By Ashley L. Hawley
May 30, 2020
The SECURE Act, a federal law enacted on December 20, 2019, made significant changes to how retirement assets, including 401(k) plans and other IRA’s, are treated both during our lives and for our beneficiaries after death.
This article will briefly summarize the aspects of the Act that likely matter most to you.
During Your Life
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 withdrawing from a retirement plan. Pre-2020, a person was required to begin taking distributions from their retirement plans when they attained age 70 ½. Under the new law, the age is increased to 72.
The Act also removes the age cap for funding traditional (non-Roth) IRA’s, meaning individuals over age 70 ½ are now able to make contributions so long as they are earning income.
After Your Death
Perhaps the most significant estate planning change has to do with how retirement plans may be distributed and taxed after the account holder’s death. If you were the beneficiary of someone else’s retirement assets, you are probably familiar with the concept of “stretching” the payout over the beneficiary’s life expectancy. If an account holder passed away prior to January 1 of this year, qualified beneficiaries were able stretch distribution over their life expectancy. In order to be a qualified beneficiary, the person had to either be an individual or a trust that meets specific criteria. This lifelong stretch provided income-tax-free growth of the inherited assets during the beneficiary’s life. It deferred the payment of income taxes, and if distributed in a properly drafted trust, also protected the assets from many of the beneficiary’s creditors.
In many cases, the Act has done away with the stretch-IRA. There are several exceptions.
For example, a surviving spouse, minor children (but not grandchildren) and beneficiaries who are disabled are still permitted to take distributions over their expected lifetimes, though children who are minors must take the full distribution within 10 years after reaching the legal age of adulthood.
Retirement assets can still be left in trust for these types of special beneficiaries, but drafters must be extremely careful not to disqualify the individual from this tax favorable treatment. All other beneficiaries must take the assets out of the retirement account by December 31 of the tenth anniversary of the original account holder’s death. If a beneficiary is not an individual or a qualified trust, the withdrawal must be made within five years.
Unfortunately, Congress gave us very little warning that these significant changes were coming. Accordingly, estate plans that, through the end of 2019, offered a sound approach to planning for retirement assets may suddenly no longer provide a good solution.
For example, some of our clients may have current plans in place that leave their retirement assets to a “conduit trust.”
Favorable Tax Treatment
When a beneficiary qualified for a lifetime stretch, these conduit trusts oftentimes provided an ideal situation—creditor protection and favorable tax treatment. Each of the required minimum distributions would be paid directly to the beneficiary as a distribution. Because the assets were stretched out over the beneficiary’s life expectancy, these required distributions were typically small, leaving the bulk of the assets in a creditor-protected trust for the beneficiary over their lifetime.
Now, with some exceptions (i.e. a surviving spouse), assets left in a conduit trust for a beneficiary are required to be distributed to the beneficiary, outright, within 10 years of the account holder’s death. If the account holder intended these assets to be held within the creditor-protected trust for a longer period, this sort of conduit trust language is directly contrary to his or her intentions.
What Should I Do Next?
First and foremost, check your beneficiary designations. Many people are not even aware of who is listed as the beneficiary of these types of assets. Not listing a beneficiary or listing your estate as a beneficiary is the most common (and most costly) mistake that people make.
Second, review your estate plan. Even if you do not have a trust as a beneficiary of your retirement assets, you should review your estate plan and speak with a qualified estate planning attorney to discuss the advantages and disadvantages of creating a trust and naming that trust as the beneficiary of your retirement assets.
And, if you have a trust as the beneficiary of your retirement assets, you should have the language of that trust reviewed to make sure it is up to date with the new terms.
The best information for you to know is there are options and creative strategies to be explored in order to make the most of the new law.
© 2020 The Badger Common Tater, Antigo, WI. Reprinted with permission
The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.
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