The SECURE Act: How Does It Affect Your Retirement Accounts?
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act” or “Act”), which became effective on January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. It could have a positive impact for many older Americans but, without appropriate estate and income tax planning, may have negative tax consequences for many beneficiaries of their retirement accounts.
Since the SECURE Act was first introduced in the House of Representatives in early 2019, Evans & Davis has monitored its development, assessed its potential impact on our clients’ estate plans and devised strategies to pass retirement assets to beneficiaries in a tax-efficient manner while simultaneously protecting those assets from the claims of creditors. This article gives a brief overview of some of the major changes the SECURE Act made to both employer-provided and individual retirement accounts. This article’s brevity, however, is not intended to, and should not lead anyone to, downplay the significance of the changes made to retirement assets and the effect of those changes on current estate plans. Moreover, the limited discussion of steps you should take following the passage of the SECURE Act or the potential strategies available to maximize the value of your retirement assets should not be inferred as a limitation on available strategies or steps you should take following the Act’s passage. Finally, no two estate plans are identical and not all strategies are ideal for every client.
Evans & Davis’s attorneys are here to guide you through the numerous changes made by the SECURE Act and implement plans that protect not only your retirement assets but, most importantly, your family.
The Good and the Bad
While much of the discussion of the SECURE Act has focused on the elimination of the “stretch out” for beneficiaries (discussed below), the Act makes several positive changes for account owners. First, the Act increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70½ to 72 years of age. This is a positive change for account owners because it delays the imposition of taxes on retirement assets and preserves retirement assets for use later in life. Second, the Act eliminates the age restriction for contributions to qualified retirement accounts. By eliminating the age restriction for contributions, the Act not only allows an individual to save longer but allows one to make offsetting tax deductible contributions to the account during years in which he or she is required to take taxable RMDs.
The most significant change the Act makes to retirement assets is the elimination of the “stretch out.” While this change does not directly affect account owners, it will drastically affect the beneficiaries of retirement accounts. Under the laws in effect prior to January 1, 2020, beneficiaries of retirement accounts generally were required to take distributions from inherited retirement accounts in amounts based on their individual life expectancies. The effect of this provision was to “stretch out” the RMDs for years, possibly decades, thus ensuring further tax-deferred growth. The SECURE Act, in contrast, requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death. The Act, however, provides exceptions to the ten-year rule for spouses, beneficiaries who are not more than ten years younger than the account owner, children (but not grandchildren) of the account owner who are under the age of majority, disabled individuals, and individuals who are chronically ill (collectively, “eligible designated beneficiaries”).
As is evident from this shortened ten-year time frame for taking distributions, the Act drastically accelerates the time for which income tax will be due on retirement assets. This has the negative effect of potentially increasing the total income taxes due over time, causing your beneficiaries to be bumped into a higher income tax bracket, and causing your beneficiaries to receive less than you anticipated or desired.
On a final related note, it is important to remember that as of 2014, inherited retirement accounts have lost creditor protected status as it relates to the beneficiaries, which is a significant departure from traditional legacy planning. In Clark v. Rameker, a unanimous Supreme Court of the United States ruled that inherited retirement accounts are “freely consumable” by the beneficiary and should be available to make a creditor whole in some situations. Clark v. Rameker, 573 U.S. 122 (2014). In short, the Court said allowing an inherited retirement account to be exempt from creditor claims would undermine the purpose of the Bankruptcy Code. Id.
The decision in Clark, coupled with the SECURE ACT, means that traditional retirement planning may no longer be viable legacy planning.
 If a beneficiary is not considered a “designated beneficiary,” distributions must usually be taken by the fifth year following the account owner’s death.
What Should You Do?
In order to protect your hard-earned retirement account and the ones you love; it is critical to review your estate plan now. In addition to the tax considerations stemming from the SECURE Act, you might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. Evans & Davis can help you think through strategies, including the following options, to help you achieve your estate planning goals:
Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
Depending on the value of your retirement account, you may have addressed the distribution of your accounts in an RLT or created an SRT to handle your retirement accounts at your death. Under prior law, it was best practice to draft these trusts with “conduit provisions,” pursuant to which the trustee would only distribute required minimum distributions (RMDs) to the trust beneficiaries, thus allowing the continued “stretch” based upon their age and life expectancy. Moreover, the conduit trust provisions protected the overall account balance from the claims of creditors and divorcing spouses, as only the RMDs, and not the entire account balance, were vulnerable to such claims. With the SECURE Act’s passage, however, a conduit trust structure may no longer work for long-term asset protection and growth because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death (unless they are an eligible designated beneficiary, discussed above). One strategy to address this concern is drafting retirement provisions in a RLT or SRT as an “accumulation trust.” An accumulation trust is an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.
Consider Additional Trusts
If you have not done so already, it may be beneficial for you to create a trust to handle your retirement accounts at your death. Simple beneficiary designation forms--allowing you to name an individual or charity to receive funds when you pass away--might not fully address your estate planning goals and the unique circumstances of your beneficiaries. A trust is a great tool to address the potential downfalls to the new mandatory ten-year withdrawal rule under the SECURE Act and provide continued protection of a beneficiary’s inheritance.
Review Intended Beneficiaries
With the changes to the laws surrounding retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation forms are filled out correctly, naming a trust or an individual as your primary beneficiary, and naming contingent beneficiaries. Evans & Davis can advise you about the impact of the SECURE Act on certain beneficiaries.
If you are charitably inclined, now may be the perfect time to review your estate planning and possibly use your retirement account to fulfill these charitable desires. If you are concerned about the amount of money available to your beneficiaries and the impact that the accelerated income tax may have on the ultimate amount, you can explore different strategies with us, in collaboration with your other advisors, to infuse your estate with additional cash upon your death.
We Can Help
Although this new law may be changing the way we think about retirement accounts, Evans & Davis is prepared to help you properly plan for your family and protect your hard-earned retirement accounts. Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.