On December 20, 2019, the SECURE Act was enacted, effective January 1, 2020.  This new law results in significant changes in how we can utilize retirement benefits to create an estate plan maximizing tax benefits.  We have provided below a summary of the new law and some considerations for how it may affect your current estate plan. 

 

Summary of SECURE Act

 

Prior to the enactment of the SECURE Act, a technique called a conduit trust was used to direct retirement benefits (through beneficiary designation) to separate trusts for beneficiaries. It had several benefits, including providing continued control and protection of assets at death and the ability to “stretch” payouts over the beneficiary’s life expectancy rather than the participant’s life expectancy, with the potential to leave plans in tax-deferred status for years or decades after the participant’s death.  The SECURE Act results in several changes, the most significant of those are outlined below:

 

1.         The “stretch” payout over a beneficiary’s life expectancy has been replaced with a maximum 10-year payout for everyone except for 5 specific categories of designated beneficiaries (as explained below in #2).  This means that all retirement benefits (even those left in trust) must be withdrawn within 10 years after the participant’s death.

 

2.         There are exceptions to the 10-year payout rule for individuals who are considered “eligible designated beneficiaries” (EDBs), including: surviving spouses, minor children of the participant, disabled and chronically ill beneficiaries and beneficiaries less than 10 years younger than the participant. Please see below for examples.

 

3.         Other noteworthy changes: (a) The age for starting required minimum distributions (RMDs) was raised to 72 from 70 ½ for individuals born after June 30, 1949;  (b) The age cap for contribution is removed; (c) With some exceptions, for deaths prior to 2020, where benefits were being paid over a beneficiary’s life expectancy, the 10-year payout rule will apply upon the death of the beneficiary.

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Effect on Your Estate Plan

 

In light of the above changes to the tax laws, you should review your current estate planning documents. For majority of our clients, primary designations for retirement benefits are to the surviving spouse.  However, contingent designations may be left in trust for the benefit of children or grandchildren.  Many estate plans that were previously established by us or others direct contingent retirement benefits into separate (conduit/see-through) trusts for the benefit of trust beneficiaries (often children/grandchildren).  If the trust is a lifetime trust to provide benefits over the lifetime of your beneficiaries, this change will result in the retirement benefits being paid out of the trust directly to the beneficiaries within 10 years after your death, while other non-retirement trust assets will be held in trust pursuant to the current terms of the trust.  If assets were left in trust because children are minors, to protect assets from a financially unsophisticated beneficiary or from creditors of a beneficiary, or to protect in the event of a beneficiary’s divorce, you may want to consider making amendments to your trust document as this payout may have unintended consequences.  We’ve included two examples below.  Disclaimer:  These law changes are very complex and include many nuances that we have not explained in minute detail.  These examples are solely to provide clarity to common estate plans. 

 

Example 1:  Married Couple with Adult Children

Husband and Wife leave assets first to the surviving spouse.  Upon the death of the surviving spouse, assets are left to two adult children, in separate trusts to be paid out over each child’s lifetime.  Assuming beneficiary designations leave retirement first to surviving spouse and then in trust for each child, then the SECURE Act changes the estate plan to result in the following:

 

Upon the death of the first spouse, the surviving spouse can still use the life expectancy to stretch the payout for retirement benefits.  However, on his/her death, the 10-year payout would apply.  Each child would be required to withdraw the full retirement benefit within 10 years of the participant’s death, while other non-retirement assets will stay in trust for the benefit of each child for the remainder of their lives. 

 

Example 2: Married Couple with Minor Children

Husband and Wife leave assets first to the surviving spouse.  Upon the death of the surviving spouse, assets are left to two children, ages 4 and 10, (“eligible designated beneficiary”) in separate trusts to be paid out to each EDB when they turn 35.  Assuming beneficiary designations leave retirement first to surviving spouse and then in trust for EDB, then the SECURE Act changes the estate plan to result in the following:

 

Upon the death of the first spouse, the surviving spouse can still use the life expectancy to stretch the payout for retirement benefits.  However, on his/her death, the 10-year payout would apply.  Minor children have an exemption that the 10-year rule does not apply until the minor child reaches the age of majority.  Upon the surviving spouse’s death, any retirement benefits left in trust for EDB will have to be withdrawn in full when each child reaches the age of 28 (10 years from age of majority), while other non-retirement assets will stay in trust until each child reaches the age of 35.  

 

Example 3:  Married couple with Minor Disabled or Chronically Ill Child*

Husband and Wife leave assets first to the surviving spouse.  Upon the death of the surviving spouse, assets are left for a disabled or chronically ill minor child (“eligible designated beneficiary”) in a special needs trust.  Assuming beneficiary designations leave retirement first to surviving spouse and then in trust for the EDB, then the SECURE Act changes the estate plan to result in the following:

 

Upon the death of the first spouse, the surviving spouse can still use the life expectancy to stretch the payout for retirement benefits.  On the surviving spouse’s death, the EDB can use his/her life expectancy to stretch the payout of retirement benefits.  Upon the death of the EDB, any retirement benefits left will have to be withdrawn in full within 10 years by next designated beneficiary (assuming they are not also an EDB).

 

*A Disabled or Chronically Ill Child is defined by the Internal Revenue Code. 

 

Conclusion

 

While it is unlikely that these changes to the tax code will be repealed while President Trump is President, if he is not reelected and/or Congress changes hands, it is possible that additional changes to the tax laws can occur.  However, given these recent changes to the tax law, you may consider amending your planning. We also strongly encourage you to consult with your financial advisor and CPA to discuss tax implications of this Act.  We would obviously be pleased to provide any assistance you may request or answer any questions you may have about the new Act.

 

Please feel free to contact us by clicking the contact button below to schedule an appointment or telephone conference to discuss further.  

 

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