How Does the SECURE Act 2020 Affect Your Estate Planning?
The federal SECURE act became effective on January 1, 2020, which affects many people who have already established their estate plans. “SECURE” stands for Setting Every Community Up for Retirement Enhancement. The 2020 law implements new rules regarding the inheritance and distribution of retirement accounts to beneficiaries named under the plan or in estate planning documents.
The Law Before the SECURE Act?
Prior to 2020, most designated beneficiaries of a deceased individual’s inherited retirement account could extend distributions from the IRA over their lifetime.
This kind of “stretching” of withdrawals over their lifetime allowed designated beneficiaries to continue earning investment returns on a tax-deferred basis indefinitely. The ability to stretch withdrawals was a popular wealth preservation tool. Families could pass wealth across generations with minimal taxes, while their IRAs continued to grow tax-free.
The SECURE Act has eliminated a beneficiary’s ability to “stretch” these withdrawals from an IRA over their lifetime.
What Did the SECURE Act Change in 2020?
Instead of “stretching” lifetime withdrawals, the amount of a deceased person’s retirement account must be distributed to the designated beneficiary in full within 10 years of the decedent’s death. However, there are exceptions to the ten-year payout rule under the SECURE Act.
The following five classes of “eligible designated beneficiaries” are not required to withdraw the entire amount of the IRA within 10 years:
- The plan participant’s surviving spouse;
- Disabled beneficiaries;
- Chronically ill individuals;
- Beneficiaries less than ten years younger than the plan participant; and
- Minor children of the plan participant.
Note: The ten-year rule applies to minor children when they become legal adults. Therefore, a plan participant’s child must take all assets from the decedent’s IRA and pay all applicable taxes by age 28.
Interestingly, the SECURE Act does not require withdrawals to be made during the ten-year period. However, the beneficiary must withdraw all assets and pay the taxes at the ten-year mark.
How to Mitigate the SECURE Act’s Impact on Estate Planning
If you own an IRA or other qualified retirement account, you should talk to your attorney to review your current beneficiary designations on your IRA to mitigate some of the impacts of the SECURE Act.
If your existing estate plans include provisions that create conduit trusts with the purpose to hold IRA accounts and preserve the stretch IRA benefit, you may want to revisit those provisions. Any existing conduit trust must be modified before the plan creator’s death because the SECURE Act may undermine the intent of the trust.
There are a couple of alternatives to the “stretching” of withdrawals after the SECURE Act:
- Making a charity the beneficiary of your IRA account while using life insurance or other estate planning strategies to replace the value of the charitable donation.
- Paying the IRA balance to a Charitable Remainder Trust (CRT) to stretch out the distributions to the CRT’s beneficiary over his or her lifetime (when used combined with a life insurance trust, this might replace the assets that pass to the charity under the CRT rules).
Speak with experienced St. Petersburg estate planning attorneys to discuss the potential impact of the SECURE Act on your estate plan and explore ways to address the changes of the Act. Contact Legacy Protection Lawyers, LLP, at 727-471-5868 to evaluate your situation today.
