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 individual retirement accounts from 70½ 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 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.
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. In order to protect your retirement account, it is important to act now.
Your trust may have included a “conduit” provision, and, under the old law, the trustee would 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 will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. You should 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.
For several years, we have been recommending that clients consider giving a beneficiary the right to establish an accumulation trust, which is an alternative structure that does not require the payout of the RMDs to the beneficiary directly. Under an accumulation trust structure, a beneficiary can make a timely election to be treated as an accumulation trust and thereby permit the trustees to retain distributions in a protected trust for them.
Since retirement accounts are often the largest assets that people will pass on to their family, it may be beneficial to create trusts to handle these retirement accounts.