How the Secure Act Affects Beneficiaries of Retirement Accounts

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) took effect January 1, 2020. It is the most impactful legislation affecting retirement accounts in decades. The Act has several facets, including increasing the required beginning date for required minimum distributions from a retirement account from 70 ½ to 72 years and eliminating the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of your retirement accounts because the Act requires most (with a few exceptions) designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.

Under the old law, individual beneficiaries and beneficiaries of a properly drafted trust that inherited an IRA account could take distributions over the beneficiaries’ life expectancies, thus “stretching” the IRA. A beneficiary had to withdraw a minimum amount each year that was determined by the size of the account and the life expectancy of the beneficiary. This allowed deferral of income tax due and more opportunity for growth. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket such that they receive less of the funds than you may have originally anticipated.

For most Americans, a retirement account is the largest asset they will own on death. Most individuals’ estate planning goals include more than just tax considerations. Many are concerned with protecting a beneficiary’s inheritance from creditors, future lawsuits, or failed marriages and use a trust as the vehicle for that protection. However, trust structures used before the SECURE Act may no longer work to achieve the original goal. An alternative trust structure may need to be used to allow the funds to accumulate in trust and remain protected. This is a sophisticated planning tool. If you have named one or more trusts as beneficiary of your retirement account, you should meet with an estate planning attorney to see what, if any, changes should be made to your trust. If a trust is not properly drafted, the trust could be forced to withdraw the entire balance in five years.

In order to protect your hard-earned retirement account and the ones you love, it is critical to act now. A proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planed for.

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