The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) was just signed into law on December 20, 2019 and becomes effective January 1, 2020 (less than 2 weeks later!). The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes:
- It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age;
- It eliminates the age restriction for contributions to qualified retirement accounts.
However, perhaps the most significant change will affect the beneficiaries of your retirement accounts: The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten (10) years of the account owner’s death (certain non-individuals such as charities and estates are still limited to a maximum 5 year withdrawal period).
- 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;
- Account owner’s children who have not reached the “age of majority”;
- Disabled individuals and chronically ill individuals.
The takeaway is that proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for.
So instead of planning for beneficiaries of inherited retirement accounts taking distributions over their individual life expectancy, the SECURE Act will result in the acceleration of income tax due the shorter ten-year time frame. This could cause 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.
Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.
Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
In your estate plan you may have addressed the distribution of your accounts in trust that ensures the maximum lifetime stretch out for your beneficiaries. But with the SECURE Act’s passage, such 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 your death. Your new plan should consider 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
Your retirement account may be one of the largest asset that you will own when you pass away. It may be beneficial to utilize a trust to handle your retirement account distributions at your death. The account’s beneficiary designation form by itself does not take into consideration your estate planning goals and the unique circumstances of each beneficiary. 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.
Review Intended Beneficiaries
With these changes 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 is filled out correctly. If your 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 you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.
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.
Other Strategies
Although this new law may be changing the way we think about retirement accounts for estate planning, there may be other strategies affected as well. 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. ROTH IRA conversions and some annuities might be some new tools to discuss with your financial advisor. If a portion of your retirement plan is held in a 401k or other employment based vehicle, you should discuss with your advisors whether a different plan (such as an IRA) might be better for you. Asset protection of your retirement plans should also be reviewed, in particular how you might benefit your beneficiaries.
Do not delay having your complete estate plan reviewed by a competent estate planning attorney and your financial plan reviewed as well. Our estate planning attorneys at Berlin Patten Ebling PLLC are also here to help.
Sincerely,
Berlin Patten Ebling, PLLC
Article Authored by Christopher Caswell, ESQ. ccaswell@berlinpatten.com
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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