The federal appropriations bill enacted into law on December 20, 2019 changed federal law in ways that may affect your retirement assets, including 401(k) plans and IRAs.  Those changes, often referred to as the “SECURE Act,” may affect you during your lifetime and also the way those retirement assets may be distributed to your beneficiaries after your death.  Significantly, the SECURE Act changes the timing and amount of tax to be paid by those beneficiaries when they receive the retirement assets, your ability to protect the retirement assets from the beneficiaries’ creditors, and the value of those retirement assets in the hands of the beneficiaries.

The SECURE Act contains many provisions; however, this e-alert summarizes only some of the key aspects of the SECURE Act as they relate to estate planning.

Changes Affecting You During Life

One component of the SECURE Act that will affect many people during their lives is a change in the age at which a person must begin taking distributions from a retirement plan.  Under the prior law, most people were required to begin taking distributions from their retirement plans or IRAs when they reached age 70 ½.  Under the new law, the age is increased to 72.  In addition, the SECURE Act removes the age cap for funding traditional (non-Roth) IRAs, meaning that individuals over age 70 ½ are now eligible to make contributions to a traditional IRA.

These changes may present an opportunity for people to take further advantage of the tax-deferred savings offered by retirement plans.  In some instances, they may even present additional opportunities for funding a Roth IRA.  Your accountant or financial advisor is likely in the best position to advise you as to whether and how you might benefit from these changes in the law.  We encourage you to reach out to them to discuss your retirement strategy in light of the SECURE Act.  Of course, you are welcome to contact any of us as well, and we will be glad to assist you in understanding how the SECURE Act applies to your circumstances, in coordination with your other financial professionals as appropriate.

After Your Death

Perhaps the most significant changes brought about by the SECURE Act, at least in terms of estate planning, relate to how your retirement plan may be distributed and taxed after your death.  You may recall reading or hearing about the goal of “stretching out” your retirement plan after death.  Under the prior law, it was possible to stretch the distribution of an inherited retirement plan over the life expectancy of a beneficiary, if that beneficiary was a “designated beneficiary.”  This lifetime stretch-out provided income tax free growth of the inherited retirement plan assets during the beneficiary’s life, deferred the payment of income taxes paid on distributions made to the beneficiary from the retirement account, and protected the retirement plan assets from most of the beneficiary’s creditors.  The prior law permitted these advantages even for retirement plan assets left to beneficiaries in trust, as long as the trust contained certain required terms and conditions.

However, the SECURE Act has changed these rules to require that most designated beneficiaries will now be required to receive the entire inherited retirement account within 10 years following the death of the original account owner.  There are several exceptions; for example, a surviving spouse, minor children (but not grandchildren), and beneficiaries who are disabled or chronically ill are still permitted to take distributions over their expected lifetimes (though children who are minors at the time of inheritance must now take the full distribution within 10 years after reaching the legal age of adulthood).  However, if the retirement plan is left to those beneficiaries in trust, they may not qualify for the lifetime distribution, depending on the terms and conditions of the trust.

The good news is that the SECURE Act does not change the method of designating a beneficiary or beneficiaries to receive inherited retirement assets.  If you have existing beneficiary designations in place, those designations are still valid.  What the SECURE Act does introduce, however, is a host of new considerations that you should consider in structuring your estate plan to maximize the benefit of your retirement plan assets and best protect your beneficiaries.

Unfortunately, Congress gave us very little warning that these changes were coming.  Accordingly, estate plans that, through the end of 2019, offered a sound approach to planning for retirement assets, may suddenly no longer provide a good solution.  For example, some of our clients may have current plans in place that leave their retirement assets to a trust known as a “conduit trust” following the client’s death. Generally, distributions of retirement plan assets to a conduit trust pass immediately from the trust to the beneficiary.  Conduit trust plans were frequently utilized under the prior law because the distributions of the retirement plan would be stretched over the expected lifetime of the trust beneficiary but still retain the creditor protection provided by the trust arrangement.  However, under the SECURE Act, that same conduit trust may now result in distribution of all of the retirement plan assets to the beneficiary within 10 years of the death of the original account owner, which may not be a desired outcome.  Depending on the circumstances, other planning techniques may better serve the goals those plans are meant to achieve under the new rules.

Take Action

If you have retirement plan assets, we recommend that you review your estate plan as soon as possible, to ensure that it disposes of those assets in the best manner for your family taking into account the SECURE Act changes.