SECURE Act Passes: Your Estate Plan May Need to be Reviewed
On December 20th, the President signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act became effective January 1st. The Act is the most impactful legislation affecting retirement accounts in decades. You have probably seen reports of this law change in the news.
How Does the SECURE Act Change Current Law?
The Act has several positive changes:
- It pushes 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 your qualified retirement accounts.
However, the most significant change will affect the beneficiaries who receive your account when you pass. The SECURE Act requires most beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.
Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. For example, a 30-year-old beneficiary of an IRA could “stretch-out” distributions over a 55-year period. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, potentially causing your beneficiaries to be pushed into a much higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated.
The SECURE Act also makes it more challenging for you to protect a beneficiary’s inheritance from their creditors, immature spending habits, future lawsuits or a divorcing spouse.
The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule:
- Beneficiaries who are minor children,
- Disabled beneficiaries
- Chronically ill beneficiaries
Depending on the value of your retirement account, we may have addressed the distribution of your accounts in your current estate plan. Your living trust may contain a “conduit” provision. We have included that “conduit” language in virtually every living trust we have drafted in the last several years. This language was required under the old law. It provided that the trustee would only distribute the required minimum (usually very small) distributions (RMDs) to the trust beneficiaries based upon their age and life expectancy. The balance could remain in the account and continue to grow tax-free until it was required to be distributed. A conduit trust protected the account balance, and only RMDs–much smaller amounts–were vulnerable to creditors and divorcing spouses. With the SECURE Act’s passage, a conduit trust structure will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within 10 years of your death.
What Should You Do Now?
This law change may require you to take specific action to accomplish your planning objectives, including:
- Review Your Current Beneficiary Designations. The enactment of the SECURE Act makes this 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 designations are 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. There is specific language we recommend when a trust is named as a beneficiary. If you want the primary beneficiary to be an individual, that person must be named. Ensure you have listed contingent beneficiaries as well. A surprisingly large number of retirement accounts have incorrect beneficiary designations—or worse—no beneficiary designation.
- Amend Your Trust. Depending on your planning goals, you may need to amend your trust to remove the conduit language. However, this is not the right decision for every client, so this is not a solution that we will universally recommend.
- Consider an Alternative Type of Trust. You may want discuss the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions from the retirement account and continue to hold them in a protected trust for your beneficiaries.
- Roth Conversion. While there is a front end tax cost to convert to a ROTH IRA, the SECURE Act makes a ROTH conversion much more compelling now. We can help you determine if this makes sense for you.
- Charitable Strategies. If you have a charity you would like to benefit, the SECURE Act makes that more attractive. You can benefit a charity with an outright distribution of your retirement account at death or use a Charitable Remainder Trust that can replicate much of the benefit of the “stretch-out” provided under the old law. This is a good time to consider creating a donor advised fund and engage younger generation family members in the practice of generosity. This is one of the most enjoyable and powerful things you can do to build a lasting bond with younger generation family members.
- Life Insurance. 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, life insurance protected in a trust for your beneficiary may now make sense. Premiums can be paid from early withdrawals from your retirement account.
For most Americans, a retirement account is the largest asset they will own when they pass away. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiaries.
If you have recently divorced or married, you will need to ensure the appropriate changes are made because at your death, the plan administrator will distribute the account funds to the beneficiary listed on the beneficiary designation form regardless of your relationship with the beneficiary or what your ultimate wishes might have been.
We are encouraging all of our clients with tax qualified retirement accounts to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.
Give us a call at (501) 221-7776 if you would like to set up an appointment to discuss.