Significant Estate Planning Implications Under SECURE and CARES Acts

Chambliss, Bahner & Stophel, P.C.
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Chambliss, Bahner & Stophel, P.C.Both the SECURE Act and CARES Act are filled with important changes related to estate planning. The Secure Act (Setting Every Community Up for Retirement Enhancement Act), enacted in December of 2019, carries significant updates for retirement asset planning, especially with the elimination of “stretch” required minimum distributions (RMDs). And, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), enacted in March of this year, provides financial relief to both individuals and businesses who are facing the negative impacts of the COVID-19 pandemic. One of the key updates under CARES Act is providing flexibility to IRA owners and retirement plan participants.

These two Acts are packed with notable updates, and we discuss their impact on potential specific scenarios in our article Estate Planning Implications of SECURE Act and CARES Act. If you are looking for a rundown on the significant changes for each Act, please see below and let us know if you have any questions.

Significant changes under the SECURE Act and CARES Act include the following:

Elimination of “Stretch” RMDs

IRA owners and qualified retirement plan participants frequently designate their spouse as a primary beneficiary and their children or grandchildren as contingent beneficiaries. Prior to the SECURE Act, retirement assets could generally be distributed over a beneficiary’s lifetime. By “stretching” the distributions over the beneficiary’s lifetime (1) undistributed retirement assets continued to grow on a tax-deferred basis and (2) young beneficiaries (e.g., children and grandchildren) had time to mature before receiving a full distribution of retirement assets.

The SECURE Act substantially limits the ability to stretch distributions from IRAs and qualified plans. A new 10-year payout period applies to all but five categories of “eligible designated beneficiaries” under the SECURE Act. The 10-year rule provides that the entire retirement account must be distributed by December 31 of the 10–year anniversary of the account owner’s date of death. Withdrawals do not need to be made pro rata, nor do they need to be made every year, though the funds must be entirely withdrawn by the above deadline. “Eligible designated beneficiaries” consist of designated beneficiaries who are (1) the spouse, (2) a minor child of the IRA owner or plan participant (benefits would have to be distributed within 10 years from when the child attains the age of majority), (3) a person with a disability or who is chronically ill, or (4) a person not more than 10 years younger than the account owner (often a sibling).

Increase in Age for RMDs

For individuals who reach age 70½ after December 31, 2019, the SECURE Act increases the RMD age from 70½ to 72.

Waiver of 2020 RMDs

The CARES Act waives RMDs from IRAs and certain defined contribution plans for the 2020 tax year. If you took your 2020 RMD between February 1, 2020, and May 15, 2020, you have until July 15, 2020, to roll over the distribution to an IRA or other eligible retirement plan to avoid paying income tax on the distribution.

No Age Cutoff for Traditional IRA Contributions

Prior to the SECURE Act, individuals were prohibited from contributing to a traditional IRA in the year they turned 70½ and thereafter. Individuals may now contribute to a traditional IRA regardless of age. When evaluating whether to make a contribution to an IRA after age 70½, it is important to consider the impact such contribution may have on qualified charitable distributions from the IRA. Up to $100,000 per year of qualified charitable distributions may be excluded from the IRA owner’s taxable income. However, if additional contributions are made to a traditional IRA after age 70½, the amount of qualified charitable distributions that may be excluded from taxable income will be reduced.

2020 Charitable Giving

Individual taxpayers who itemize their deductions are typically not able to deduct more than 60% of their adjusted gross income (AGI) for cash gifts made to public charities. The CARES Act removes the 60% of AGI limitation for cash gifts to public charities from individuals during 2020 (i.e., itemizing individual taxpayers can offset up to 100% of their income in 2020 with cash contributions to eligible charities).

Individual taxpayers who plan to take the standard deduction in 2020 are entitled to a new “above-the-line” deduction of up to $300 for cash gifts to charity. Contributions made to private non-operating foundations, supporting organizations, and donor-advised funds do not qualify for this provision. For more information, read Charitable Giving in the Time of COVID-19.

529 Plans; Penalty-Free Withdrawal Relating to Birth or Adoption of Child

The SECURE Act also includes expanded uses of Section 529 plans and penalty-free withdrawals of up to $5,000 of retirement assets for expenses related to the birth or adoption of a child.

Waiver of Early Withdrawal Penalties for 2020

The CARES Act allows retirement plan participants and IRA owners to withdraw up to $100,000 from their accounts in 2020 without incurring the 10% penalty for early distributions (generally applicable to withdrawals taken before age 59½). Only “qualified individuals” may benefit from this provision. These individuals are defined as plan participants who have experienced adverse financial consequences resulting from a reduction in work hours, layoff, quarantine, or furlough, or who are unable to work due to lack of childcare on account of the coronavirus, as well as plan participants, spouses, or dependents who have been diagnosed with the coronavirus.

Provisions Relating to Retirement Plan Loans

For loans taken between March 27, 2020, and September 23, 2020, the CARES Act increases the maximum amount a qualified individual is permitted to borrow as a plan loan to the lesser of $100,000 or 100% of the participant’s vested account balance (up from $50,000 or 50% of the account balance).

The CARES Act also delays the due date for loan repayments for qualified individuals that are due between March 27, 2020, and December 31, 2020, for one year and extends the maximum 5-year repayment period accordingly.

Minimum Required Contributions for Single-Employer Defined Benefit Plans

The CARES Act provides that any minimum required contribution for a single-employer defined benefit plan that is due in 2020 can be postponed until January 1, 2021, with accrued interest from the original payment due date to the actual payment date. For purposes of determining the minimum funding requirements for plan years that include any portion of 2020, plan sponsors are permitted to use their plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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