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The SECURE Act: May Complicate Estate Plans & Retirement

Kathryn Van Eeuwen

February 13, 2020

Although The SECURE Act's intent may have been to simplify the existing retirement savings rules, it may make your client's estate plan a bit more complicated. The changes make it important to schedule time with your clients to review previously drafted documents to make sure it still has the intended effect. Here are the basics as pertaining to IRAs:

Remember July 1, 1949 

For individuals born on or after July 1, 1949, no Requirement Minimum distribution (RMD) need be taken until the individual reaches age 72.  Individuals born before July 1, 1949 (i.e. those turning 70 ½ on or before December 31, 2019) must follow the old RMD rules.   

Income Earners May Continue to Contribute
While the previous rules disallowed contributions to traditional IRAs if the IRA owner received income after he or she reached age 70 ½, the new law allows income earners to continue to contribute even after they reach the age that their RMDs kick in. 

QCDs are Still OK at 70 ½
As under the previous law, individuals are still permitted to make qualified charitable distributions (QCDs) from their retirement accounts beginning at age 70 ½. The new law did not raise that age limit to 72.  This means that an individual may make a donation up to $100,000 from an IRA directly to a charity with no income tax incurred.  And as was the case under the prior law, the distributions may not also be taken as a charitable deduction. 

Impact on Estate Plans
Most of the fanfare regarding the SECURE Act centers around the eliminated of the stretch provision for most non-spouse beneficiaries of retirement accounts. Unlike under the previous law which allowed the RMDs to be stretched out over the life expectancy of the oldest beneficiary, the new law mandates that the funds be paid out over a 10-year period.  Note there are some exceptions for beneficiaries with disabilities, chronic illnesses, or those who are minors or less than 10 years younger than the retirement account owner.  This means that IRA trusts may be less attractive than under the previous law.

With the 10-year rule, retirement funds will be subject to taxation sooner and may cause creditor protection to end earlier. Accumulation trusts may bare significant tax burdens due to the short time frame in which the IRA must be distributed as trusts reach the highest tax bracket at a mere $12,950 of income.  For conduit trusts, the beneficiaries will receive the funds sooner, reducing the number of years creditor protection is available for retirement funds left to a trust. 

Given the potential increase in taxation and shorter creditor protection periods, individuals who leave retirement assets to trust may wish to consider reviewing their plans.