Estate Planning

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 (sometimes called “retirement assets” in this letter).  Those changes, often referred to as the “SECURE Act,” may affect you during your lifetime, but may also affect the way in which those retirement assets may be distributed to your beneficiaries after your death.  Significantly, the SECURE Act may impact the timing and amount of tax paid by those beneficiaries on distributions of the retirement assets, as well as your ability to protect the retirement assets from the beneficiaries’ creditors, and ultimately may affect the value of those retirement assets in the hands of the beneficiaries.

Most notably, the SECURE Act does the following:

  • Allows many individuals to wait until age 72 to begin taking distributions from qualified plans or IRAs (if they have not already started taking distributions)
  • Eliminates the age restriction on contributions to a traditional (non-Roth) IRA
  • In many cases, eliminates the ability to stretch distribution of retirement assets over the life expectancy of a designated beneficiary after the employee’s death, requiring distribution within 10 years instead
  • Creates a dilemma for blended families by making it difficult to stretch the distribution of retirement assets over the life of a surviving spouse while still controlling how the retirement assets pass after the surviving spouse’s death

As is often the case when dealing with new laws, the details of these changes are complex and cannot fully be explained in a few bullet points.  The rest of this letter summarizes in some additional detail the key aspects of the SECURE Act that may affect you or your estate plan.  I hope you find it helpful in understanding the major changes enacted by this legislation, and how they might affect you.  However, given the significance of these changes, I strongly urge you to contact our office to arrange a time for us to discuss this new law as it applies to you and your family, so that we may take any action to revise your estate plan to protect your beneficiaries and their inheritance of your plan and IRA interests.

Changes Affecting You During 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 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 their qualified plans or traditional (non-Roth) IRAs by April 1 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.

These changes involve additional detail and nuance beyond the brief 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, they may even present additional opportunities for funding a Roth IRA.  Your accountant or financial advisor is likely in the best position to advise you as to whether and how you might benefit from these changes in the law.  I encourage you to reach out to them to discuss your retirement strategy in light of the SECURE Act.  Of course, you are welcome to contact me as well, and I will be glad to assist you in understanding how the SECURE Act applies to your circumstances, in coordination with your other trusted financial professionals as appropriate.

After Your Death

Perhaps the most significant changes brought about by the SECURE Act, at least in terms of estate planning, relate to how your qualified plan or IRA is distributed and taxed after your death to avoid penalties.  You may recall that we discussed the goal of “stretching out” your retirement assets after death.  Under the law prior to January 1 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 free  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, 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 10 years of the death of the person who funded the 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 over their expected lifetimes (though children who are minors at the time of inheritance must now take the full distribution within 10 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 lifetime 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 a good 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 retirement assets 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.  However, under the SECURE Act, that same conduit trust may 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.

Take Action

If you have assets in a qualified plan or IRA, I recommend that we review your estate plan as soon as possible, to ensure that it disposes of those assets in the best possible manner, taking into account the SECURE Act changes.  I would welcome the chance to discuss these changes with you, answer any questions you may have, and make recommendations specifically for you.  Please contact my office to arrange a meeting or phone conference at your early convenience, so that we can help you find the best planning solutions to meet your needs and those of your family.