We write to share a recent change in the law governing retirement plans as of January 1, 2020. If you have one or more retirement plans (e.g. 401(k)s or IRAs), this change could impact your estate plan. This is especially true if you’ve named (or are considering naming) a trust as a primary or secondary beneficiary of a retirement plan. If you feel your estate plan could be impacted by this change in the law, please contact us to discuss your situation.
The Secure Act
The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) was signed into law on December 20, 2019 and changes many requirements for retirement plans. Among the changes, the SECURE Act does away with the “stretch” payout option for many beneficiaries inheriting retirement benefits after December 31, 2019. For deaths on or before December 31, 2019, a beneficiary of a retirement plan could often stretch out required distributions over the beneficiary’s life expectancy, delaying accompanying income tax payments and maximizing income tax-free or deferred growth in the plan. Starting January 1, 2020 for most plans, while surviving spouses and some other beneficiaries (disabled or chronically ill beneficiaries, beneficiaries not more than ten years younger than the retirement plan owner, and minor children, while minors) will still be able to take advantage of stretch payout, other beneficiaries will have to take full distribution of the
retirement plan within ten years following the owner’s death.
Trusts As Beneficiaries Of Retirement Plans
A retirement plan owner sometimes chooses to name his or her trust as primary or contingent beneficiary of the plan. Reasons to do this include, for example, providing for investment management of the retirement plan and controlling how the plan passes following a beneficiary’s death. For deaths starting January 1, 2020, trusts designed to achieve stretch payout under the old rules may no longer qualify for this treatment. The same trusts may now be required to take distribution of the entire retirement plan, pay the accompanying income tax, and often even distribute the funds out to the trust beneficiary within ten years following the plan owner’s death.
Accordingly, retirement plan owners who have named trusts as beneficiaries will want to review their estate plans to see if any changes are in order. Depending on trust terms, trust beneficiaries may now receive more of the retirement asset, and faster, than intended.
On the other hand, retirement plan owners who have named an individual as beneficiary to achieve stretch payout may now want to name a trust for other reasons if
the individual can no longer receive distributions based on his or her life expectancy.
More to Come?
The SECURE Act is brand new and there are many open questions around how it will work. How the Act affects each person will depend on his or her particular
circumstances. In addition, we expect that the IRS will ultimately issue further guidance and regulations, which may provide additional clarity.