SECURE Act: dramatic changes for Estate Planning
Some BackgroundRemember the almost government shutdown in 2019? Well, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was part of the spending bill rushed through Congress to avoid the shutdown and keep the government open. As usual, it contained many new rules about all kinds of stuff. But for purposes of this post, I want to talk specifically about some rule changes that affect estate planning, including rules regarding IRA payouts to a deceased participant’s beneficiaries. “Why does Congress always insist on having acronyms for their laws? And wasn’t the shutdown in 2018??” I don’t know why they love acronyms so much. And that was the other shutdown. Anyway, that law went into effect last month. Your estate plan may now need some updating. “Sounds expensive.” Hopefully not, but ignoring the changes could be a lot more expensive. Here are some of the major changes that were included (but, reminder: don’t try this by yourself, you should consult an estate planning attorney to evaluate your specific circumstances).
1. The End of Stretch IRAs (mostly)Before the SECURE Act, a designated beneficiary of an inherited retirement account could generally “stretch out” the retirement account by taking the required minimum distributions (or RMDs) from the account over the beneficiary’s life expectancy. “This sounds familiar.” If you had a parent or grandparent leave an IRA, there is a good chance that your family already uses this estate planning tactic. Anyway, the result of these so-called “Stretch IRAs” was that the beneficiary could more-or-less indefinitely extend the benefit of tax-deferred investment returns, creating some pretty major tax savings. “That’s pretty clever. If I haven’t done this before, can I start now?” After the SECURE Act, this indefinite stretching is generally no longer allowed. In most cases, the account must be distributed in full within 10 years after a plan participant’s death. You can stretch out the tax-deferred investment returns over a 10-year period (which, to be fair, is still a pretty good amount of time…), but you cannot extend it for full life expectancy. “So, Congress is forcing me to convert my tax-deferred investments into taxable investments on an accelerated schedule. This sounds a bit like a back-door inheritance tax.” Yes, it does. “OK, but you said it’s mostly no longer the case… what’s the exception?” The exception is somewhat narrow, unfortunately. Lifetime stretch rules, still with some modification, remain available to:
- a surviving spouse;
- minor children;
- disabled beneficiaries;
- chronically ill individuals;
- beneficiaries who are less than 10 years younger than the plan participant.
2. RMD Age Increase and Contribution Rule ChangesBut, it’s not ALL bad. The SECURE Act raises the age at which an account owner is required to start making RMDs from an IRA. Now, the RMD requirement doesn’t kick in until age 72. “What was it before?” Before it was 70½. So, you get another year and a half to grow the account on a tax-deferred basis, while considering strategies to minimize overall tax burden and optimize your estate plan. So, that’s a good thing. “OK. I think I get that. What’s the deal with the contribution rule changes?” The SECURE Act also removed the age 70 cap for making deductible IRA contributions. So, you can keep building up your tax-deferred account for a while longer. “This is not as interesting as the “back door inheritance tax” stuff you were talking about before.” No, it isn’t. But you should know about it anyway.
3. What To Do??Revisit your estate plan with a competent estate planning attorney. You should give particular attention to:
- Beneficiary designations (Are the beneficiaries eligible to stretch? Is anyone else eligible to stretch? Is there a no-longer-ideal conduit trust somewhere in there? Should you change or eliminate the trust?)
- Your plan for RMDs and contributions
- Any philanthropy or charitable giving that is included in your estate plan may need to be re-examined (the SECURE Act can cause some changes on Qualified Charitable Distributions (QCDs) that I have not explored in detail here)