What to Do About the SECURE Act and Your Estate Plan

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), effective January 1, 2020. This law is the most impactful legislation affecting retirement accounts in decades. It has provided more options to help individuals save for retirement such as bumping the age from 70½ to 72 for required minimum distributions (RMD) from retirement accounts and eliminating the age restriction for contributions made to these accounts.

Unfortunately, the SECURE Act has also significantly impacted how beneficiaries will receive these funds. The feature of stretching this money over the lifetime of its beneficiaries has been eliminated. Now nonspouse beneficiaries are required to withdraw the entire balance within ten years of the account owner’s death. Yearly withdrawals for RMDs are no longer mandatory, but by year ten that account must be empty.

What This Means for You.

If you’re using a Living Trust or IRA Inheritance Trust to distribute funds to your beneficiaries, there could be unintended consequences. The most notable: a high tax bill. A condensed time frame accelerates taxes, which is exactly what this provision was set up to accomplish. If your beneficiaries are bumped into a higher income tax bracket due to higher distributions, the inheritance received from your hard-earned retirement fund will be significantly reduced.

In order to protect both your loved ones and your retirement accounts, make sure your current estate plan continues to accomplish what you intended in light of these new requirements. Following are some actions and strategies to consider.

1. Review and Amend Your Living Trust or IRA Inheritance Trust 

You may have either addressed the distribution of your accounts in your Living Trust or created an IRA Inheritance Trust to handle your retirement accounts at your death. If your trust includes a “conduit” provision where beneficiaries receive tax deferred RMDs over their lifetime, these advantages have now been eliminated. Your retirement funds are no longer safe from higher taxes and the mismanagement of a beneficiary. Therefore, it’s wise to start acting now.

But take special note. The SECURE Act is new and the tax system uncertain, so revisions over time may be necessary depending on your goals. Because some of these provisions are complex and open to interpretation, a number of factors must be considered to determine the best way to implement them on a case-by-case basis. Either way, you should start the discussion with your estate planning attorney to review and amend your current estate plan.

2. Take Stock of Your Estate Planning Goals and Beneficiaries

A thorough review of your estate plan includes re-examining your estate planning goals and the personal circumstances of your intended beneficiaries. Doing so will ensure your goals are accomplished and your beneficiaries are thoroughly planned for.

These goals will most likely include more than just tax considerations because your beneficiaries could potentially obstruct where your money ends up. Whether there are potential creditors, possible lawsuits, a divorcing spouse, lifestyle choices, or responsibility issues, it’s important to account for anything that could interfere with your intentions for how your funds are distributed and used.

3. Consider Additional Estate Planning Strategies

For most Americans, a retirement account is the largest asset they will own when they pass away. Many accounts do offer simple beneficiary designation forms that allow you to name an individual or charity to receive these funds. However, this form alone doesn’t account for your estate planning goals and the personal situation of your beneficiaries.

Fortunately, there are several other estate planning and financial tools that can address the mandatory ten-year withdrawal rule and provide necessary safeguards for your beneficiaries’ inheritance – a couple are briefly discussed below. There’s no magic bullet. Strategies must be customized to each individual’s unique situation. To ensure your plan successfully aligns with what is best for you and your family, it’s important you receive guidance from your estate planning attorney and/or financial advisor.

Accumulation Trust

Depending on your goals, you may benefit from creating an “accumulation trust” which continues to give you post-death control of your assets. This strategy allows your trustee to continue to take distributions and hold them in an asset protected trust for your beneficiaries according to the controls you set up for the spending and use of the funds.

Although this trust can protect beneficiaries from themselves – quickly whittling away their inheritance – it may not address the tax concerns most hope to avoid. Accumulated interest held in the trust is taxed at a higher trust tax rate. Depending on the beneficiary, this may be the lesser of two evils. However, if beneficiaries are in a maximum tax bracket, this trust could help prevent additional tax loss since distributions will be spread out.

If your IRA Inheritance Trust already includes accumulation trust provisions, please take note that you may still need to amend it. This is dependent upon whether a beneficiary is one of the “exceptions” allowed by the law

Charitable Trust

If you are charitably inclined, now may be the perfect time to review your planning and use your retirement account to fulfill these charitable desires. This could include designating a charity as your account beneficiary and appropriating the necessary tools for how you want these funds distributed to the charity.

Charitable Remainder Trusts (CRT) are often used to generate tax-deducted income for the grantor while they’re still living; the remainder is distributed to a designated charity upon death. However, a CRT can also be named as an IRA beneficiary where a family member – such as a child – becomes the income beneficiary of the trust. This allows your named beneficiary to stretch the distributions longer than ten years. Once the trust’s term ends or the beneficiary dies, the funds pass to the designated charity.

4. Review Intended Beneficiaries

If you haven’t done so already, now is a great time to review and confirm your retirement account information. It’s always important your beneficiary designation is filled out correctly. If you intend for the 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.

If you have recently divorced or married, you will need to ensure the appropriate changes are made. Don’t wait to do this. In many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes were.

5. Attend a SECURE Act Seminar to Learn More

On March 11, 2020, the attorneys at Perkins & Zayed will be holding an additional seminar at our Wheaton, Illinois location for those affected by the SECURE Act. This is the perfect opportunity to learn about the available options that can protect your hard-earned retirement accounts and the ones you love. Click here for more information.

If you reside out-of-state or are unable to attend, feel free to schedule a call or appointment with one of our attorneys to discuss how your estate plan and retirement accounts could be impacted by the SECURE Act.