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SECURE Act and Your Estate Planning

One area you may want to re-visit at this time is your retirement accounts, such as a 401(k) or an IRA. During the final weeks of 2019, Congress and the President signed into law an update to the federal tax code known as the “SECURE Act”. The changes set forth in the SECURE Act will affect your retirement plans both during your lifetime and after your death. More particularly, the SECURE Act will impact the timing and amount of taxes paid by beneficiaries of your retirement accounts, your ability to protect those retirement assets from creditors, and ultimately the value of your retirement assets in the hands of your beneficiaries.

First, you should review your current retirement accounts and the designated beneficiaries upon death. Based on the changes set forth in the SECURE Act, you should possibly update the beneficiaries of your retirement accounts to address the changes in the SECURE Act.

Required Minimum Distributions. One component of the SECURE Act that will affect many people is a change in the age at which a person must begin taking distributions from a qualified plan or an IRA (Required Minimum Distributions or “RMDs”). Previously, most people were required to take RMDs from their plans after reaching age 70 ½; under the SECURE Act, that age increased to 72. Furthermore, the SECURE Act now allows individuals over age 70 ½ to make contributions to a traditional IRA until they are 72 ½ so long they have earned income. Though the changes mentioned above involve additional detail and nuance, they may present an opportunity to take advantage of further tax-deferred savings. We recommend contacting your accountant or financial advisor to discuss your retirement strategy in light of the SECURE Act changes mentioned above. Of course, you are welcome to contact our offices to discuss these changes and how they apply to your circumstances.

The most significant changes brought by the SECURE Act, however, relate to how your qualified plan or IRA is distributed and taxed after your death. These changes include the timing of when assets are distributed and how those distributed assets are protected from your beneficiaries’ creditors.

Stretch IRAs. Prior to January 1, 2020, it was possible for a designated beneficiary to stretch out the distribution of an inherited qualified plan or IRA assets over that beneficiary’s life. This extended period of time allowed the beneficiary to take advantage of tax benefits, including income tax free growth on the assets and the cumulative amount of income taxes paid on distributions, and creditor protection of the retirement assets. The SECURE Act, however, reduces those previously-available benefits.

The SECURE Act now obligates a designated beneficiary to receive the full amount of the inherited qualified plan or IRA within 10 years of the death of the person who funded the plan or IRA (though this change does not apply to certain beneficiaries, such as a spouse, minor children, and disabled or chronically ill beneficiaries). Because of this compressed distribution schedule, other planning techniques may better serve your goals to provide tax benefits and creditor protection for beneficiaries of your qualified plan or IRA.

In particular, using an “accumulation trust” may help you provide the same benefits to your beneficiaries that were available prior to passage of the SECURE Act. With an accumulation trust, distributions from your retirement assets may be accumulated within the trust, allowing you to control when and how those distributions are made to your beneficiaries. In designating an accumulation trust as the beneficiary of your qualified plan or IRA, though the distributions must be made within 10 years to the trust, there is no requirement that the trust automatically make such distributions to the beneficiaries thereof.

Benefits with an Accumulation Trust

With distributions being made to an accumulation trust, you can now take advantage of the benefits previously available prior to passage of the SECURE Act. First, the trust can retain the distributions from your retirement assets and grow those assets for your beneficiaries, and your loved ones will only be taxed on distributions made to them from the trust. And even though distributions must be made to the accumulation trust within the mandatory 10-year window, there is no requirement that the trust make those distributions to your beneficiaries within the same period. Furthermore, because the trust owns the distributed assets, your beneficiaries’ creditors cannot reach those assets while in the trust because, legally, your beneficiaries would not “own” those assets.

If you have significant assets in a qualified plan or IRA, we recommend you review your current beneficiary designations and your current estate plan to ensure those assets are disposed of in accordance with your planning goals in light of the recent SECURE Act changes.

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Jeffrey M. Manley