How the SECURE Act Affects Your Estate Planning — and What to Do Next

In December 2019, the SECURE Act was passed by Congress and signed into law, implementing some big changes to America's retirement planning system. One of the primary goals of the new law is to make it easier for workers to save for retirement, but it also presents significant impacts for some current and future retirees, as well as for some people's estate plans.

People who have already accumulated a substantial level of wealth in qualified retirement accounts might need to revisit their estate planning strategies and adjust their estate plans to help protect their heirs from unexpected tax bills. Getting financial guidance during this time is critical to ensure your estate plans stay on track.

Learn more about how this law affects your financial future, and how to adjust to the new rules.

How does the SECURE Act affect estate planning?

Retirement accounts make up the largest share of many Americans' net worth, so it's important to have an estate plan for these accounts, especially under the SECURE Act. One of the SECURE Act's biggest impacts on estate planning is in the tax treatment of "Stretch IRAs."

Before this legislation, the rules for required minimum distributions (RMDs) from retirement accounts allowed non-spouse beneficiaries of IRAs and defined contribution accounts to take distributions across their full life expectancies. This is also known as "stretching" the account, or using a "Stretch IRA."

By allowing more gradual withdrawals from these accounts, beneficiaries could potentially reduce their taxable income in any given year, and/or defer taxes further into the future.

Under the SECURE Act, with some limited exceptions, certain people who are non-spousal beneficiaries of IRAs and defined contribution plans are required to completely withdraw the money in their inherited accounts within 10 years.

This means: If you want to leave a retirement account to a non-spouse beneficiary, they might be forced to withdraw the money in that account sooner than they would have preferred, which could cause them to owe a higher tax bill than they had expected.

Who is impacted by the SECURE Act?

The SECURE Act's changes affect people (other than spouses and a few other limited exceptions) who inherit their loved ones' IRAs and other defined contribution accounts. As a result, the changes also affect those retirement account owners who had planned on leaving their retirement account assets to their children, grandchildren or other non-spouse beneficiaries.

If you are a non-spouse beneficiary or leaving money to a non-spouse beneficiary, you may want to re-evaluate your tax strategies or estate plan with a financial professional.

If you are single (widowed or divorced) and planning to leave retirement account assets to a beneficiary, it's especially urgent for you to re-evaluate your estate plan with your financial professional now to discuss options to limit the tax impact on your beneficiary.

What are some possible estate planning strategies to adjust to the new rules?

As described in Barron's¹ and InvestmentNews², there are several possible estate planning strategies to help your estate plan adjust to the new rules, depending on your situation:

• Fund an irrevocable trust with a life insurance policy. If you own an IRA, you can take an account distribution to purchase a life insurance policy. The death benefit would fund a trust that would pay a regular income stream to beneficiaries and could be spread out beyond the 10-year limit.
• Convert traditional IRA funds to a Roth IRA. You'll have to pay some taxes now, but your beneficiaries' future withdrawals from the inherited Roth IRA account would be tax-free.
• Give more money to charity. There are tax strategies where you can donate money from an IRA account directly to a qualified charity, helping to reduce your taxable income. This lets you give other (taxable) assets to your heirs.
• Give stocks to your loved ones instead. Other types of non-IRA financial assets, such as stocks, can potentially offer some advantages for your beneficiaries' tax planning. People can sell stocks anytime they choose, with no 10-year withdrawal requirement.

Every person's situation is different, and there are complex rules and considerations for any estate planning strategy. But if you are concerned about how the SECURE Act might affect your plans for transferring tax-deferred retirement accounts, you can use these ideas to start a detailed conversation with your financial professional.

Footnotes

• ¹ https://www.barrons.com/articles/the-secure-act-will-upend-the-stretch-ira-strategy-here-are-workarounds-51576778401 Opens in new window
• ² https://www.investmentnews.com/how-to-replicate-a-stretch-ira-79691 Opens in new window

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