On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act is effective January 1, 2020 and is the most impactful legislation affecting retirement accounts in decades.
The SECURE Act has several positive changes: It pushes back the age you must take required minimum distributions 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 is that 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, minor children, individuals with disabilities, and chronically ill individuals can still “stretch” distributions from an inherited retirement account over their life expectancy.
However, many beneficiaries will be subject to the shorter ten-year time frame for taking distributions. This means acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket and receiving less of the funds contained in the retirement account than you may have originally anticipated.
What can you do to ensure that your estate planning goals are still accomplished and your beneficiaries are properly planned for?
Review/Amend Your Revocable Living Trust or Standalone Retirement Trust
Depending on the value of your retirement account, we may have addressed the distribution of your accounts in your Revocable Living Trust, or we may have created a Standalone Retirement Trust that would handle your retirement accounts at your death.
Under the old law, your trust may have included a “conduit” provision, which allowed your trustee to only distribute the required minimum distribution to your beneficiaries, thus “stretching” the retirement account. With the SECURE Act’s passage, a conduit trust structure is no longer viable, as the entire account balance must now be distributed within ten years of your death.
We should discuss the benefits of an “accumulation trust,” an alternative trust structure through which your trustee can take any required distributions and continue to hold them in a trust for your beneficiaries, protecting their inheritance from creditors, future lawsuits, or a divorcing spouse.
Consider Additional Trusts
For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. 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 from creditors, future lawsuits, or a divorcing spouse.
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. 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. Many companies will distribute your account funds to whatever beneficiary is listed, regardless of your relationship with that beneficiary or what your ultimate wishes might have been.
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.
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.