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  • Linda Varga

Congress Passes The SECURE Act: How It Impacts the Beneficiaries of Your Retirement Account


On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), which was effective January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of your retirement accounts: The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death. If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. § 1.401(a)(9)-3, Q&A (4)(a)(2) and 1.401(a)(9)-5, Q&A (5)(b).


The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and you have properly planned for your beneficiaries.


Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated.


Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.


Review/Amend Your Revocable Living Trust (RLT)

Depending on the value of your retirement account, we may have addressed the distribution of your accounts in your Revocable Living Trust so that the Trustee would handle your retirement accounts at your death. If your trust was drafted by Moravec, Varga & Mooney then it includes a “conduit” provision, and, under the old law, the trustee would distribute required minimum distributions (RMDs) to the trust beneficiaries, allowing the continued “stretch” based upon their age and life expectancy. A conduit trust protected the account balance, and only RMDs--much smaller amounts--were vulnerable to creditors and divorcing spouses. With the SECURE Act’s passage, a conduit trust structure may no longer work for you because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. Should you desire that the Trustee hold onto the distributions for longer than ten years, we should discuss the benefits of amending your Trust to include an “accumulation” provision, an alternative trust structure through which the trustee can take any required distributions and continue to hold them beyond the 10 years in a protected trust for your beneficiaries.


If your Trust was drafted by another law firm, it may include a provision requiring that only the required minimum distributions be taken on a yearly basis from your retirement plan. If that is the case, then such a provision would mean that the entire balance would have to be withdrawn in the tenth year thereby subjecting the entire remaining balance to income tax in that single tenth year as opposed to spreading the income over the full ten-year stretch period. This may not be your intended result so you may need to consider amending your Trust.


Consider Establishing A Trust If You Don’t Have One

For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not prepared a Trust for you already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing 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 is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.


If you have recently divorced or married, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.


Other Strategies

Although this new law may be changing the way we think about retirement accounts, we are here and prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are charitably inclined, now may be the perfect time to review your 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, we can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death.


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. Call 626-793-3210 or send us an email.

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