January 17, 2020
Understanding the Sweeping Changes to Retirement Planning
On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) which became effective on January 1, 2020.
Most retirement savers will be affected by the SECURE Act, which provides comprehensive changes to our retirement system. Some of these changes include:
- An increase in the Required Beginning Date (“RBD”) age from 70½ to 72, enabling individuals to defer Required Minimum Distributions (“RMDs”) until the year in which they reach the age of 72;
- The removal of the age limit restricting contributions to a qualified retirement account, allowing individuals to make deductible contributions at any age; and
- The elimination of stretch IRAs for most non-spousal account inheritors, requiring the complete distribution of inherited retirement accounts within ten years of the original account holder’s death.
Spouse as Beneficiary
A surviving spouse will continue to have the option of rolling over the deceased owner’s retirement account into his or her own IRA, an option not available to other beneficiaries. Additionally, the surviving spouse continues to have the option to establish an inherited IRA for his or her benefit. If the deceased owner had already reached his or her RBD, now 72, the surviving spouse must begin taking RMDs, based upon his or her life expectancy, from the inherited IRA by December 31 of the year following the deceased owner’s death. If the retirement account owner dies before reaching his or her RBD, now 72, the surviving spouse, who is the sole beneficiary thereof, will continue to have the option of delaying the commencement of RMDs from an inherited IRA until the deceased owner would have reached his or her RBD, now age 72. The effect of the passage of the SECURE Act in this situation is limited to the increase to the RBD.
Non-Spousal Individual Beneficiaries
Until January 1, 2020, an individual non-spousal beneficiary was permitted to “stretch” out the RMDs from an inherited retirement account over his or her life expectancy. With the passage of the SECURE Act, most non-spousal beneficiaries are now instead required to withdraw the entire account within approximately ten years of the account owner’s death.
There are some exceptions to this ten year rule. If the beneficiary is a minor child of the deceased owner, the ten year rule does not apply until such child has reached the age of majority. Also, a beneficiary who is chronically ill, disabled or not more than ten years younger than the deceased account owner is not subject to the ten year rule. Such beneficiaries are considered eligible designated beneficiaries (EDBs). The ten-year rule will come into effect when an EDB no longer qualifies as an EDB.
Estate as Beneficiary
If the deceased owner’s estate is the beneficiary of his or her retirement account or if there is no valid beneficiary designation of same, the entire account will continue to be required to be withdrawn by the estate within approximately five years of the account owner’s death.
Trust as Beneficiary
The same five year rule continues to apply to a trust which fails to qualify as a see-through trust. For several reasons, including creditor protection, many account owners have designated their trusts as a beneficiary of their retirement assets. Prior to the effective date of the SECURE Act, with certain drafting techniques, a trust could qualify as a see-through trust to allow for the deferral of withdrawals from an inherited retirement account over the life of a trust’s beneficiaries
One technique commonly used to accomplish this deferral was to require the trustee to (i) withdraw the RMDs and (ii) distribute to the beneficiaries, free of trust, all withdrawals from the inherited retirement account to the trust beneficiaries. Such a trust is referred to as a conduit trust. With the passage of the SECURE ACT, such a “stretch” is no longer available if the trust is not for the benefit of an EDB. In fact, the SECURE Act will now require the outright distribution of the entire retirement account to the beneficiary of a conduit trust, who is not an EDB, within approximately ten years of the account owner’s death. Any outright distribution will be subject to income taxes and the beneficiary(s) creditors.
Quite often, instead of structuring trusts as conduit trusts, “accumulation” trusts have been designated as the beneficiary of retirement accounts. Unlike with a conduit trust, any withdrawals made from the retirement account may remain in the accumulation trust rather than being distributed outright to its beneficiaries. In order to make such a trust eligible for “stretch” withdrawals based upon the life expectancy of the trust’s oldest beneficiary, additional trust provisions were inserted. Such technique, may continue to be desirable in order to avail itself to the ten-year rule rather than the five-year rule.
In addition to reviewing your current estate plan and retirement plan beneficiary designations to determine whether updates may be desirable, there may be other planning strategies which warrant your consideration. Some of these include charitable giving and Roth conversions. With such strategies, the income tax effects of the SECURE Act may be mitigated.
Please contact any of the attorneys in Pabian & Russell, LLC’s Estate Planning practice group if you would like to discuss any of these matters.