Planning with Retirement Accounts – The SECURE Act

For many Americans, their largest asset is their retirement account. January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect. The Act is the most impactful legislation affecting retirement accounts in decades. It has some positive elements for many older Americans, but could have negative tax consequences for many of the later beneficiaries of their retirement accounts.

The Good and the Bad 

The SECURE Act makes several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70½ 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—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. If a beneficiary does not meet the qualifications of a “designated beneficiary,” distributions must usually be taken by the fifth year following the account owner’s death.

Under the old law, “designated beneficiaries” of inherited retirement accounts (i.e. beneficiaries who are individuals or who are beneficiaries of specially designed trusts) 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 order to protect your hard-earned retirement account and the ones you love, it is critical to act now. 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. We 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. Only the distributions—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 (unless they meet one of the exceptions mentioned above). You should now consider the benefits of an “accumulation trust”, a trust structure which allows the trustee to 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 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. A trust is a great tool to address the potential downfalls to 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. We can advise you about the impact of the SECURE Act on the various beneficiaries to consider.

Other Strategies

If you are interested in supporting one or more charities, now may be the perfect time to review your estate planning and to explore the use of 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 amount, we can explore different strategies, 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. The upcoming presidential election may result in other changes to law, creating additional income tax exposure or reductions in the amount of assets that can be passed free of gift or estate tax consequences.

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 and other possible changes in the law.