By Brendan J. King

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a bipartisan retirement bill that went into effect on January 1, 2020.

The law contains many favorable provisions for retirement account owners, including removing the age limit for IRA contributions (previously limited to 70 ½) and extending the age to begin taking “required minimum distributions” (RMDs) to age 72.

However, the law substantially changes the rules regarding the inheritance of retirement accounts.  Most notably, the law eliminates the ability for most beneficiaries who inherit retirement accounts to “stretch” the taxable distributions over their actuarial life expectancies, as was previously allowed.  Under the new law, most beneficiaries must withdraw/pay taxes on the entire inherited account over a maximum window of ten years.  Certain beneficiaries are exempted from the ten-year distribution requirement: surviving spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries who are less than ten years younger than the deceased account owner. However, the ten-year rule may apply for most of these beneficiaries when they receive their portion of the account through a trust.

Proper estate planning for retirement account owners has never been more important.  In some cases, existing beneficiary designations should be examined and changed to avoid undesirable or even dire consequences beyond the increased tax rate.  For instance, accounts payable to so-called “conduit trusts” would now result in the account not just being taxed, but also paying outright to the beneficiary, within ten years.  For young or otherwise financially vulnerable beneficiaries, this could be an unacceptable outcome.

The new law underscores the importance of discretionary trust models, known as “accumulation trusts”.  Unlike a conduit trust, an accumulation trust allows funds distributed from retirement accounts to be maintained inside the trusts, and does not require the retirement distributions to be paid out to the trust beneficiaries.  While accumulation trusts require purposeful tax planning after the account owner’s death, they are critical to protect the inheritances of beneficiaries who may be financially vulnerable due to age, disability, marital issue or other factors.  Fortunately for existing EPLO clients, we have been drafting and funding accumulation trusts since our beginning.

While the new rules will unavoidably result in a greater tax lability for most inheritance scenarios, the law presents new planning opportunities, particularly for charitable planning.

For account owners who are charitably inclined, the strategic use of a charitable remainder trust will allow for a longer payout period for beneficiaries, and therefore substantially reduce the overall income tax liability, while at the same time accomplish charitable objectives by benefitting designated charities at the end of the beneficiaries’ lives.

While maintaining your estate plan has always been important, this particular change in the law warrants special attention.  In addition to reviewing estate documents and account beneficiary designations, account owners should also consult their financial planners to consider lifetime strategies, including Roth conversions, to minimize the overall tax impact to these accounts and their future beneficiaries.

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