Is this the Biggest Wealth Planning Issue for 2020?
The SECURE Act has passed and the “Stretch IRA” is DOA. What do you need to do to protect your estate/wealth plan?
In a surprise move, the SECURE Act passed as part of the massive end-of-year spending bill that was required to avoid another government shutdown. While there are several positive provisions, Congress paid for the SECURE Act with a very substantial negative provision: eliminating the “stretch” for inherited IRAs and retirement accounts. For most beneficiaries other than surviving spouses, the new rules require that the entire IRA/retirement plan balance be paid out within 10 years.
The SECURE Act generally applies to any IRA holder/401(k) participant who dies after 12/31/19, so 2020 is the year to ensure your estate and wealth planning strategies still work.
Some things to consider and discuss with your advisor:
Including trust provisions as part of your beneficiary designation.
This is more important than ever. Even without the benefits of a “stretch”, avoiding a full payout within 10 years of death has special importance for older parents (whose children might be adults but still too young to inherit so much wealth) and those whose beneficiaries might have spending issues, substance-abuse issues, or special needs. Without the protection of a trust, creditors or a beneficiary’s spouse (or former spouse, in a divorce proceeding) could access inherited retirement funds.
Doing a post-SECURE Act beneficiary check (even if a trust already is named)
Even if you used a trusteed IRA or a trust as beneficiary of your IRA/retirement plan, it may well need updating. Many retirement plan beneficiary trusts were drafted as so-called “conduit” trusts because they automatically qualified for the “stretch”. Conduit trusts mandate that the RMD be passed out to trust beneficiaries each year. The only way to avoid passing out the entire IRA/retirement plan balance in 10 years is to pay the RMDs to an “accumulation trust”, which gives the trustee discretion to keep the RMDs in the trust. Of course, this means that the trust might pay tax on the RMDs at the trust level and at the trust rate, so clients need to discuss with their advisor the relative benefit of delaying payment against potential increase in income tax.
For folks early in their career/retirement planning, this is another factor to weigh in favor of Roth IRA and 401(k)s, since Roth IRAs and Roth 401(k)s have no lifetime RMDs, and inherited Roth RMDs may be exempt from income tax. Folks further down the path might re-examine Roth conversion strategies (including phased multi-year conversion plans), depending on the deferred capital gain and tax bracket.
Allocating more IRA assets to fund your philanthropic goals.
If retirement assets must be distributed out (and taxed) over 10 years rather than multiple lifetimes, you might want to increase the amount of your qualified charitable distributions (during lifetime) and the amount designated to charitable beneficiaries or your own donor advised fund (at death).
Many unmarried partners address their joint financial planning with their partners through contracts: e.g. joint ownership, a health care power of attorney, a will. Since anyone can be named as the beneficiary of an IRA or an retirement account, the contractual route has worked for planning with retirement plan assets. However, the SECURE Act adversely impacts an unmarried partner, who will be forced to take a 10-year payout in almost all cases, but exempts spousal beneficiaries. For the large numbers of people who have the majority of their wealth in qualified retirement plans, the negative provisions of the SECURE Act may be a sufficient inspiration for some to pop the question!
There will be more clarity around the SECURE Act as the provisions are analyzed and as guidance and regulations are released. What is clear now, however, is that it is important to review your existing wealth and estate plan – especially beneficiary designations - to make sure it still works post-SECURE Act.
For more information, click here to read our FAQs about the SECURE Act.