The SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed by Congress with an effective date of January 1, 2020. Pub L No 116-94. The purpose of the act was to make it easier for small employers to offer retirement savings plans and to increase the types of employees eligible to contribute to those plans. However, the act also changes the required minimum distributions (RMDs) from inherited retirement accounts. This effectively ends the stretch IRA for certain beneficiaries and replaces the stretch with a 10-year pay-down period.
The new law creates a class of beneficiaries called “eligible designated beneficiaries” (EDBs). These beneficiaries will still be able to take advantage of the stretch:
- surviving spouse
- minor children of the account owner
- disabled individuals under IRC 72(m)
- chronically ill individuals under IRC 7702B
- individuals not more than 10 years younger than the account owner
If an account owner dies on or after January 1, 2020, that owner’s designated beneficiaries who do not qualify as EDBs will take under the new 10-year rule.
We are busy here at ICLE getting out information on the new act. Nancy Welber and Amy Morrissey have already shared some insights into how the new act affects estate plans in the on-demand seminar Plan for Retirement Assets Under SECURE Act.
According to Amy Morrissey, one of the problems that will need to be planned for under the new rules is the case in which a beneficiary who does not qualify for EDB status needs a trust. These could be individuals who need protection from creditors, who are in high-risk professions, or who are spendthrifts. These beneficiaries will be subject to a 10-year payout period. Amy suggests that one solution might be a multibeneficiary dynastic-type trust with many designated beneficiaries and the trustee having the discretion to pick and choose who to make distributions to and when.
When it comes to preexisting estate plans, Nancy Welber points out that a current conduit trust that is drafted to distribute only RMDs will no longer work if the 10-year rule applies. The only required RMD in the 10-year rule scenario is a distribution of all the funds in the 10th year. Nancy suggests looking carefully at all conduit and accumulation trusts and figuring out what will work going forward based on the law today. But you (and your clients) will need to be flexible because some details could change once the regulations are issued.
In addition to the on-demand seminar, my colleague Jeff Kirkey has planned an entire track at the 60th Annual Probate and Estate Planning Institute on retirement assets and the SECURE Act. And the act will be covered in chapters in Michigan Estate Planning Handbook and the new edition of Michigan Revocable Grantor Trusts (renamed Drafting the Michigan Trust), which will be published in 2020.
Here is what some of our contributors have had to say so far about the act:
Please tell us what else you want to know about the act and its planning ramifications. Also, if you have a blog post on the SECURE Act, please consider linking to it in the comments.