On December 20, 2019, President Trump signed into law the SECURE Act (“Setting Every Community up for Retirement Enhancement Act of 2019”), which will take effect January 1, 2020. While the SECURE Act provides opportunities to make retirement planning more accessible, it also makes significant changes to the rules regarding required minimum distributions (RMDs) with respect to inherited IRAs.
Under pre-SECURE Act law, beneficiaries of retirement accounts could generally stretch out the RMDs over the beneficiary’s own life expectancy. This ability to calculate RMDs based on the beneficiary’s life expectancy was a significant tax planning tool that allowed beneficiaries to defer the income tax liability over a longer period of time. However, the SECURE Act requires that most non-spousal beneficiaries of inherited IRAs will need to withdraw all of the funds within 10 years. This 10-year rule does not apply to certain categories of “eligible designated beneficiaries” – surviving spouses, minor children, disabled and chronically ill beneficiaries, and beneficiaries less than 10 years younger than the participant.
For many clients, their current plans will still “work” in terms of passing assets to their intended beneficiaries, but clients need to understand that retirement assets may need to be distributed sooner than anticipated, which will result in potentially significant tax consequences for the beneficiary. For clients who have a trust named as the beneficiary of their retirement assets, it is particularly important for them to review their estate plan. Trusts in this regard can be either a “conduit trust” or an “accumulation trust.” Under the SECURE Act, conduit trusts would be the most impacted by requiring a 10-year payout to the beneficiary, rather than a gradual payout that was likely intended. Accumulation trusts will still work, but will result in an accelerated tax bill with the 10-year distribution requirement.
Given the potential impact of the SECURE Act, clients for whom retirement benefits are a significant part of their estate plan should review their current plan with estate planning professionals to understand the implications of this new law.