust provisions 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 for long-term asset protection and growth because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. You should discuss the benefits of an “accumulation trust” with your estate planning attorney. 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.
Consider Additional Trusts
If you have not done so already, it may be beneficial for you to create a separate IRA Trust to handle your retirement accounts at your death. Simple beneficiary designation forms–allowing you to name an individual or charity to receive funds when you pass away–might not fully address your estate planning goals and the unique circumstances of your beneficiaries. An IRA Trust is a great tool to address the new mandatory ten-year withdrawal rule under the SECURE Act and provide continued protection of a beneficiary’s inheritance.
Review Intended Beneficiaries
With the changes to the laws surrounding retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation forms are filled out correctly, naming a trust or an individual as your primary beneficiary, and naming contingent beneficiaries. Your estate planning attorney can advise you about the impact of the SECURE Act on certain beneficiaries.
For some individuals a conversion from a traditional IRA into a Roth IRA during the participant’s lifetime, may be worth consideration. This can be challenging as it will require an analysis based upon a number of factors including your age, applicable income limitations, the income tax due on conversion and the anticipated rate of return after conversion. Converting may make sense if you believe the tax free growth after conversion will exceed the cost, and if there is a desire to avoid required minimum distributions during lifetime and for your designated beneficiaries.
If you are charitably inclined, now may be the perfect time to review your estate 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, you can explore different strategies with an estate planning attorney, in collaboration with your other advisors, to infuse your estate with additional cash upon your death.
We Can Help
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. Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.
 If a beneficiary is not considered a “designated beneficiary,” distributions must usually be taken by the fifth year following the account owner’s death.