By: Greg Reese, President & CEO, AmeriEstate Legal Plan, Inc.
The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on Friday, December 20, 2019 and became effective as of January 1, 2020.
For purposes of this article, traditional IRAs and employer tax deferred accounts such as 401(k)s, 403(b)s, and 457s will all be referred to collectively as Qualified Retirement Plans or QRP’s.
For QRP Account Owners there is one major change created by the new law:
1) Required Minimum Distributions (RMDs) for QRP Account Owners Will Start at Age 72, Not Age 70½.
** Note that Surviving Spouses who are the named beneficiary of the QRP will still be allowed to “roll over” the QRP into their own IRA Rollover.
For Inherited QRP’s there are a few significant changes created by the new law:
2) For inherited QRP’s, Required Minimum Distributions (RMD’s) will no longer be required.
3) The “Stretch IRA” option for persons inheriting a QRP (other than a spouse) are effectively eliminated.
4) The QRP must be completely withdrawn by the end of the 10th year after the owner’s death.
5) If the beneficiary of the QRP is a conduit trust, it must now be completely distributed to the Trust's beneficiaries.
A spouse who inherits an IRA is still able to treat the IRA as his/her own by rolling it over into an IRA in the name of the surviving spouse (and taking distributions over his/her lifetime). The following non-spouse beneficiaries are also given special treatment:
- Disabled or chronically ill individuals
- Individuals who are not more than 10 years younger than the account owner
- Minor children: However, once the child reaches the age of majority, he or she has 10 years to withdraw the money from the account.
Under the prior law, people (other than spouses) inheriting a QRP generally had the choice of 3 options:
1) Cash out the entire QRP and pay the associated taxes
2) Create an “inherited IRA,” take at least Required Minimum Distributions (RMD’s) each year, and cash out the QRP within 5 years (paying all taxes by the end of 5 years).
3) Create a “Stretch IRA” where payments from the QRP would be distributed in roughly equal payments over the beneficiary’s life expectancy.
What You Should Do
Here are some actions you should consider taking to protect your beneficiaries from the ramifications of the SECURE Act:
1. Review Your Beneficiaries
Because the SECURE Act changes the outcome for many inherited retirement accounts to be distributed in a shorter time period, now is the time to review your beneficiary designation. Beneficiary designations on IRAs and 401(k)s determine who the accounts will pass to once the owner dies. Take the time to make sure all your beneficiary designations are in order and that they still match up with your intended goals. Changing a beneficiary designation might make sense to better align with your goals after the SECURE Act’s passing.
2. Consider Naming Your Spouse as Your Primary Beneficiary
Naming a spouse as the primary beneficiary of your IRAs instead of naming your children (as is quite common when you have children from a prior marriage), will allow them to continue tax-favored growth without having to follow the 10-year timeline for withdrawals. Although they are still subject to RMDs from that account based on their life expectancy, those withdrawals will likely be less than what would be required under a 10-year withdrawal plan, and your spouse is likely to be in a lower tax bracket then your children. If your children are from a prior marriage, but you were intending to leave some assets to your current spouse and some to your children, consider naming your spouse as the beneficiary of your IRA or other qualified account, and leaving other assets to your children.
3. Take a Closer Look at Your Trust
If you were using a trust as a beneficiary of an IRA or 401(k) in order to achieve creditor protections and take advantage of the stretch IRA provisions through a conduit trust, there could be a huge issue with your plan now that the SECURE Act has been enacted. Be sure to review your trust documents and beneficiary designations and have your attorney make whatever changes you both agree are necessary. If you have chosen this option because you have minor, disabled or chronically ill beneficiaries, chances are that the trust you are using as the Beneficiary of the QRP is a “Conduit” Trust. Ask your attorney under these circumstances whether this portion of your trust should be converted to an “Accumulation Trust” .
4. Consider a Charitable Remainder Trust
If you have a significant IRA, and your goal is to give lifetime income to a child, and you desire to leave a gift to charity upon your death, you might want to consider establishing a charitable remainder trust (CRT) that will be named as the beneficiary of your IRA funds, and these funds can then be used to provide your child with lifetime income (similar to a stretch IRA) while also leaving a lump sum amount to the your favorite charity upon your child’s death. The CRT isn’t taxed on either the distribution from the IRA or income and gains it earns, but your child likely will owe taxes on distributions from the CRT (just as your child would owe taxes on distributions from a stretch IRA).
Now is the Time to Make Revisions to Your Estate Planning Documents
The SECURE Act may have a significant impact on some retirement and estate plans. Consider reaching out to your Estate Planning attorney and/or CPA to guide you in the best course of action, especially if you are now using a trust as the named beneficiary to your QRP.