Stephen A. Pinnacoli, Esq., LL.M.
The Law Offices of Keane Thomas & Pinnacoli
Edward Jones Financial Advisor
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is 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.
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 your beneficiaries are properly planned for.
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. If you have previously planned for the above issues by utilizing a trust for your retirement assets (potentially called a “conduit trust”), you should sit down with your tax or estate planning professional to discuss the ramifications the required 10 year distribution rule will have on your trust beneficiary’s distributions. A Conduit Trust requires RMDs to be paid through to the beneficiary (to ensure the life expectancy stretch under the old tax laws); however, under the SECURE Act, the beneficiary will receive the entire IRA within ten years. This will not only increase taxes, as discussed above, but it could frustrate your intent to protect the funds from your beneficiary’s creditors or divorcing spouses.
Some planning options to help alleviate the tax implications of the SECURE Act include, but are not limited to:
- Converting your Traditional IRA to a ROTH IRA (keep in mind your minimums for social security and Medicare Part B & D “IRMAA”)
- Utilize Life Insurance to pay the income tax consequences caused by the forced accelerated 10-year withdrawal after your death.
- Leave your IRA directly to a charity or create a Charitable Remainder Trust.
Charitable Planning with IRAs with direct contributions will allow you to eliminate any income tax consequences attributed to your IRA. Also, if you have a large enough estate, this would create an estate tax charitable deduction. Utilizing a Charitable Remainder Trust will create an annuity payment to your beneficiary that will “mimic” the stretch provided by using the life expectancy of the beneficiary. There will be no income tax on the distribution to the Charitable Remainder Trust, and the beneficiaries would only pay tax on their yearly distribution amount. You can couple this with life insurance planning to make up for the percentage of the asset that goes to the charity at the termination of the trust. If you are concerned about the amount of money available to your beneficiaries, the impact that the accelerated income tax may have on the ultimate amount, and the potential creditor protection eliminated due to the SECURE Act, please contact your tax or estate planning professional to explore different strategies to update your plan to alleviate said concerns.