How Will The Secure Act Affect You?

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Lauren Pitman

Attorney, Founder

When you craft a thoughtful estate plan, you don’t want any loose ends left for your heirs. You may have heard of the SECURE Act and wondered if it could affect these carefully-made plans.

About the SECURE Act

In December 2019, the President signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. This new law changed some of the rules that will impact current retirees, those saving for retirement, and their heirs.

Some of the most notable new rules include:

  • The minimum distribution age changed from 70 1/2 to 72
  • The age limit for Individual Retirement Accounts ( IRA) contributions for working people was removed entirely
  • The ability for beneficiaries to “stretch” out distributions over their life expectancies has been reduced to a maximum of ten years. 

As Americans live longer, the goal is to allow them to save over a longer period of time and to provide extra financial stability. There are benefits to these new rules, but as an estate-planning attorney, I’m concerned about the impacts the SECURE Act might have on the transfer of wealth to anyone besides a spouse and the inheritance of retirement funds.

SECURE Act Affects “Stretch” IRAs

Before the SECURE Act, people who inherited IRAs were able to roll the IRA over into new accounts in their name and take distributions over the course of their lives through the payout of new “stretched” out Required Minimum Distributions (RMDs). Although the beneficiary had to begin to take RMDs immediately after inheriting the IRA, the RMDs were calculated over the life-span of the beneficiary. The IRA could distribute less each year, postponing income taxes and “stretching” the distribution of the IRA over a longer period of time. In terms of estate planning, this had advantages for young beneficiaries, those who inherited as minors or well before their own retirements.

Under the new rules, most beneficiaries will be required to withdraw assets in an inherited IRA or 401k within 10 years. There is no longer a requirement to pull RMDs out annually as long as all of the funds are liquidated within 10 years of the year after the original owner passed away.  As a result, beneficiaries will pay taxes sooner, and the investments will not have the same opportunity to grow over a longer period of time. There are some exceptions to the ten-year rule: surviving spouses, disabled beneficiaries, minor children under age 18, and beneficiaries who are 10 years younger or less than the account holder.

When it comes to making your estate plan, you’ll want to review with your attorney how this will affect your own beneficiaries.

SECURE Act Affects Trusts

When a person creates an estate plan, they often have concrete goals for the funds they are passing to their heirs. An attorney uses trusts to help achieve these goals. For example, a trust is a useful tool to help a beneficiary manage the funds, to control or restrict the use of the funds, and to protect the funds from creditors.

The SECURE Act affects both when and how funds might be distributed through a trust. A conduit trust had the benefit of allowing distributions from the IRA or 401k to pass through the trust to the beneficiary based upon their newly calculated RMDs, so although the principal of the IRA was protected in the trust the beneficiary still received the “stretch” RMDs as though they owned the account outright. An accumulation trust, on the other hand, allowed for the accumulation of income over time, and the distributions made at the trustee’s discretion. While this had potentially negative income tax consequences it had its own benefits of protecting potentially spendthrift beneficiaries from themselves.

Now, under the SECURE Act, there is the possibility that the funds will payout in one lump sum, ten years after the account holder’s death. This would likely mean the beneficiary pays more income tax, and it might not be aligned with the account holder’s plan when they created the trust in the first place.

Experienced attorneys know how to prepare for these situations and can combine strategies to make sure that the purpose of the trust is fulfilled and the beneficiary gets what they need.

SECURE Act and Charitable Giving

Unlike individual beneficiaries, a charity can receive the income from an IRA or 401k without the same tax consequences. So the account holder of an IRA or 401k might consider naming a charity as a beneficiary and distributing a different asset to their traditional beneficiaries, such as their children or grandchildren. This could help all parties avoid or limit income tax consequences.

There is also a tool called a Charitable Remainder Trust, which gives a beneficiary a lifetime “stretch” of income and pays the remainder to the charity upon the beneficiary’s death. There are tax benefits to this type of trust as well, and anyone considering it should discuss this with an attorney who focuses on this area.

Other Planning Strategies

If you’re concerned about the tax consequences of your IRA or 401k, consider replacing this asset for your beneficiaries with income tax-free assets, such as life insurance. Keep in mind that there are complications with this type of asset too, so you want to plan carefully with your financial advisor and attorney.

Depending on your assets, you might also consider naming a beneficiary who is still exempt from tax penalties under the SECURE Act. This includes heirs that are less than ten years younger than you, such as a spouse or a sibling, instead of a child or grandchild.

Consider converting to a ROTH account, so you, the beneficiary, can withdraw the money income tax-free. This can be useful for account holders who are in a lower tax bracket than their beneficiaries, such as an older parent leaving an account to a child who is in his or her peak earning years.

Although the SECURE Act can have an impact on your estate planning, an experienced attorney has the tools to help you minimize the risks and consequences. If you have concerns about your current plan, reach out to your attorney and your financial advisors to make sure the new law won’t create any unforeseen issues for your children or other beneficiaries.

Ultimately, a good estate plan is a gift you give to yourself and to your heirs. Take special care to craft the right plan based on the size and type of your assets. And when in doubt, seek professional counsel. That’s the best way to ensure your heirs and assets are protected.

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Disclaimer: The information contained in this article should not be considered tax or legal advice and is not a substitute for such advice. State and federal laws change frequently and the information in this article may not reflect your own state's laws or the most recent changes in state or federal law. For current tax and legal advice, please consult with an accountant or attorney licensed to practice in your state.
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