What happened?
On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). The SECURE Act, effective January 1, 2020, significantly affects many clients’ estate plans, especially as it relates to retirement accounts and beneficiary designations. Existing estate plans may be outdated due to the changes implemented by the SECURE Act.
What are the retirement and estate planning changes?
The SECURE Act resulted in several significant changes that likely affect your 401(k)/IRA/Roth IRA or similar qualified plan, Will or Revocable Trust and beneficiary designations. Some highlights:
- Required minimum distributions from IRA plans are deferred to age 72. Previously, distributions needed to be taken by age 70½.
- Individuals with earned income who have attained age 70½ may now make contributions to IRA plans.
- A beneficiary can no longer “stretch” the distributions from an “Inherited IRA” over the beneficiary’s lifetime, with exceptions for surviving spouses, minors, disabled and chronically ill beneficiaries.
- Qualified plan beneficiaries (other than the exceptions listed) will generally have to withdraw funds within a 10-year period, or in certain circumstances, within 5 years.
- The elimination of IRA stretch provisions effectively speeds up the time period for a beneficiary to withdraw and pay tax on the funds withdrawn. No income tax will be due for any Roth IRA distributions, but the tax-free deferral period for all qualified plan assets is substantially shortened.
How might the SECURE Act affect my estate plan?
- Often, clients have made beneficiary designations for retirement accounts so the IRA assets remain in trust for children, grandchildren or other beneficiaries. Trusts established under pre-2020 estate plans may have been drafted as “conduit trusts” requiring distributions to be transferred outright to a beneficiary (now within 10 years) and not remain in trust.
- Retirement account owners who have designated trusts as a potential beneficiary should strongly consider a review and update to their estate plan.
- Beneficiary designations for retirement assets may also need to be updated.
- Only you can decide whether an outright distribution to a child or grandchild within 10 years is desirable, or whether retaining the assets in trust is preferable, despite a likely less-desirable income tax result.
How FLB can help.
The SECURE Act made significant changes to the laws regarding retirement accounts and beneficiary designations. Clients are strongly encouraged to review their current estate/trust documents (if prepared by us, look for a reference to “Deferrable Retirement Benefits”) and beneficiary designations on their retirement accounts to determine the impact of the SECURE Act.
If you have any questions regarding the SECURE Act’s impact on your estate plan, please reach out to a member of the Estates Group at FLB – namely Ed Lentz or Pete Iorio We also encourage you to reread our April 2019 letter relating to other tax and estate planning matters.
