For most Americans, a retirement account (IRA, 401k, 403b), is the largest asset they will own when they pass away. A new law that went into effect January 1, 2020 increases the tax burden on most retirement account beneficiaries.
First, the good news: The SECURE Act (Setting Every Community Up for Retirement Enhancement), increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age. It also eliminates the age restriction for contributions to qualified retirement accounts and expands the class of employees who can participate in these plans to include permanent part-time workers.
Now the bad news: 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. This increases the income tax burden on most beneficiaries in comparison to prior law.
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.
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.
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. You may simply want to protect your beneficiaries against their own excessive or wasteful spending habits. Whatever the case, it is critical to act now to protect your hard-earned retirement benefits and your loved ones.
Here are some changes to consider:
1. Review/Amend Your Living Trust or Standalone Retirement Trust (SRT)
Depending on the value of your retirement account, you may have addressed the distribution of your accounts in your living trust, or you may have created an SRT to handle your retirement accounts at your death. Your trust may have included a “conduit” provision, and, under the old law, the trustee would only 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 accommodate your objectives, as the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. You may want to consider the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.
2. Consider Additional Trusts
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 you intend 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 that 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.
3. Charitable Gifts and Other Strategies
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 that the new law may substantially reduce the amount of money available to your beneficiaries, several strategies may be explored to infuse your estate with additional cash upon your death.
Whatever your objectives, we are prepared to help you protect your hard-earned retirement benefits and ensure they are distributed in the manner you desire.
If you would like to review or update your trust, please contact our offices at 678-319-0100.
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).