The SECURE Act: What is it? And how does it affect you?
For most Americans, a retirement account is the largest asset they will own when they pass away. On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect and it directly affects those retirement accounts.
The SECURE Act has several positive changes: (1) it increases the required beginning date for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and (2) it eliminates the age restriction for contributions to qualified retirement accounts. However, 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.
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. Fortunately, the 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,” disabled individuals, and chronically ill individuals. However, these exceptions don't provide near the flexibility account owners had in the past.
Prior to January 1, 2020, it was relatively common to use a trust (and certain specific provisions in the trust) to distribute required minimum distributions (RMDs) to the trust beneficiaries, allowing the the pay-outs to “stretch” based upon their age and life expectancy. By doing this, the account balance could be protected and, therefore, only RMDs (which are much smaller amounts) were vulnerable to creditors and divorcing spouses.
Unfortunately, with the SECURE Act’s passage, this type of trust structure will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. That being the case, it is important to consider alternate planning strategies for your retirement accounts.
What are the alternatives?
A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance. Instead of naming individuals as beneficiaries of your retirement accounts, you could designate a trust as the primary beneficiary and then the terms of the trust can dictate how ultimate distributions are made to your loved ones. Depending on your goals and individual circumstances, there are several different types of trusts that can be used. Here are some examples:
1. Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
An RLT or SRT that contains "accumulation" provisions might be the best estate planning tool for these unique assets. By naming these types of trusts as the account beneficiary, the trustee of the trust can receive the RMDs from the retirement account as often as required by law. The advantage is that the trust allows the trustee to exercise discretion as to when and how much of the funds are distributed to or used for the benefit of the beneficiary. Of course, the trust will still need to pay income tax on the distributions from a retirement account (just like an individual beneficiary would). However, the primary benefit to using a trust is that it can hold those retirement assets as they pay out and keep them safe from creditors, divorces, or lawsuits. It can also pay out proceeds from the account according to a timeline that you prefer.
2. Charitable Remainder Trust (CRT)
If you are charitably inclined, a CRT may be the right solution for your retirement accounts. This kind of trust allows you to designate beneficiaries to receive an income stream from the retirement account for a period of time, with the remainder ultimately going to a charity named in the trust agreement. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon your passing, your estate will receive a charitable deduction for distributing the retirement account to the trust, and the distribution from the retirement account to the CRT is not taxed. Another benefit to this strategy is that the distributions to the beneficiaries will be smaller and therefore subject to less income tax liability.
What should you do?
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.
Of course, we would be happy to meet with you to discuss what solutions might best fit your unique circumstances. Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.
*This article is intended for information only and is not intended to be construed as legal advice. The choice of a lawyer is an important decision and should not be based solely upon advertisements.