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Forget my New Year Resolution; I am a fair-weather gym member. I will even use daylight savings time as an excuse to why I avoid the gym in the morning. When I do go to the gym, I remember the golden rule: stretching before exercise has its benefits!
Before this year, leveraging the “stretch IRA” also had its benefits. Viewing assets comprehensively permitted equitable and even targeted estate planning to meet a client’s overall goals. Designating specific beneficiaries to retirement plans was and still is an effective method to direct benefits outside of the probate process as part of an estate plan – but the benefits of stretching “required minimum distributions” over a beneficiary’s lifetime are now, for the most part, history.
The SECURE Act of 2019
For participants who die after January 1, 2020, the SECURE Act of 2019 requires that all funds from a retirement plan be distributed within ten years, unless the designated beneficiary is (i) the surviving spouse, (ii) a child who has not reached the age of majority, (iii) disabled, (iv) chronically ill, or (v) not more than ten years younger than the participant.
This requirement affecting all 401(k), traditional IRA, and Roth IRA plans effectively ends required minimum distributions for most beneficiaries (minimum amount that must be withdrawn from the plan each year). Distributions may instead be made periodically or in one year so long as all plan funds are distributed within ten years. Regardless, the income tax consequences on distributions from a tax-deferred plan, especially during a beneficiary’s highest income years, could be substantial.
Changes to Historical Trust Strategies
Conduit and see-through trusts will also face similar consequences. Historically, these type of trusts were established by naming the trustee as the beneficiary of a retirement plan allowing assets to be consolidated, managed, and distributed to the trust’s beneficiaries over a stretched period.
Trusts are not treated differently, however; retirement plan funds must be distributed to trusts within the same ten-year requirement, which means tax consequences both to the trust and to the beneficiaries of the trust once distributions are made to them.
What Are Next Steps?
Whether individuals named their beneficiaries outright or through a trust strategy, the SECURE Act calls for a careful review of beneficiary designations and trusts to ensure strategic estate planning goals are still being met.
For more information or a consultation to review trust and estate planning documents, please contact us at 704-892-1699. We can assist in determining whether an update is advisable.
Author: Philip Kuhn, Estate Planning Attorney