The SECURE Act

The SECURE Act, signed into law on December 20, 2019, has a serious impact on estate planning for clients’ retirement accounts.  In the past, many individuals who inherited retirement accounts were able to “stretch” the distributions over their own life expectancy.  The SECURE Act moves most individuals to a 10-year payout period.  The SECURE Act also makes several other changes that impact clients.

Retirement Accounts During Owner’s Lifetime

• Individuals who own their own retirement accounts can start taking required minimum distributions (RMDs) at 72 instead of 70 ½.
• You can continue to make contributions to a traditional IRA for as long as you’d like.
• You can still make qualified charitable distributions (distributions directly to charity that bypass reporting on your income tax return) beginning at 70 ½.  Note that if you also make contributions to a traditional IRA after age 70 ½, your qualified charitable distributions may be limited.

Retirement Accounts After Owner’s Death

• Eligible Designated Beneficiaries can still stretch distributions over their lifetimes.  Eligible Designated Beneficiaries include spouses, minor children of the owner, a disabled or chronically ill individual, or anyone not more than 10 years younger than the owner.
  • Eligible Designated Beneficiaries also include “conduit” trusts for the benefit of these individuals and, in the case of the disabled or chronically ill, an “accumulation” trust.  Once a minor reaches the age of majority, the “stretch” treatment ends and all distributions must be made within 10 years.
    • A conduit trust is one where all distributions from the retirement account must be paid out to an individual.  The individual recipient pays the income taxes on distributions.
    • An accumulation trust allows the trustee to accumulate any withdrawals from a retirement account in the trust and not distribute them to a beneficiary.  Any withdrawals that are retained in the trust will be taxed at the trust income tax rate (the top rate after a small deduction).
• Designated Beneficiaries (other than Eligible ones) must fully pay out the retirement account assets by December 31st ten years after the owner’s death.  Designated Beneficiaries include all other individuals other than Eligible Designated Beneficiaries, as well as conduit and accumulation trusts.
• Other beneficiaries, such as an estate or a trust that does not meet the requirements of a conduit or accumulation trust, must pay out under the rules previously in place – within 5 years for an owner already receiving RMDs, or over the owner’s remaining life expectancy if the owner was not yet receiving RMDs.

Estate Planning Strategies

• Reevaluate whether retirement accounts should be left directly to a beneficiary instead of to a trust. The advantages a trust previously provided are lessened under the new law.
• A spouse, minor child or person not more than 10 years younger than the account owner should likely not receive retirement account assets through an accumulation trust.  If a trust is still desirable, it should usually be a conduit trust.
• If other beneficiaries need assets retained in trust for their protection due to concerns about substance abuse, creditors or other issues, an accumulation trust should be considered, though only if the concerns outweigh the income tax disadvantages of this option.
• Those who are charitably inclined may want to name a charity as the beneficiary of a retirement account, or leave the account to a charitable remainder trust.
• Most conduit and accumulation trusts as drafted by skilled attorneys still “work.”  Their time frame is simply shortened in most cases – instead of stretched over a beneficiary’s lifetime, withdrawals must now take place under the 10-year rule.
• For questions or assistance regarding updates to estate planning documents, please contact our trusts and estates team.