SECURE Act Signed into Law
January 24, 2021
The Setting Every Community Up for Retirement Enhancement Act of 2019, more commonly known as the “SECURE Act” was signed into law on December 20, 2019. Taking almost immediate effect, the SECURE Act makes significant changes to how certain retirement plans like IRAs and 401Ks are administered after the death of the primary account holder. Now, in most instances, the income tax advantageous “stretch” IRA has been replaced by a maximum 10-year post-death payout period for most designated beneficiaries.
Effective January 1, 2020, beneficiaries other than the account owner’s surviving spouse or minor child, a disabled beneficiary, a chronically ill individual or a beneficiary less than ten years younger than the account owner, will be required to completely withdraw all plan assets within 10 years of the death of the account owner. The distributions to the beneficiary can be made at any time or times during the 10-year period as long as the plan is totally distributed by the end of the 10-year period. This differs substantially from prior rules which allowed beneficiaries to elect to have inherited account balances paid out over their remaining life expectancies.
If you are the owner of an inherited retirement plan, the SECURE Act will also affect the payout periods available to your designated beneficiaries.
Although the SECURE Act did effect positive changes, such as increasing the beginning age for required minimum distributions and allowing for contributions to age 72 (prior law required distributions and allowed for contributions to 70½), the significance of the loss of the “stretch” planning technique cannot be overlooked. Prior to the SECURE Act many estate plans included the creation of trusts for children and grandchildren to own retirement assets for the purposes of spendthrift and/or creditor protection while also taking advantage of and maximizing the “stretch” out of payments to realize significant income tax savings. Therefore, the SECURE Act is poised to cause upheaval in the worlds of estate and income tax planning across multiple generations. As a result of the SECURE Act, some trusts may no longer be effective to achieve client goals and some trusts that may still be effective will require revisions to consider the now-shortened payout period.
Under the new rules of the SECURE Act, beneficiaries are no longer able to defer income taxes using their life expectancies and many estate planning techniques which may have been put in place to take advantage of the “stretch” may now be frustrated. We would encourage current and past clients to think about their assets critically and reach out with any questions they may have regarding the SECURE Act and how it might affect them, their retirement assets, their estate plans and their designated beneficiaries.
These materials were prepared by Putney, Twombly, Hall & Hirson LLP prior to their combination with Bond, Schoeneck & King for informational purposes only and are not intended as legal advice or advertisement of legal services. Transmission of the information is not confidential and is not intended to create an attorney-client relationship or an attorney-client privileged communication. You should not act upon any of the information contained in these materials without seeking the advice of your own professional legal counsel.