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Understanding How the new SECURE Act Affects Your Retirement and Estate Planning

The Setting Every Community Up for Retirement Enhancement Act, called the SECURE Act, was signed into law on December 20, 2019 and went into effect on January 1, 2020. It is the most impactful legislation affecting retirement accounts in decades.

The SECURE Act as a whole brings some simple, straightforward, beneficial changes: 

  1. It delays the age for required minimum distributions from retirement accounts from 70 ½ to 72 years of age for distributions required to be made after December 31, 2019; and
  2. It repeals the maximum age for contributing to traditional IRAs, allowing you to keep contributing to an IRA if you are still working or your spouse is still working over age 70.5. 

This is good because we are typically working longer as our longevity increases, and so we may want to keep contributing to our retirement accounts and accumulating tax-free growth. 

However, (and this is a big “However”), the SECURE Act offsets these beneficial changes by requiring less favorable distribution requirements for most beneficiaries, meaning the people who will get your retirement account after you die.

Under the old law, the beneficiaries of your inherited retirement accounts could elect to stretch distributions over their own life expectancy. For example, an 18-year old beneficiary with a 65-year life expectancy could stretch out the distributions from an inherited retirement account over 65 years. This allowed a beneficiary to minimize the amount withdrawn in any year, and allowed for the assets left in the account to continue to grow without being subject to income tax.

The SECURE Act, in contrast, 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:

  1. A surviving spouse named as an outright beneficiary of a retirement plan still has the option of rolling over the benefits to his or her own IRA or taking distributions based on his or her own life expectancy.
  2. Beneficiaries who are less than ten years younger than you can still take distributions based on the beneficiary’s life expectancy.
  3. Your minor children, who have not reached the “age of majority” don’t have to deplete the account until 10 years after they reach the “age of majority.”  But that still would be a much shorter “stretch” than previously available.
  4. Disabled individuals and chronically ill individuals can take distributions based on their life expectancy.

Apart from these exceptions, opportunities for stretching the IRA over an extended period of time will no longer be available.

Depending on the value of your retirement account, you may have addressed the distribution of your accounts already in your Will, Revocable Trust, or you may have already created a Standalone Retirement Trust to handle your retirement accounts at your death.

Your Will or Revocable Trust may have included a “conduit” provision. Under the old law, a trustee of a trust that included a conduit provision would only distribute required minimum distributions or RMDs to the trust beneficiaries, allowing the continued “stretch” based upon their age and life expectancy.  A conduit trust protected the 

account balance, exposing only the RMDs–much smaller amounts– to creditors and divorcing spouses.

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, and therefore receiving less of the funds contained in the retirement account than you may have originally anticipated.

Additionally, because all funds in your retirement account will need to be withdrawn within 10 years after your death, under the SECURE Act, trusts drafted as a “conduit trust” would cause all retirement assets to be distributed outright to the beneficiary within ten years, causing the asset protection you may have built into your plan to be lost.

If you want to maximize tax deferral and provide asset protection for your retirement account assets, we should discuss the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.

Note, however, that drafting a trust as an accumulation trust has its own drawbacks. Although a Trustee is not required to make distributions to beneficiaries and can retain distributions from retirement plans in trust, retained distributions from traditional IRAs would be exposed to compressed income tax rates that apply to trusts. Currently, trusts reach the maximum 37% tax bracket with undistributed taxable income of $12,950, so plans should be made to address taxes if we opt for this solution.

Feel free to call our office so we can look at how your retirement accounts are impacted by the SECURE Act, and what changes are now necessary to ensure your assets make it to your loved ones in the most tax-advantaged, least risk manner. You’ve worked too hard for these assets to have them lost, squandered or not passed on in the way that you choose.

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