SECURE IN YOUR KNOWLEDGE: WHAT THE NEW ACT MEANS FOR ESTATE PLANNING
Written by Jim Worthington on December 22, 2019
A new law that has important financial and estate planning implications takes effect January 1, 2020. Everyone will need to review their planning but it particularly means that parents who have trusts for minor or young adult children should review and possibly amend their estate plans very soon. Doing so in the first quarter of 2020 is a good timetable.
The Setting Every Community Up for Retirement Enhancement Act (the” SECURE Act” or the “Act”) became law on Friday, December 20, 2019. The Act makes big changes to the planning aspects of retirement accounts, including 401(k)s, 403(b)s, and Individual Retirement Accounts (“IRAs”). Two big changes to the financial planning landscape are:
- the increase from 70.5 to 72 of the age for calculating a person’s required beginning date for taking distributions, and
- the ability to keep making contributions regardless of one’s age.
While these and other financial planning aspects of the SECURE Act will have significant effects on retirement planning, I’d like to focus on the estate planning implications.
Estate Planning: Not a Stretch
The most important change affecting estate planning is that the stretch IRA is no longer available to most beneficiaries. The mechanism for this change is the introduction of the new term, “eligible designated beneficiary” and the restriction of lifetime distributions to that group. The Act defines the term as beneficiaries designated by the retirement account owner who are:
- her or his surviving spouse,
- her or his minor children—until reaching majority,
- disabled persons,
- chronically ill persons, or
- other beneficiaries who are “not more than 10 years” younger than the retirement account owner.
A surviving spouse will still be able to roll over an IRA and receive distributions over his or her lifetime.
Conditions as they exist on the account owner’s date of death determine if a designated beneficiary is also an eligible designated beneficiary. Thus, a person whose disability or chronically ill status is determined after the owner’s date of death may not be eligible for lifetime distributions. Thus, families of disabled persons must not delay seeking those determinations. The rules for children are more complicated.
Ode to the Stretch: Adult Children are Not Eligible Designated Beneficiaries
An adult child will have only 10 years in which to take distributions from a parent’s account. She will not be required to take distributions until 10 years after her parent’s death but must take any undistributed portion of the account on that tenth anniversary. The distributions remain taxable to the beneficiary; that part of the law has not changed. The beneficiary will want to have as much income as possible taxed in lower brackets. This could mean taking 10 equal distributions, or it could mean taking larger distributions in years when one’s other income is lower, whether intentionally or unintentionally. Trustees of trusts that include retirement accounts as assets will need to coordinate with the actual beneficiaries of the trust to do that planning.
Both trustees and beneficiaries need to review trust language about retirement plans to make sure the needed flexibility exists. Trustees may need to modify irrevocable trusts and clients may need to amend their revocable trusts.
Minor Children are Eligible Designated Beneficiaries While Minors
The scenario is a little more complicated for minor children. They may receive calculated minimum distributions until reaching the age of majority. The 10-year-period applies once the minor child reaches the age of majority—18 except in Alabama and Nebraska (19) and Mississippi (21). For example, a 15-year-old child in most states, like Kentucky and North Carolina, would receive calculated minimum distributions for the first three years and then would have to receive the remainder of the account before his twenty-eighth birthday.
My initial response to this change is to modify or amend trusts so trustees have the discretion to distribute retirement accounts at any age before the latter of the tenth anniversary of the owner’s death or the beneficiary’s tenth birthday after attaining majority. The trustee’s discretion should be guided by the trust beneficiary’s maturity and tax situation.
Trustees of trusts that have already become irrevocable will need to review and possibly modify trusts. Persons with revocable trusts should plan to make any necessary amendments in the first quarter of 2020. That should give skilled lawyers enough time to study the SECURE Act and recommend appropriate amendments. If your lawyer is not up to date about this new law, it may be time to work with a lawyer who focuses on estate planning, such as a Fellow of the American College of Trust and Estate Counsel.