The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect on January 1, 2020, and we saw some major changes…especially with regard to estate planning. More specifically, the SECURE Act impacted IRAs and 401(k)s, including the ability to delay distribution, as well as reduced flexibility for inherited IRAs. In light of this new law, it is prudent to review your estate plan, as what was appropriate before 2020 may not make sense anymore. 

While pre-SECURE Act rules are grandfathered and apply to retirement accounts of dependents who passed away before January 1, 2020, many of these rules do not apply to the retirement accounts of individuals who are still alive. Let’s take a look at some of the changes to help you determine if you should review your estate plan. 

Key Provisions of the SECURE Act

The SECURE Act includes several noteworthy and beneficial provisions that individual retirement-savers should understand.

In most situations, you must begin taking distributions from qualified retirement plans and IRAs after a certain age. Prior to the SECURE Act, these “required minimum distributions” (RMDs) had to start at age 70-1/2. For those who reached 70-1/2 prior to 2020, the rules do not change. If you were born July 1, 1949 or later, the SECURE Act extends the age requirement to 72, which allows you even more time to build up your tax-deferred nest egg. 

Previously, you could not contribute to an IRA after the age of 70-1/2, but the SECURE Act removes this restriction. This enables you to supplement existing retirement plan accounts with IRA contributions if you continue working or otherwise qualify. 

Notable Impact

Although the above provisions seem to improve retirement security for many Americans, they also take away the ability for many beneficiaries of IRA accounts to take distributions throughout the course of their lifetimes. Pre-SECURE Act, beneficiaries could stretch required minimum distributions (RMDs) over their lifetime, while allowing the remaining balance to grow, tax-deferred, in an inherited IRA account. Younger beneficiaries would have benefitted the most, as their life expectancy was longer. Now, due to the new law, most beneficiaries must withdraw the balance within a 10-year period. Accordingly, the beneficiary will be required to take out larger amounts of money at once, and will be taxed on that larger distribution. 

The ramifications of this change are significant for estate planning purposes. The new law is problematic when it comes to accumulation trust, because the tax rate for the trust is a lot higher than the individual tax rate. Likewise, the language in a conduit trust should be reviewed to avoid any unintended adverse consequences. 

If you have any concerns about the implications of the SECURE Act on your estate plan, a thorough review by you and your attorney would be prudent. We all live busy lives and often push estate planning to the end of the to-do list. However, with changes to laws— not to mention all that has happened over the last 1-1/2 years—there is no better time than now. Contact us to discuss the updates that your estate plan may require in light of these tax changes, or complete the brief form below to send a message to our legal team.