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The SECURE Act and Your Estate Plans | NOVAEstateLawyers.com

For many Americans, a retirement savings account becomes one of their largest and most important financial assets. 401(k) accounts and individual retirement accounts (IRAs) often come up during the estate planning process, as most plan providers require you to name a beneficiary in the event of your death.

If you have a retirement savings account or plan to open one, it’s important to understand the implications of the recent Setting Every Community Up for Retirement Enhancement Act (SECURE Act) on your estate plans, particularly its new rules about the payout of IRAs to beneficiaries. Here’s what you need to know, and how you should update your estate plans in light of these regulations.

What is the SECURE Act?

The SECURE Act is a bipartisan bill intended to assist Americans in their retirement planning. It was passed in December 2019 and has been in effect since January 1, 2020.

The Act contains a number of provisions that make it easier for Americans to save for retirement, including raising the age at which they must start taking a required minimum distribution (RMD) from the account and eliminating the age cap for making contributions to an IRA. It also incentivizes employers to sponsor retirement savings plans for employees.

How does the SECURE Act affect estate planning?

The SECURE Act could impact your estate planning strategy, depending on your relationship to your retirement account beneficiary.

Prior to the SECURE Act, a non-spouse beneficiary (e.g. a child, grandchild, or trust) could opt to stretch out the disbursement of a decedent’s retirement savings account funds over the course of their expected lifetime. By only taking the required minimum distributions (RMDs) from the account, beneficiaries could pay the minimum possible income tax on their payouts, while still earning tax-deferred investment returns on the account’s remaining balance.

Now, this “stretch IRA” strategy is no longer allowed for any beneficiary that is not the decedent’s spouse. Instead, the account must be paid out in full within 10 years of the account holder’s death. In most cases, this means beneficiaries will be receiving larger amounts of money at a time and will owe a larger amount of income tax in a shorter period of time.

There are a few notable exceptions to this policy to be aware of as you consider your estate plans:

  • Retirement accounts that name a conduit trust or accumulation trust as the beneficiary are subject to the 10-year payout rule, which means a spouse that benefits from the trust will not be able to take advantage of the lifetime distributions.
  • The 10-year payout rule does not apply to minor children who inherit an IRA until they reach the age of majority.
  • Beneficiaries who are chronically ill, have special needs, or are within 10 years of age of the IRA owner are not subject to the 10-year payout rule.

If you haven’t yet reviewed the beneficiaries on your retirement accounts and your trust setup (if applicable) in 2020, now is the time to do so. Understanding whether your beneficiary will be subject to the accelerated 10-year payout schedule can help you ensure they are prepared for their potential income tax liability when they inherit your account. An estate planning attorney can advise you on whether you can structure a trust in such a way that your chosen beneficiaries can still receive the tax benefits of stretched-out IRA disbursements.

Have questions about your estate plans? Contact The Law Office of Patricia E. Tichenor.

Estate planning can be complex enough on its own, and it becomes even trickier when you have to factor in new and changing regulations that impact your overall estate. A trusted estate planning attorney can guide you through these regulations and determine how you can best plan for your future beneficiaries to inherit your retirement accounts.

The Law Office of Patricia E. Tichenor has nearly two decades of experience helping Northern Virginia residents with Wills, trusts, and other estate planning needs. Schedule your free virtual consultation to discuss your circumstances.