The SECURE Act, signed into law on December 20, 2019, is the most impactful legislation to affect estate planning in decades. Although the SECURE Act includes many positive changes in regard to tax-deferred retirement accounts, it no longer permits most non-spouse beneficiaries (e.g., children) to withdraw an inherited retirement account over the beneficiary’s life expectancy (aka “stretch IRA”). Instead, the default law now requires the entire account to be withdrawn and liquidated by the end of the 10th year after the death of the account owner (“10-year liquidation rule”). This change has major implications when considering whether to name an individual or trust as beneficiary of a retirement account.
The 10-year liquidation rule results in the acceleration of income tax due, possibly causing a beneficiary to be bumped into a higher income tax bracket and receiving less of the funds contained in the retirement account than under the prior law. However, the SECURE Act does provide a few exceptions to the usual rule that are available to surviving spouses, beneficiaries less than 10 years younger than the account owner, minor children, and disabled individuals. But these exceptions only complicate the analysis because your estate planning objectives likely include more than just tax considerations. For example, you might be concerned with protecting a beneficiary’s inheritance from future creditors and ex-spouses or preventing your spouse from disinheriting your children upon the spouse’s remarriage. All these issues should be considered simultaneously when naming beneficiaries of a retirement account.
If your estate plan currently names a trust as primary or secondary beneficiary of a retirement account (e.g., IRA, 401k, TSP), then you should reconsider whether this is still appropriate after the SECURE Act, and if yes, determine what type of trust to use. As a courtesy, I have written an article, “Decision Tree for Naming Retirement Account Beneficiaries after the SECURE Act” which provides a structured analysis, i.e., a decision tree, for determining the answers to these questions. This article is available on my website.
In some cases you may discover the reason you named a trust as beneficiary of a retirement account is no longer applicable, which permits you to name individuals as beneficiaries instead of a trust (although a trust restatement may still be appropriate in case circumstances change).
But in most cases the solution will be to integrate SECURE Act compliant provisions into your will or revocable living trust by restating it.
Arizona law provides a mechanism called a “decanting power” that gives your trustee a tool to fix the trust in the event you die before updating your estate plan. But relying on this mechanism invites an unnecessary hassle for your trustee. Doing nothing is a careless approach.
By integrating SECURE Act compliant provisions into your will or revocable living trust, we will accomplish the following:
Thomas J. Bouman