The SECURE Act and Retirement Accounts
The retirement account has long been an advantageous tool for tax and estate planning. Workers could defer taxes on earnings by contributing to these accounts and deferring tax on distributions until they retired. Beneficiaries who inherited retirement accounts were able to “stretch” distributions over their lifetimes and therefore defer the income taxes resulting from such distributions. Well-drafted trusts which were named as beneficiaries of retirement accounts were also entitled to stretch distributions over the lifetime of the trust beneficiary. However, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), enacted at the end of 2019 severely limits the ability of many individual and trust beneficiaries to defer distributions from inherited retirement accounts.
The SECURE Act was passed by an overwhelming majority of Congress on both sides of the aisle and many of its provisions are beneficial. Plan participants may now defer taking required minimum distributions until they reach of the age of 72 and may continue to make contributions throughout their lifetimes.
However, the SECURE Act contains a surprise tax hike for non-spouse beneficiaries of retirement accounts by requiring that most beneficiaries other than spouses withdraw all funds from an inherited retirement account within ten years after the death of the initial account holder. . These beneficiaries, which include children, grandchildren and most trusts, now lose the tax advantage of stretching distributions over their lifetime, which will usually result in additional income tax owed on the account distributions.
The SECURE Act contains exemptions from the ten-year payout requirement for “eligible designated beneficiaries”. These include:
- The spouse of the participant;
- The minor child of the participant (but the ten-year rule applies after the child achieves majority);
- Disabled or chronically ill beneficiaries, and
- Beneficiaries who are no more than ten years younger than the plan participant.
The effects of the SECURE Act on estate plans can be dramatic. We suggest you review your estate plan with your estate planning attorney if you have assets held in retirement accounts. This review is especially critical if your retirement accounts are to pass to trusts, which present unique issues. For example, although the SECURE Act preserves the lifetime payout for a spouse, certain trusts for the benefit of a spouse will lose the option for lifetime payout. Trusts for the benefit of disabled or chronically ill individual, including a spouse, may qualify for the lifetime payout but they must be carefully drafted to ensure compliance with SECURE Act requirements.
Our experienced Trusts & Estates attorneys can help you review your current estate plan and beneficiary designations and ensure that you maximize your ability to provide for your loved ones. Understanding the new rules imposed by the SECURE Act is even more critical at this time due to additional changes to retirement account rules contained in the CARES Act, the recent federal law designed to address the COVID-19 pandemic. We have covered the retirement account aspects of the CARES Act in a previous client update which can be found here.
During this time when social distancing is vitally important to prevent the spread of COVID-19, our attorneys can meet with you remotely via our videoconferencing technology. We can also assist you with executing any necessary estate planning documents remotely, which makes this time when New York and other states are on “pause” a great time to review your estate planning.
We extend our best wishes to you and your families during this very challenging time. Please do not hesitate to call us with any questions you may have.