SECURE Act: How It Will Affect You and the Beneficiaries of Your Retirement Accounts
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act became effective on January 1, 2020. 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, and 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 years of the account owner’s death.
The SECURE Act does, however, 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. However, 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.
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 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 revisit the beneficiary designations of your retirement accounts to ensure they achieve your intentions for these accounts.
Naming a Trust as the Beneficiary of Your Qualified Retirement Account
Depending on the value of your retirement account and ages of your beneficiaries, you may have named your revocable trust or a testamentary trust as the beneficiary of your retirement accounts. Under the old law, once the account is transferred to the trust, the trustee would be permitted to distribute required minimum distributions (RMDs) to the trust beneficiaries. This allowed the continued “stretch” of the tax-deferral of the account based upon your beneficiaries’ ages and life expectancies. More importantly, the trust protected the account balance, and only RMDs–much smaller amounts–were vulnerable to creditors and divorcing spouses.
Now, with the passage of the SECURE Act, a trust structure may no longer work as well because the trustee will likely be required to distribute the entire account balance to a beneficiary within ten years of your death. Depending upon your unique situation and whether you have concerns about your beneficiaries receiving your retirement accounts without any restrictions, we should 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.
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 is filled out correctly, including naming contingent beneficiaries in case your primary beneficiary predeceases you.
If you have recently divorced or married, it is imperative that you revisit the beneficiary designations of your accounts! In many cases, in many cases, the plan administrator of these accounts will distribute the account funds to the beneficiary listed, regardless of a divorce or remarriage, which may be inconsistent with your ultimate wishes.
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.
Please feel free to contact our office to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.