The SECURE Act impacted how qualified retirement assets should be planned for in your estate planning. Here are some important facts about the Act and what you should know.
What does SECURE Act stand for? The Setting Every Community Up for Retirement Enhancement Act of 2019.
When did the SECURE Act become law? The SECURE Act was signed into law on December 20, 2019 but became effective January 1, 2020.
Who does the SECURE law affect? Individuals who die on or after January 1, 2020, and their beneficiaries.
What does the SECURE Act affect? Qualified retirement plans through employers (i.e. 401ks) and individual retirements plans (i.e. IRAs).
How did the SECURE Act affect “stretch” planning? “Eligible” beneficiaries are still able to take advantage of an inherited “stretch” IRA, while all other beneficiaries are not (“non-eligible” designated beneficiary).
Who is an “eligible” beneficiary? (1) Surviving spouse of client, (2) a child of the client who has not yet attained the age of majority, (3) disabled beneficiary as defined under I.R.C. § 72(m)(7), (4) chronically ill beneficiary as defined under I.R.C. § 7702B(c)(2), or (5) a beneficiary who is not more than 10 years younger than the client.
What does this mean for a “non-eligible” designated beneficiary? Following the death of the client, the qualified retirement plan must be fully distributed to the beneficiary within 10 years.
What if I name my estate, a charity, a trust that is not a qualified trust, or leave the beneficiary designation blank? The qualified retirement plan will either need to be distributed over the client’s life expectancy or within 5 years, depending on whether distributions began during the client’s life.
How does this affect my current estate plan? The changes may mean that the “stretch” planning done with conduit trusts for beneficiaries may no longer work to the extent they did previously. For example, if you previously had a retirement plan being distributed to a trust until that child attains the age of 35 with required distributions based on the child’s life expectancy being withdrawn and distributed, this may no longer be possible under the SECURE Act.
What can I do now? It is recommended that you meet with an attorney to discuss your options and how to best incorporate your qualified retirement plans into your estate plan in order to prevent unwanted income taxes and/or a premature distribution to your beneficiary.