What the SECURE Act Means for Your Retirement Accounts

What the SECURE Act Means for Your Retirement Accounts

 In Retirement Planning, Wills & Trusts

On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act by a vote of 417 to 3, sending it off to the Senate where it is expected to be approved and signed into law by the President. There are notable benefits under the proposed law. For example, the maximum age for making contributions to a retirement account, as well as the age when the account holder must start withdrawing from the account, will be expanded. However, the act also comes with a downside for those who have done well accumulating their savings and who wish to pass it on to children or grandchildren.

Under current law, the balance remaining in a qualified retirement account, such as a traditional IRA, can be left to children at death with certain advantages, including protections against life’s uncertainties. In these cases, non-spouse beneficiaries, like children, must begin taking distributions from the inherited retirement account regardless of their age at the time of inheritance. The amount of the required minimum distributions (RMDs) the beneficiary must take out of the account each year is based on their life expectancy, meaning the inherited retirement account could theoretically be retained for their entire lifetime and even passed on to their children. The SECURE Act significantly limits this lifetime stretch-out period and reduces it down to 10 years, as noted by Kiplinger.

As a result, trusts that are written to include protections around a beneficiary’s inheritance from divorcing spouses, disputes leading to legal liability, debts owed to creditors, disability benefits, destructive spending habits, and even death taxes (the so called “Killer Ds”) will need to be reviewed, and in many cases updated to ensure these protections continue as intended.

Upon becoming law (possibly as early as January 1, 2020), the SECURE Act will change the way planning is done to protect retirement assets for beneficiaries. Currently, the most common approach to planning with retirement accounts is to build protections into a revocable trust that will protect the undistributed account balance, while only the RMDs that come out of the account are subject to Killer D claims. In many cases this result is palatable since the bulk of the account could go untouched for many years, even a lifetime, leaving just the RMDs to be exposed to the Killer Ds. On the other hand, under the proposed SECURE Act, an accelerated stretch-out period of 10 years would instead put all of the retirement funds in jeopardy since the entire account would be forced out to the beneficiary at a much faster pace (10 years vs. their lifetime). And as the funds leave the account they also leave behind the protections of the trust.

One solution may be to establish a standalone retirement plan trust separate from the revocable trust, which would be written to protect the RMDs as they pour out of the retirement account over the 10 year payout period, meaning all of the funds would remain in the trust even after the account has been fully paid out. A retirement plan trust is designed to hold RMDs inside the trust where they are protected from attacks, as opposed to passing them directly out to the beneficiary where they are open to creditor and predator claims.

Existing trust-based estate plans should be reviewed once the ink dries on this new law since the retirement provisions they currently contain are likely to need attention.

 

Recommended Posts