Do you know if the 2020 SECURE Act legislation affects you?
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Does the 2020 SECURE Act significantly affect your retirement and estate plans?
Do you know who you have designated as beneficiaries on ALL of your retirement accounts?
Are you approaching your 70s?
Does the value of your retirement accounts exceed 500k or do you expect it to by your retirement age? (includes IRA, 401k, TSP, etc.)
How many children do you have?
Are you single? (including if you're widowed or divorced)
Do you have a Standalone Retirement Trust (SRT)?
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law. The SECURE Act, which is effective January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) 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 will affect the beneficiaries of your retirement accounts: 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, the account owner’s children who have not reached the “age of majority” (18 in Maryland), disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for based on the circumstances.
Under the old law, beneficiaries of inherited retirement accounts 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, thus receiving less of the funds contained in the retirement account than you may have originally anticipated.
Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. For parents with minor children our office is not recommending a change in beneficiary designations. The most tax efficient strategy for married couples is to name your spouse as the primary beneficiary of a retirement accounts.
Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
Depending on the value of your retirement account, we may have addressed the distribution of your accounts in your RLT, or we may have created an SRT that would handle your retirement accounts at your death. Your trust may have included a “conduit” provision, and, 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. 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 is less effective because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. We should discuss alternatives to your trust such as an accumulation trust, Roth conversions or a Charitable Remainder Trust. The strategy for each family will vary depending on your goals, the anticipated size of the inheritance, and the tax bracket of the beneficiary. Input from your tax preparer and financial advisor should be solicited as part of the process to address changes brought about because of the new law.
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. 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. If you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.
Other Strategies
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.
We encourage you to contact our office to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.