Estate Planning and Trust Preparation The SECURE Act

Posted: September 24, 2020 | News

You may or may not have read that a change in retirement planning has been made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was incorporated into last year’s end-of-year spending bill and signed by the President on December 20, 2019. While we are not able address every piece of legislation that may impact the estate plans of our clients, this new Act is one with such broad impact that we believe it is important enough to make an exception.

SECURE immediately changes the rules concerning IRAs, Roth IRAs, 401(k), 403(b) and qualified plans (hereinafter “IRAs” for simplicity). The biggest change in terms of estate planning, though the new law makes other changes, is that most Designated Beneficiaries (people who would inherit your plans) will be required to withdraw the entire retirement account within 10 years of the original account owner’s date of death.

Under the old rule, an owner was required to withdraw required minimum distributions (“RMDs”) upon attaining the age of 70 ½ years old. Further, upon the owner’s death, if the owner designated his/her surviving spouse as a Designated Beneficiary, then the surviving spouse could treat the owner’s IRA as a Spousal Rollover (i.e., treat as the surviving spouse’s own IRA) or treat the owner’s IRA as an Inherited IRA. An Inherited IRA used the beneficiary’s life expectancy to “stretch out” withdrawals. A non-spouse Designated Beneficiary (such as a child or a grandchild who you want to inherit your IRA) had the option to take a lump sum distribution, or to treat an owner’s IRA as an Inherited IRA. Thus, a non-spouse Designated Beneficiary had the option to stretch out withdrawals by utilizing an Inherited IRA thereby allowing the IRA to grow tax-free until distribution, often over a long period of time, such as the entire lifetime of the Designated Beneficiary.

Under SECURE, the RMD starting age is extended to 72. More importantly, except for a few types of “Eligible Designated Beneficiaries”, the stretch out payment is eliminated and replaced by a 10-year post-death payout period. This means that a Designated Beneficiary is required to withdraw all IRA funds within 10 years of an owner’s death, rather than being able to stretch out IRA withdrawals to minimize income taxes. This will likely increase the income tax liability of most Designated Beneficiaries. Importantly, the stretch out is still available for some types of Designated Beneficiaries, including surviving spouses, now called Eligible Designated Beneficiaries under the new Act.

Therefore, anyone with a retirement account should seek counsel to determine the implications of SECURE. SECURE creates new estate planning opportunities, some of which include:

        Roth Conversions: A Roth conversion involves taking all or part of an existing traditional IRA and converting it to a Roth IRA. The idea is to pay income tax now on the contributions so that the remaining Roth IRA grows tax-free longer without the need for RMDs. This could result in a larger tax-free inheritance to your beneficiaries.

       Accumulation Trusts: If you have a beneficiary with spending or substance abuse issues, then consider an Accumulation Trust. An Accumulation Trust is a trust that receives IRA funds and limits access to the beneficiary and denies access to creditors. Although an Accumulation Trust still pays income tax upon receipt of IRA funds, this may still be preferable to a beneficiary receiving funds outright.

        Charitable Remainder Trusts (“CRT”): If you want more than a 10 year stretch out of IRA payments and you have charitable intent, consider naming a CRT as a beneficiary. Upon your death, the CRT pays no income tax when receiving the IRA funds and pays income to an income beneficiary. This income can be stretch out for the income beneficiary’s entire life; however, a CRT subjects the payout amount to the beneficiary’s creditors.

For those of you whom we have created retirement trusts over the years, we urge you to contact us for a free review of its provisions to determine what, if any, adjustments should be made. If revisions are needed to meet your goals given the new Act, we will provide you with an estimate of the fee to address those needs. For those who have revocable trusts or family trusts, the same suggestion applies, and we may need to make revisions to some trusts to accommodate the new law’s changes. We invite you to please contact our office if you would like to discuss SECURE and its impact on your estate plan.

John P. Hannon III

John P. Hannon, III, Esq. is an Associate in Ferruzzo & Ferruzzo, LLP’s Trust and Estate Administration Practice Group. John assists clients with the administering trusts and estates, including inventorying assets, settling creditor claims, marshalling assets, collecting death benefits, assisting with Federal Estate Tax Returns, funding subtrusts, probating estates, and modifying and decanting trusts. He also advises clients on real property issues, including determining title, clearing clouds on title, and maximizing property tax efficiency through exclusions and legal entities.