Family. Retirement Accounts. Taxes. Oh My! – New SECURE Act

Coffee in hand, I sit down to my laptop to start my day. My inbox is overflowing with emails from colleagues and trusted advisors. I’m seeing it in my Facebook feed and all over LinkedIn. If you’re like me, you’re drowning in information about this new SECURE Act. 

Let me get right to the point. [Which I cover in a Free Webinar, click here to register]

The 2020 SECURE Act. What is it and why should you care? 

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law and became effective January 1, 2020. As I see it, the Act has two positive changes:  

  1. It delays the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts — from 70½ to 72 years of age, and,
  2. It eliminates the age restriction for contributions to qualified retirement accounts. 

 Great. But there’s also an onslaught of implications, which I wouldn’t call “positive.”  

Your beneficiaries may pay way more in taxes. 

The most significant SECURE Act 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.  

For most families, this will mean a massive increase in taxes paid! 

Under the old law, beneficiaries could spread distributions over their life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, AND could bump beneficiaries into a higher income tax bracket. In both scenarios, they receive less of the funds contained in the retirement account than you originally anticipated. 

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, the account owner’s minor children, older beneficiaries who are within 10 years of age of the account owner, disabled individuals, and chronically ill individuals. 

You may need a new way to protect your retirement assets.

You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, or a divorcing spouse. With the new law, it might be time for new strategies to protect your hard-earned retirement account and the ones you love.  

Review/Amend Your Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT) 

Depending on the value of your retirement account, we may have addressed the distribution of your accounts in your RLT, or we may have created an SRT that would handle your retirement accounts at your death. Your trust may have included a “conduit” provision, and, under the old law, the trustee would only pay out the required minimum distributions (RMDs) to the trust beneficiaries, allowing a 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 be the best option, because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. 

In this case, we should discuss 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. 

Consider Additional Trusts 

For most Americans, a retirement account is the largest asset they’ll own when they pass away. If we haven’t done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance.

 Review Intended Beneficiaries

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’s important that your beneficiary designation is filled out correctly.

If your intention is for 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, make sure you revise your plan 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.

Other Strategies

If you’re 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’re concerned about the amount of money available to your beneficiaries and the impact that accelerated income tax may have on the ultimate amount, we can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death. 

So, is it time to review your estate plan? 

I can’t emphasize enough how important it is to go over your estate planning goals more than just once, updating your planning so it meets your current goals, your current beneficiaries’ circumstances, and addresses current laws… yes, like this new SECURE Act.   

If it’s time for you to update your plan (especially if you don’t know whether it’s time to update your plan which is a really good sign that it probably is…)  book an appointment with us to talk about our 7-part Plan Preservation Program. It’s a maintenance program for your estate plan designed to ensure families of all kinds avoid extra taxes, surprise expenditures, cascading problems, and lengthy and complex probate processes. (All 7 steps are outlined here.) 

The new SECURE Act — Get More Info 

I created an informational webinar about the SECURE Act, how it impacts your family, and what to do now. Let us know you’d like access, and we’ll make sure you have all the details! 

I’d Like access to the SECURE Act Webinar! CLICK HERE

                                                                                                                                           

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