The Secure Act: New Legislation and Estate Plan Pitfalls
On December 20, 2019, The Setting Every Community Up for Retirement Enhancement Act of 2019, 133 Stat. 2534, Public Law No. 116-94 (“The SECURE Act”) was signed into law. This legislation has significant implications for estate planning. Due to these changes, I advise all my clients to take a look at their current estate and retirement plans, and especially any retirement account beneficiary designations. If a trust is a designated beneficiary it is important to review the trust to ensure that there are not tax or estate plan pitfalls related to the new legislation.
Retirement Benefits and Family Planning
The SECURE Act made several key changes that directly impact retirement and family planning.
1. Repeals Maximum Age for IRA Contributions
First, in Section 107, the legislation repeals the prohibition on contributions to a traditional IRA by those individuals ages 70 ½ and above. This change makes it possible for older working individuals to continue making contributions to an IRA beginning January 1, 2020.
2. Allows Long-Term Part-Time Employees to Contribute to 401(k) Plans
Second, in Section 112 of the Act, employers are now required to allow long-term part-time workers to participate in 401(k) plans. An employer is now required to have dual eligibility for employees to participate in its 401(k) plan. Now, an employee must either complete 1) one year of employment working a minimum of 1,000 hours or 2) complete three consecutive years of employment working a minimum of 500 hours per year. This will likely have significant retirement savings benefits to those working part-time (which is more disproportionately women) by allowing them to make contributions that they were not allowed to make prior to enactment of The SECURE Act.
3. Allows Penalty-free Withdrawals from Retirement Plans for Births and Adoptions
Third, Section 113 of the Act allows penalty-free withdrawals of up to $5,000 for individuals who have a “qualified birth or adoption” and it allows repayment of the distributions.
4. Expands 529 Education Accounts
And last, Section 302 expands 529 accounts to cover registered and certified apprenticeship programs. It also allows 529 accounts to be distributed to pay student loans of up to $10,000, including student loans of siblings.
Estate Planning Changes and Pitfalls
In addition to the changes mentioned above related to retirement savings and family planning, the SECURE Act makes a couple significant changes that need to be analyzed for estate planning purposes.
1. Increases the Age For Required Mandatory Distributions from Retirement Plans
First, Section 114 of the Act increases the minimum age for mandatory retirement distributions from 70 ½ to 72 beginning for distributions required on or after January 1, 2020 and to individuals who attain age 70 ½ on or after January 1, 2020. The policy behind this rule has always been to ensure that individuals use their retirement plans during their life and not for estate planning purposes to transfer generational wealth. Thus, the new rule takes into account increases in life expectancy.
2. Modifies the Required Minimum Distribution Rules for Retirement Plans
And last, probably the most significant change when it comes to estate planning, Section 401 of the SECURE Act modifies the five-year distribution rule for certain inherited retirement plans to ten years, while at the same time doing away with what is known as “the stretch IRA” for certain individuals. These modifications apply to anyone who dies on or after January 1, 2020. The stretch IRA remains intact for spouses, minor children (until they reach 18), beneficiaries who are not more than 10 years younger than the original account owner, chronically ill individuals, and disabled individuals.
How do these changes impact estate planning? As background, there are two commonly used estate planning tools for dealing with retirement accounts, conduit trusts and accumulation trusts. Conduit trusts are written so that any required minimum distribution (“RMD”) that is paid by the retirement account is directly distributed to the beneficiary. Under the SECURE act, depending on who the beneficiary is under the trust, the entire retirement account may be required to be distributed outright in ten years. The consequences of this are enormous, including losing the ability to protect the assets throughout the individual’s life, as well as the tax ramifications. Thus, one possible fix is to change the beneficiary under the retirement account, and also consider splitting the account between multiple beneficiaries. Another possibility is to amend the conduit trust into an accumulation trust so that the entire amount is not distributed at the ten-year mark.
Therefore, I urge everyone to take a look at your retirement beneficiary designations and if a trust is a designated beneficiary, consider whether it is prudent to amend the designation or amend the trust by consulting with an estate planning attorney. If you need assistance in taking a look at these issues in your estate plan, please contact Hansen Legal LLC, and I will be happy to assist.
