What is The SECURE Act and What Does it Mean for Your Estate Plan?

There are three circumstances that necessitate an update to your estate plan. These are changes in your personal life, including financial and family matters, changes in your attorney’s knowledge leading them to suggest updates and changes in legislation. The signing into law of The Setting Every Community Up for Retirement (or SECURE) Act on January 1, 2020, is an example of the third type of circumstance. With this new act, most estate plans will need to be updated.

The SECURE Act introduced three basic changes that affect retirement accounts.

1. The age limit for making Traditional IRA contributions was removed, meaning that those who choose to work past the age of 70 may contribute to their IRA indefinitely.
2. The required beginning date for required minimum distributions (RMDs) was increased from 70.5 years old to 72 years old meaning individuals can keep money in their IRAs for longer and put off paying taxes on funds until they are truly needed.
3. Beneficiaries are now required to withdraw funds from an inherited IRA within ten years of the original account holder’s death (so long as the death occurred after December 31, 2019). This effectively eliminates conduit trusts and stretch-out IRA trusts for all but a limited number of excepted kinds of beneficiaries (more on those exceptions later).

The elimination of the stretch IRA—a term used to describe a technique in which a beneficiary extends distributions from an inherited IRA over his or her lifetime, thereby spreading out the payment of income taxes over a longer period—complicates many peoples’ estate planning goals. Luckily, additional mechanisms directed toward the same ends are easy to implement with a quick update to one’s plan. Options include:

A Standalone Retirement Trust (with accumulation provision)

Designed specifically for retirement accounts, a standalone trust allows the trustee to accumulate required distributions in a trust instead of receiving them directly. The provisions of the trust then dictate the terms upon which assets are received.

Irrevocable Life Insurance Trusts (ILIT)

Life insurance is a powerful vehicle that allows for the addition of cash to the gross estate thereby offsetting the accelerated income tax liability implied by the SECURE Act. Also, the ILIT protects against the beneficiary’s creditors and gives the trustee discretion on how and when to make distributions. Lastly, this option can be structured to remove the proceeds from your gross estate if estate tax is a concern.

Charitable Remainder Trust

For the charitably inclined, this is an excellent way to protect assets that would otherwise be lost to taxes. Naturally, implementing a charitable trust may mean beneficiaries receive less but for many, that is simply a part of the plan.

As mentioned, exceptions to the SECURE Act exist. A living spouse, minor child, disabled individual, or a chronically ill individual are not subject to the consequences of this new legislation. Unfortunately, these exceptions account for only a fraction of the population.

The introduction of the SECURE Act is no disaster. It only means that updates are needed for existing plans. Periodic revision of one’s estate plan is a natural part of the process and so, in a sense, this was to be expected. After all, if the present moment has taught us one thing, it is that change is inevitable.

If in learning about the SECURE Act you find yourself concerned about your personal estate planning goals, don’t hesitate to reach out. We would be happy to help you explore the updates best-suited to your goals!

For more information, view our recent YouTube video on this topic, or call our offices to schedule a consultation. 

Contact the Estate Planning Attorneys at the Law Firm of Christopher W. Dumm