What Impact Will It Have On You and the Beneficiaries of Your Retirement Accounts Post Your Death?
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), effective January 1, 2020. The SECURE Act contains, by far, the most significant changes to retirement planning in a lifetime. This article will not be all doom and gloom as the SECURE Act does have several beneficial changes: under the old law, required minimum distributions (RMD) had to begin at age 70 ½. The Secure Act pushes this required beginning date out to age 72, thereby allowing your retirement assets to grow tax-deferred for a slightly longer period of time. So, that’s certainly a small benefit. The Secure Act also eliminates the age restriction for contributions to qualified retirement accounts. These, among some other miscellaneous provisions not applicable to most, are beneficial and do push towards the SECURE Act’s stated goal of helping individuals accumulate assets for their retirement. However, benefits need to be paid for and the most significant change encompassed in the SECURE Act will be out and out disastrous for your loved ones if not properly planned for: The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.
The following groups are excepted from the mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, disabled individuals, chronically ill individuals, and, most significantly, the account owner’s children who have not yet reached the “age of majority” (18 years of age in most states – however, once they have reached the age of majority all bets are off as discussed below).
The Changes Brought About by The SECURE ACT
Pre-SECURE Act, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy calculated per the IRS tables (this is what’s referred to as the “stretch”). Under the SECURE Act, beneficiaries are now forced to take distributions over the shorter ten-year time frame (for all intents and purposes, the “stretch” has been killed). What does this mean in “plain English”? Several, all negative, things: as the yearly RMDs to your beneficiaries are greater than they would have been pre-SECURE Act, less money is growing tax-deferred and more income will flow to your beneficiaries each year for which they’ll have more taxable income / more income taxes will be due. Bottom line, your retirement dollars today are worth less than they were “yesterday” and less than you think they are worth to your beneficiaries.
However, tax dollars are among the least of the problems presented by the SECURE Act, as the reason you performed your estate planning was not solely to save on estate/income taxes. Our clients care more than anything, almost across the board, that the inheritance they leave to their beneficiaries (typically their own children) not cause more harm than good (i.e., a child should be allowed to grow into wealth as opposed to having it thrust upon them). They’re also concerned that the money they worked a lifetime for not be lost to creditors, predators, or a child’s divorcing spouse. Simply listing your child as a contingent beneficiary of your retirement assets is no protection at all—they’ll come into great wealth at a very young age with zero in the way of asset protection.
Bottom line, it’s critical to act now, but how?
What Does Your Estate Plan Look Like Currently – Solely a Revocable Living Trust (RLT) or a RLT + Standalone Retirement Trust (SRT)?
One thing we’ve long been proud of, more so in light of the changes wrought by the SECURE Act, is our advocating for an SRT as a necessary component of a comprehensive estate plan. There has long (decades!) been a school of thought among estate planners that conduit provisions baked into your RLT were a sufficient structure to plan for retirement assets. With conduit provisions, pre-SECURE Act, the trustee of the SRT would take the RMD from the retirement account and pass them outright directly to the beneficiary (hence the “conduit” term to refer to such mechanisms). What was our concern with such an approach? While it was certainly easier to draft for than the structure we’ll soon discuss, what benefit is there to passing assets outright and unprotected to a beneficiary? No one was able to convince us of the structural benefits of conduit provisions baked into an RLT so, just because many were doing it, it was never a structure we espoused to clients. The SECURE Act has utterly destroyed conduit trust planning. Why? Simply because the trustee must distribute every dollar of the account outright and unprotected to your beneficiaries within ten years of your death. There are a lot of lawyers contacting their clients saying “the structure we put in place for you no longer works.”
The approach we’ve long advocated for clients as part of a comprehensive estate plan is the use of an SRT to plan for your retirement assets. The SRTs we have drafted for most clients are structured as an “accumulation trust,” which is pretty much what it sounds like—a trust structure through which the trustee can take any RMD’s and continue to hold them (i.e., accumulate them) in a protected trust structure for your beneficiaries. No more financially immature child coming into a windfall, losing assets to creditors or a divorcing spouse, or those problems that now accompany conduit RLT planning (or simply naming your children outright as beneficiaries—a scary thought with divorce and creditor concerns these days, much less the idea of a young adult coming into great wealth with no clue how to handle it—but one we see all too often for those who have taken a very basic approach to their estate planning).
An SRT is NOW a Necessary Component of a Comprehensive Estate Plan
You have worked your entire life to accumulate assets in your retirement account. For most of our clients, their retirement assets are the largest asset they own. It’s also the only asset that has any sort of tax-deferred growth attached to it. So, it’s, therefore, magnitudes more important than an asset of similar value that lacks tax deferment. As discussed above, with the SECURE Act now law, the ONLY way to protect your retirement assets is via a SRT. Not to get on a soapbox, but it frustrates me to no end that beneficiary designation forms provided by an employer make no mention of an SRT as a potential beneficiary. They expect each of us to act like robots, not think of the ramifications, and just list, say, our children as beneficiaries. No mention is made of the risk exposure this creates. Anyone can simply list their child as primary or contingent beneficiary (after say a surviving spouse) of their retirement account, that doesn’t take much effort, but like many shortcuts in life, it will be an unhappy day when the retirement assets are lost to a creditor, divorcing spouse, or a young adult’s own financial immaturity within only a decade of your passing. A SRT is the only tool available to deal with not only the ten-year withdrawal rule under the SECURE Act but also to protect the assets from a creditor, divorcing spouse, or a beneficiary’s own financial immaturity.
No Matter What, Check Your Beneficiary Designations Immediately
There’s no better time of year than the New Year to check things like your beneficiary designations. Maybe you’re in the camp of “my retirement assets aren’t material, so I don’t need to worry about a SRT.” If that’s the case there’s of course nothing wrong with that but please spend the time, less than 20 minutes I’m sure, to confirm your beneficiary designations reflect your wishes. Make sure you haven’t listed anyone, such as an ex, you no longer want to receive your retirement assets and have listed everyone, such as a recently born child, who you do want to receive a share of your retirement assets.
If you’ve worked with us and previously put in place a SRT now is the time to make sure your beneficiary designations are accurate. If you want the primary beneficiary to be an individual, such as a surviving spouse, he or she must be named. Just as important as primary beneficiaries are your contingent beneficiaries. A structure we’ll often see is (i) surviving spouse as primary beneficiary and (ii) SRT (with nuanced separate share language for each beneficiary—please contact us if you’re not sure this is accurate on your own beneficiary designations as it’s a recently changed, and very important, area of the law) as a contingent beneficiary.
Other Advanced Strategies
Although it’s beyond the scope of this article, there are ways to obtain back some of the dollars lost by the required 10-year distribution per the SECURE Act. These involved the use of charitable trusts and are something we’re happy to discuss with you.
Take Action Now – The SECURE Act is Already Law
Contact us today to schedule an appointment to discuss how your estate plan and retirement accounts will be impacted by the SECURE Act and how best to attack things to protect your loved ones and retirement assets.