You may have heard that the federal appropriations bill enacted into law by Congress and the President in the final weeks of 2019 includes changes to the federal tax code that may affect your qualified retirement plan (such as a 401(k)) or IRA (Individual Retirement Account, sometimes called “retirement assets”).
Those changes, often referred to as the “SECURE Act,” could affect you during your lifetime, but will also affect the way in which those retirement assets may be distributed to your beneficiaries after your death. The SECURE Act may significantly impact the timing and amount of taxes paid by those beneficiaries on distributions of the retirement assets, as well as your ability to protect the retirement assets from the beneficiaries’ creditors, lawsuits, and divorcing spouses, and ultimately may affect the value of those retirement assets in the hands of the beneficiaries.
This article summarizes some of the key aspects of the SECURE Act that may affect you or your estate plan; however, given the significance of these changes, we strongly urge you to contact our Firm or your legal/tax advisers to discuss this new law in detail and how it impacts you and your estate plan.
Changes Affecting You During Life (The Only Good News)
One component of the SECURE Act that will affect many people during their lives is a change in the age at which a person must begin taking distributions from a qualified plan or IRA. Under the law prior to the SECURE Act, most people (with the exception of some who are not yet retired) were required to begin taking distributions from qualified plans or traditional (non-Roth) IRAs by April 1st of the year following the one in which they reached age 70 ½.
Under the SECURE Act, the age is increased to 72 for those who were not yet required to take distributions under the old law. In addition, the SECURE Act removes the age cap for funding traditional (non-Roth) IRAs, meaning that individuals over age 70 ½ are now eligible to make contributions to a traditional IRA.
Again, consult with your accountant regarding lifetime changes as they involve additional detail and nuance beyond the summary provided above and may present an opportunity for some to take further advantage of the tax-deferred savings offered by qualified plans and traditional IRAs.
In some instances, the new rules may even present additional opportunities for funding a Roth IRA. Your accountant or financial adviser is likely in the best position to advise you as to whether and how you might benefit from these changes in the law.
After Your Death (Some Bad News That Needs Your Attention)
Perhaps the most significant changes brought about by the SECURE Act—for purposes of estate planning—relate to how your qualified plan or IRA is distributed and taxed after your death.
You may have discussed the goal of “stretching-out” your retirement assets after death with your attorney. Under the law prior to January 1st of this year, it was possible to stretch the distribution of inherited qualified plan or IRA assets over the life expectancy of a beneficiary, if that beneficiary met the requirements of a “designated beneficiary” under the law.
This lifetime stretch-out offered potential advantages in terms of income tax deferred growth of the retirement assets during the beneficiary’s life, the cumulative amount of income tax paid on distributions from the retirement account, and protection of the retirement assets from the beneficiary’s creditors, lawsuits, and divorcing spouses, or even from a beneficiary who might not have the ability to handle significant amounts of money at one time. The law also permitted these advantages for retirement assets left in trust, as long as the trust was structured to meet certain requirements.
The SECURE Act has changed these rules so that most designated beneficiaries will be required to receive the full amount of an inherited qualified plan or IRA within ten (10) years of the death of the person who funded the qualified plan or IRA. Certain designated beneficiaries, including your surviving spouse, your minor children (but not grandchildren), and beneficiaries who are disabled or chronically ill, are still permitted to take distributions based on their remaining life expectancies (though children who are minors at the time of inheritance must now take the full distribution within ten years after reaching the legal age of adulthood); however, if the retirement assets are left to those beneficiaries in trust, they may not qualify for the "stretch" distribution, depending on the terms of the trust.
The good news is that the SECURE Act does not change the method of designating a beneficiary or beneficiaries to receive inherited retirement assets. If you have existing beneficiary designations in place, those designations are still valid. What the SECURE Act does, however, is introduce a host of new considerations that we must take into account in structuring your estate plan to maximize the benefit of the retirement assets and best protect your beneficiaries.
Unfortunately, Congress gave us very little warning that these changes were on the horizon. Accordingly, estate plans that, through the end of 2019, offered a sound approach to planning for retirement assets, may no longer provide the best solution.
For example, some of our clients may have current plans in place that, at death, leave their retirement assets to a trust known as a “conduit trust.” Any distributions from retirement accounts paid to a conduit trust will pass immediately from the trustee to the beneficiary. Under the old law, that may have been a good solution in some situations, because the distributions would be stretched over the expected lifetime of the trust beneficiary. Therefore, very small distributions would be required to be paid out of the asset protection trust.
However, under the SECURE Act, that same conduit trust likely will now require distribution of the retirement assets to the beneficiary within 10 years of the death of the plan participant or plan owner or when the minor child reaches adulthood. Depending on the circumstances, other planning techniques may better serve the goals those plans are meant to achieve, given the new rules.
Basically, there are four different situations (and several more smaller variations) and each situation requires different actions. Read below to determine your situation and the actions to take (if any).
(Small IRA & Retirement Accounts)
You have smaller IRA and retirement accounts, adult children who are all currently healthy and are the direct primary or contingent beneficiaries of your IRA/retirement accounts.
First, you probably don’t have to be too concerned if your children are adults and are named as the direct beneficiaries of smaller IRA or other retirement accounts (at the death of the second spouse). There are exceptions when an heir (other than your spouse) is below the age of 26, chronically ill, or where you want to protect your beneficiary or beneficiaries from divorce and lawsuits.
WHAT TO DO: While we are continuing to review the Act and all of your options, if you: 1) have estate planning without IRA trusts and 2) have currently healthy adult children and you are sure that they are named as direct beneficiaries, then simply call Lisa, Tammy, Kara or Denise at 610.933.8069 to schedule a telephone review, later in the year, or sooner if you want to create a trust to protect your heirs’ inherited IRA accounts from future divorce, lawsuit and creditor concerns.
(Post-2012 Will or Trust that contain an IRA Trust and/or you have minor children/grandchildren)
Your will or revocable trust was drafted after 2012 but it contains IRA trusts and/or you have children or grandchildren as beneficiaries and they are below the age of 26, have a chronic illness or a special need.
If you have a will or trust drafted after 2012 that contains IRA trusts and/or you have named one or more of those trusts as a beneficiary of your IRA or retirement accounts rather than a child or grandchild directly, then the trusts will no longer operate as intended and you should call to schedule a telephone conference.
WHAT TO DO: As noted, call Lisa, Tammy, Kara or Denise at 610.933.8069 to schedule a brief telephone conference with one of our lawyers to review your options. There is no charge for the call. There are also some very simple fixes available that cost between $750 and $1,500.00. Unfortunately, because of the complexity of the SECURE Act and the importance of the trusts being carefully constructed to receive IRAs, many lawyers and accountants either know that they cannot do these or they are providing misinformation to clients. As a result, the demand to fix these trusts is very high and we are scheduling people now through the upcoming months.
(Stand-Alone IRA Trust or Current Retirement Accounts Name a Trust as Beneficiary)
If you have a stand-alone IRA trust or any of the primary or contingent beneficiaries on your current retirement account include a trust.
If you have a stand-alone IRA trust (which has always been the best practice for those with larger IRAs and retirement accounts, it is probably structured as a “conduit trust” and will no longer work as you expected. While the Internal Revenue Code still recognizes conduit trusts, it may be important to change the trust to an “accumulation trust” or a hybrid trust depending on your particular circumstances.
WHAT TO DO: In this case, you should call to review the situation with one of our attorneys. Once we have verified the best approach to updating the trust to comply with the new law, we will also schedule you for an appointment to revise the trust.
(Estate Planning Documents Executed pre-2012)
Finally, if your estate planning documents were executed before 2012 and you have any retirement accounts, you should call to schedule an update of your planning (which, due to changes in the law, may now no longer function as intended); however, if you are trying to protect significant IRA assets from divorce or lawsuits against your heirs and you have used a trust under your will or revocable trust, or if you have a stand-alone IRA trust, then your planning will need to be adjusted in consideration of the changes brought about by the SECURE Act.
Generally speaking, the new rules say beneficiaries of qualified retirement accounts, such as IRAs and 401(k) plans, need to withdraw the entire balance from those accounts within ten years, instead of over their life expectancy as was previously allowed. There are no required minimum distributions within that time frame, but the account balance must be zero after the tenth year. As a result, your heirs will pay the income tax on those assets much sooner than they would have under prior law.
As a result of these complicated law changes, original account holders and their beneficiaries may want to discuss their retirement account beneficiaries, as well as current inheritance and withdrawal plans with UTBF Estate Planning attorneys, their financial professionals, the institution housing the assets or the firm handling a trust. Failure to act on these changes, if necessary, could leave some beneficiaries paying substantially more in taxes and substantially more vulnerable to divorce, creditors and lawsuits.
Unfortunately, even though you have a plan in place, it likely does not work as you intended. Contact David Frees, Douglas Kaune, or Andrew Friedlander today at (610) 933–8069 for information regarding how to update your estate plan to conform to the provisions of the SECURE Act so that your children and beneficiaries are properly protected.
David Frees, Douglas Kaune, and Andrew Friedlander represent thousands of clients in Chester county, Montgomery county, Delaware county, Philadelphia county, Berks county and Lancaster county and many clients from communities such as, Wayne, Berwyn, Devon, Paoli, Exton, Phoenixville, West Chester, Malvern, Chester Springs, Ardmore, Villanova, Rosemont, Newtown Square, Gladwyne, and surrounding areas.