The SECURE Act: What Wealthy Clients Need To Know

The SECURE Act: What Wealthy Clients Need To Know

Voted into law this past December, The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) contains some 30 provisions meant to encourage the adoption of employer-sponsored plans and promote lifetime income options.

The Act also alters rules for inheriting IRAs and other tools that are often part of high-net-worth estate planning.

Likely the most noticeable change stemming from the SECURE Act is the elimination of the stretch provision for most non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under previous regulations, non-spouse designated beneficiaries could take distributions over their life expectancy. For many retirement account owners passing on in 2020 and later, beneficiaries will have just 10 years to empty the account.

Designated beneficiaries will have a degree of flexibility in timing distributions from the inherited accounts, aiming for maximum tax efficiency. The timing of distributions is critical, and tax projections are recommended. There are exceptions for certain beneficiaries, including surviving spouses and minors (until, that is, they come of age). Also exempted are disabled or chronically ill beneficiaries or those whose age lies within a decade of the decedent—on the younger side.

While there is some loss of tax-deferral benefit for beneficiaries, the new situation isn’t as bad as it might seem, since beneficiaries will have the flexibility of taking distributions over the course of a decade or waiting until the end of the period. Naturally, certain clients will see IRA assets as attractive for fulfilling their charitable goals, as opposed to leaving them to beneficiaries.

It pays to be eagle-eyed about beneficiary designations, particularly in the case of those who are leaving retirement accounts directly to children or non-spouse beneficiaries and to trusts for the benefit of children.

Most trust documents are drafted so as to pass required minimum distributions to the beneficiary. Under the new rules, technically speaking, there would not be an RMD until year 10. The IRA would build over the 10-year period inside the trust, and then a taxable distribution of the full account would occur.

The SECURE Act also brings consequences for conduit trusts. Many testamentary estate plans in common use these days include conduit trusts as beneficiaries for IRAs; the reason for this being that this type of trust is guaranteed to qualify as a see-through trust. Still, this structure requires all distributions from the retirement plan to be immediately disbursed to the beneficiary. At the same time, few popular estate plans containing standby conduit trusts have contemplated a mandatory within-the-decade lump-sum distribution to the trust beneficiaries.

There is more: the SECURE Act has increased the age for taking required minimum distributions from retirement savings. It has gone up from 70½ to 72—certainly an easier benchmark age to wrap one’s mind around—while the age limit for making IRA contributions has been eliminated altogether.

For business-owning wealthy clients, the new law gives employers the luxury of more time to set up retirement plans for employees. This provision goes into effect for plans beginning after December 31, 2019. Business owners have until the due date of the tax return, including extensions.

Among other changes, the Act now allows unrelated small businesses to share the administrative and financial responsibilities of establishing and preserving a retirement plan.

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For more information, please read:
What Wealthy Clients Need To Know About The SECURE Act | Financial Advisor

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