New Estate Planning Considerations After the SECURE Act

Prior to 2020, if the owner of a qualified retirements account—like 401(k) and 403(b) accounts—died leaving assets in the account, distributions could be paid out to beneficiaries in installments. Those installments, known as required minimum distributions, could be paid out to the beneficiary annually in an amount measured by the beneficiary’s life expectancy. Until the passage of the SECURE Act, estate planning attorneys drafting living trusts for clients with multiple beneficiaries had some flexibility in crafting arrangements that permitted the beneficiaries to stretch out distributions based on the oldest beneficiary’s life expectancy. For example, the grantor of a living trust would typically name the trust as the beneficiary of a retirement account upon his death. With a properly drafted trust agreement his multiple children would be permitted to stretch distributions out over the life expectancy of the oldest child, often drastically reducing the potential tax liability on those amounts.

However, with the passage of the SECURE Act, many of the benefits of planning for qualified retirement accounts in living trusts have disappeared. Beneficiaries are no longer permitted to stretch distributions over their lives based on life expectancy. Now, generally, a qualified retirement account must be distributed in its entirety within 10 years after the account owner’s death. The 10 year rule does not apply to certain beneficiaries including a surviving spouse and minor children. However, individuals who may be planning to leave retirement accounts to other beneficiaries (including adult children) may want to consider some alternative planning options.

Leave Retirement Accounts to Different Beneficiaries

Individuals with adult children that are financially secure may want to consider bypassing those children as retirement account beneficiaries altogether and instead name grandchildren as the contingent beneficiaries who can take the distributions at lower tax rates with the assets then being reinvested to provide for long-term financial security. Regardless, now is a good time to revisit beneficiary designations and consider whether there are more ideal ways to plan for retirement account inheritance.

Consider a Roth Conversion

A traditional IRA is funded with pretax dollars, meaning that it is funded tax free, but the eventual distributions are taxable. Conversely, a Roth IRA is funded with after-tax dollars. The trade-off, however, is that distributions from a Roth IRA are entirely tax free to the beneficiary. In light of the SECURE Act, individuals may want to consider converting traditional IRAs into Roth IRAs. While tax is due upon the conversion, the assets would continue to grow in the new Roth IRA tax free and not be subject to the SECURE Act’s 10 year distribution requirement.

Revisit Trust Agreements

Estate planning attorneys typically draft contingencies into trust agreements that permit flexibility when it comes to inherited qualified retirement accounts. Commonly, living trusts would be structured as “see through trusts” which permitted the trust to stretch QRA distributions out over the life expectancy of the oldest beneficiary so long as certain requirements were met (the trust was irrevocable upon the owner’s death, the beneficiaries were identifiable, etc.). The beneficiaries would then be permitted to limit the income tax consequences of receiving substantial distributions all at once, or over a shorter period of time.

Those so called “see through trusts” are no longer as helpful as they previously were since the SECURE Act places a 10 year maximum on distributions from a qualified account regardless of the beneficiary’s age. However, without structuring a living trust as a see through trust, retirement accounts still must be distributed within a 5 year window, so there is still a bit of utility to be gained.

Individuals may wish to restructure trust provisions to give the trustee discretion in making payments to beneficiaries of retirement accounts if spendthrift individuals are involved and financial responsibility is a potential issue. Without the benefit of requirement minimum distributions, it may make more sense to value asset protection over maximum tax savings.