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The SECURE Act: How It Will Affect Your Clients

February 5, 2020


The most impactful legislation affecting retirement accounts in decades became effective on January 1, 2020.  The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) made two positive changes:

  • It increases the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70 ½ to 72 years of age; and
  • It eliminates the age restriction for contributions to qualified retirement accounts.

Unfortunately, it also eliminated the “stretch” option for all individual beneficiaries except:

  • The account owner’s surviving spouse;
  • The account owner’s minor children;
  • Beneficiaries not more than ten years younger than the account owner; and
  • Disabled and chronically ill individuals.

Under the SECURE Act, individual beneficiaries other than those listed above must withdraw the entire balance of the inherited retirement account within ten years.

Without prompt and proper planning, taking the new law into account, this change could significantly increase the tax bill for most non-spouse beneficiaries. Previously, beneficiaries of inherited retirement accounts could take distributions over their life expectancy. Under the SECURE Act, the ten-year time frame for taking distributions may be shorter than that available under prior law and, if so, would result in the acceleration of the income tax.  In some cases, the increased distribution amounts could also cause the beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than originally anticipated.

Because of this monumental change in the way inherited retirement accounts are treated, it is crucial to ensure that our clients plan accordingly. Keeping an eye on tax consequences and asset protection needs, there are several strategies on which we can collaborate to address this new paradigm.

Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)

Now that most beneficiaries are required to withdraw the entire balance of a retirement account within ten years of the owner’s death, a trust might be the best estate planning tool for protecting the balance of the retirement account from a spendthrift beneficiary, the beneficiary’s creditors, divorces, or lawsuits.

If a trust is named as a beneficiary of a retirement account, however, the trust should be reviewed to determine whether it contains the traditional “conduit” trust provisions. Traditionally, conduit trust provisions require the trustee to distribute any required minimum distributions (RMDs) directly to the beneficiary through the trust. Under the SECURE Act, however, the balance of the account would have to be distributed directly to the beneficiary at the end of the tenth year if the trust contains the traditional conduit language, which is an outcome the client might want to avoid.

Under the new law, “accumulation” trust provisions may be more beneficial. Accumulation trust provisions allow the trustee to receive the RMDs from the retirement account as often as required by law, but allow the trustee to exercise discretion as to when and how much of the funds are distributed to or used for the benefit of the beneficiary. Although the trust will pay income tax on any of the distributions from a retirement account that are not distributed to the beneficiary, for many clients, the tax consequences are less important than the desire to protect the account from a spendthrift beneficiary, the beneficiary’s creditors, divorces, or lawsuits.

If your client has named a trust as beneficiary of a retirement account, we recommend reviewing their planning documents to ensure that their tax and non-tax estate planning goals are still met under current law. If their trust contains “conduit” provisions, an amendment to their trust may be appropriate.  Please feel free to reach out if we can be of any assistance to you or your clients in reviewing these documents and implementing any needed changes.

Charitable Remainder Trust (CRT)

For charitably inclined clients, a charitable remainder trust may be the right solution to plan for the disposition of their retirement accounts. Such a trust would allow the client, as the grantor, to name beneficiaries to receive an income stream from the retirement account for a period of time, with the remainder going to a charity named in the trust agreement.

When the trust is created, the net present value of the remainder interest must be at least ten percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon the plan participant’s or account owner’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust, and the distribution from the retirement account to the CRT is not taxed because CRTs are generally income tax exempt.  As distributions are made from the CRT to the beneficiaries, income tax liability would be passed out to the beneficiaries.  Another benefit to this strategy is that the distributions to the beneficiaries will be smaller and therefore subject to less income tax liability.

It is important to note that this strategy is best for individuals who are already charitably inclined. This strategy may not result in the beneficiaries getting more than they would have by utilizing other estate planning strategies, but if the client already wishes to provide for a charity, this may achieve the client’s goals in a more tax favorable way.

Irrevocable Life Insurance Trust (ILIT)

Due to the new ten-year mandatory withdrawal rule, there will be an acceleration of the beneficiaries’ income tax on inherited retirement accounts, potentially moving them into a higher income tax bracket. The new rule may also result in the amount of cash available to beneficiaries being less than the client originally anticipated. In order to help offset this shortfall, your clients may want to consider using funds from their retirement accounts during their life to purchase additional life insurance and transfer ownership of the policy to an ILIT. The ILIT will help protect the insurance funds from the beneficiary’s creditors and, if desired, can be designed so that the proceeds from the life insurance policy are not includible in the client’s estate.

Multi-Generational Spray Trust

While the distributions must be made within ten years, by distributing the retirement account to multiple beneficiaries at the same time over the ten-year period, the RMDs received by each beneficiary will be smaller, and the resulting tax liability per beneficiary will be reduced. If asset protection is important to the client, the distributions can be made to a trust for the benefit of the beneficiary instead of directly to the beneficiary.

Working Together

The SECURE Act has changed the planning landscape for inherited retirement accounts, and we would be delighted to work with you to help our clients navigate the new rules and plan for the future. We continue to believe that our clients get the best result when their advisors work together.  We welcome the opportunity to collaborate with you, so please feel free to call if we can answer any questions about the new law or help you and your clients in any other way.

Related article:

The SECURE Act: How It Will Affect Your Retirement Accounts and Your Estate Plan


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