On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The Act became effective on January 1, 2020 and impacts retirement accounts. Among other things, the Act increases the start date for required minimum distributions (RMDs) from 70 ½ years of age to 72 years of age, eliminates the contribution age limit for qualified accounts, and allows penalty-free withdrawals of $5,000 for the birth or adoption of a new child. One of the more significant and key provisions of the Act changes the way designated beneficiaries receive the funds after the account owner has died.
In the past, designated beneficiaries had the opportunity to “stretch the account” – taking distributions over their individual life expectancy. This could potentially allow the funds to remain in the account longer, thereby gaining value. Estate planners took advantage of this by utilizing trust-based planning tools to ensure that, when appropriate under the circumstances and in accordance with the client’s goals and beneficiaries’ needs, the beneficiaries received the lowest possible distribution required. This kept as much of the account intact as long as possible, a tactic that not only allowed the balance to appreciate, but protected the beneficiary from jumping tax brackets (due to large distributions) and protected the funds from spendthrift beneficiaries, their creditors, ex-spouses and other financial misfortunes. These days are now over, at least not beyond a ten-year period.
Under the SECURE Act, most designated beneficiaries will be required to withdraw the entire balance within ten years of the account owner’s death. Not only will the beneficiary receive the full balance within ten years, losing the ability to hold the balance within the account to appreciate in value, the beneficiary will be required to pay income tax on what will likely be much higher distributions, thereby increasing the risk of jumping tax brackets. Once the beneficiary receives the full balance, previously used trust-based planning tools can no longer protect funds the same way they once did.
All of this considered, there are still options for the account owner that would allow the balance and the beneficiaries to remain protected.
When considering your accounts and estate planning, what should you do?
1. Check your accounts to determine who the current listed beneficiaries are. (Be sure to check both the primary and the contingent.)
2. Ask yourself: What’s most important to my situation, tax savings or protecting my beneficiary’s interest in the balance from financial misfortunes?
3. Contact your estate planning attorney to discuss what options work best for you.