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NEW LAW DRASTICALLY CHANGES RETIREMENT ACCOUNT PLANNING – clients should review their retirement account beneficiaries in light of the SECURE Act.

In December 2019, Congress passed the Setting Every Community up for Retirement Enhancement (SECURE) Act as part of a year end appropriations bill necessary to fund the Federal government.  From an estate planning perspective, the most significant component of the SECURE Act is the drastic change to the required distributions rules for inherited IRAs.

Under prior law, when the owner of a retirement account died, his or her beneficiaries were permitted to take distributions from the account over their respective life expectancies.  In the case of pre-tax retirement funds (e.g., 401k, 403b, and traditional IRA accounts), this extended payout meant continued income tax deferral, and for after-tax Roth accounts, continued tax-free compounding.

The SECURE Act limits distribution deferral for most beneficiaries to only 10 years – i.e., inherited accounts must be emptied within 10 years after the owner’s death.  There are exceptions to this “10-year rule,” most significantly for spouses, disabled individuals, and minor children.

While it is helpful to understand the SECURE Act’s impact on your estate plan, for many clients, changes are not necessary.  For example, if your retirement account beneficiaries are individuals, not trusts, those beneficiaries may now need to withdraw funds and pay the tax sooner than previously planned.  But this expedited payout is simply a reality without appealing alternatives in most cases.

However, if your retirement accounts are payable to trusts, a prompt review is critical.  Pre-SECURE Act trust provisions obviously did not contemplate these new rules and may now be ineffective or have unintended results.  Most trusts will, at best, be subject to the 10-year rule.  Outdated or flawed trusts could have even shorter payout periods, cause taxation at unnecessarily high rates, or mandate ill-advised distributions to beneficiaries.

We encourage you to contact us to review your estate plan and how it is impacted by the SECURE Act.