Effect of SECURE Act on Estate Planning

In December 2019, the federal government passed the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act. This was an attempt by the federal government to ensure that older Americans would not outlive their savings, and is essentially an end-of-year appropriations act and tax measure that will assist many Americans.

Understanding the SECURE Act

There are several major components to the SECURE Act, however, overall the intent was to help American workers as they save for their retirement. According to the U.S. Bureau of Labor Statistics, only half of the workers in the United States even participate in their workplace retirement plan, and those that do participate fall far short of contributions necessary to retire with adequate investments. The SECURE Act is an attempt to encourage employers who previously have not established a retirement plan to begin offering this important employee benefit.

Major Provisions of the SECURE Act Affecting Estate Planning

There are many major provisions that now apply to retirement plans, which directly affect an individual’s estate planning needs and requirements. For example, the age a person must begin taking minimum distributions from their retirement account is now 72 years of age, instead of 70½ , which allows them to save longer for retirement, and impacts their estate planning decisions.

However, the SECURE Act removed the ability for a retirement account to be paid out over a designated beneficiary’s life expectancy (known as the stretch IRA), and instead, a full payout will be required within 10 years of the death of the original IRA account holder.

Additionally, the SECURE Act created a new category of beneficiaries now known as “eligible designated beneficiaries.” The retirement account distributions to these types of beneficiaries are also based on their life expectancies.

SECURE Act and Trusts

Trusts are often used to manage retirement accounts. However, the SECURE Act now decrees that conduit trusts for beneficiaries must be paid out within 10 years, instead of using the life expectancy rule, which makes conduit trusts must less appealing for asset management or creditor protection. Additionally, if a trust does not distribute the accumulated assets appropriately within the 10-year period, the undistributed trust income (over $12,950) is taxed at a rate of 37 percent. Therefore, any client who has assets in a retirement account controlled by a trustee must either have those assets distributed within 10 years of their death or understand that these assets will be subject to significant taxes.

Estate Planning Options

In light of these new changes through the SECURE Act, you have several options, including purchasing life insurance to offset the significant taxes that are expected, leaving retirement account balances to charities, or, under some circumstances, doing a Roth IRA conversion of your assets.

Contact an Experienced Attorney

If you are planning for your future, you may be wondering how the new SECURE Act can impact your estate plan. Contact the experienced estate planning attorneys at Johnston Tomei Lenczycki & Goldberg LLC  who will confer with you about your best course of action regarding your estate plan in light of the new SECURE Act. Call us today at (847) 549-0600 or email us at info@lawjtlg.com to schedule a free consultation.