Feeling SECURE in your Retirement Account Beneficiary Designations: An overview of The SECURE Act and how it impacts you and your family
Major changes to the laws governing retirement accounts became effective January 1, 2020. The SECURE [Setting Every Community Up for Retirement Enhancement] Act provides a sweeping reform in the way the workforce both contributes to and devises retirement accounts. Here is what you need to know:
Change to Required Beginning Date and Contribution Age Limit – The SECURE Act increases the age at which a retirement account owner (participant) must begin taking required minimum distributions (RMDs) from 70½ to 72. In addition, the SECURE Act eliminates the age cap for making contributions to retirement accounts. Previously, contributions were not allowed once an individual reached age 70½.
Now, an individual can contribute to his or her retirement accounts at any age, so long as he or she is still working.
Change to Inherited IRA Rules – One of the most significant changes brought about by the SECURE Act is the elimination of the “Stretch IRA” for most IRA beneficiaries. Previously, most individual beneficiaries of Individual Retirement Accounts (IRAs) were allowed to “stretch” RMDs over that beneficiary’s own life expectancy. The option for the Stretch IRA allowed the principal amount of the retirement account to continue to grow tax-free for the life of the beneficiary. Now, most beneficiaries are required to withdraw all assets from the account within 10 years of the participant’s death. For these beneficiaries, there is no RMD prior to December 31 of the year containing the 10th anniversary of the account owner’s death. A beneficiary should meet with his or her financial advisor and/or CPA to determine the best time(s) to withdraw funds from the retirement account in an attempt to mitigate the income taxes due at the time of withdrawal. There are some exceptions to the elimination of the Stretch IRA. Spouses, minor children, beneficiaries not less than 10 years younger than the participant, disabled individuals, and chronically ill individuals are typically still able to stretch RMDs over their lifetimes. If you believe one or more of your retirement account beneficiaries fall into one of these five categories, you should contact your financial advisor and estate planning attorney.
Naming a Trust as Your Beneficiary – There are some circumstances in which it is advisable to name a trust as the beneficiary to a retirement account. This type of planning is typically done when the participant does not want a beneficiary to have control of or access to all or some of the retirement account, perhaps because that beneficiary is financially irresponsible or has a job that opens him or her up to a large amount of liability. In these situations, there are two types of trusts typically used to hold and distribute retirement account proceeds: Conduit Trusts and Accumulation Trusts.
Conduit Trusts dictate that any retirement account distributions paid to the trust be immediately paid outright to the trust beneficiary. This allows the beneficiary to pay income tax on the distribution at his or her income tax bracket, which is typically lower than the income tax bracket associated with trusts. Pre-SECURE Act, this type of trust allowed the beneficiary to receive the RMDs (calculated according to his or her life expectancy) while restricting the beneficiary’s ability to liquidate and potentially squander away the principal amount of the retirement account. Now, the trustee of the conduit trust will have the ability to liquidate the retirement account over 10 years (just as an individual beneficiary would), but within 10 years of the participant’s death account must be distributed outright to the beneficiary. In a nutshell, with the SECURE Act, the conduit trust only allows the participant to protect the account from the beneficiary for 10 years after the participant’s death.
Accumulation Trusts allow retirement account funds to “accumulate” in the Trust without being distributed to the beneficiary right away. This type of trust allows the participant maximum post- death control over the retirement account. The downside of an accumulation trust is that any income held in the trust is taxed at the trust rate (currently close to 40%). However, some participants believe the extra tax burden is worth the control the accumulation trust allows over the retirement account after death. The SECURE Act requires the entire retirement account to be distributed to the trust within 10 years of the participant’s death, but the participant is able to restrict the beneficiary’s access to those funds according to the terms of the trust.
An important thing to keep in mind when evaluating if a conduit trust or an accumulation trust is right for you, is the type of retirement accounts you own. Roth IRA distributions do not incur income taxes because the income taxes on those funds have already been paid. If you are naming a trust as a beneficiary to a Roth IRA, the income tax considerations mentioned above do not apply. It is a good idea to meet with your estate planning attorney, financial advisor, and/or CPA to determine if Roth conversions would make sense in your situation.
What You Need to Do - Every individual who owns a retirement account should review his or her account structure, beneficiary designations, and estate plans as soon as possible. If any of your retirement accounts name a trust as beneficiary, it is very important that you contact your estate planning attorney to determine what changes need to be made to your beneficiary designations and your estate planning documents.
The attorneys at McLin Burnsed are dedicated to providing our clients with exceptional service. Part of this exceptional service includes staying up-to-date with changes in the law and legislation. Our attorneys are attending webinars, seminars, and workshops to ensure we are properly informed on the SECURE Act and how it affects our valued clients. Call McLin Burnsed today to schedule an appointment to discuss how the SECURE Act affects you and your beneficiaries!
– Christina A. Campbell, Esq. - McLin Burnsed