On December 20, 2019, President Trump signed the SECURE Act, which is the first substantial change in the laws regulating IRAs and other retirement plans in a decade. On its surface the changes seem simple, but their impact is far-reaching for purposes of estate planning and income tax planning for owners of these retirement accounts. All of the ramifications of this change have not yet been determined, nor have all of the planning changes been thought through. Here is a summary:

The SECURE Act adjusts the date at which you are required to withdraw a minimum amount of the retirement account assets, from age 70½ to age 72. You can continue to make contributions to a retirement account after age 72. These changes, although subtle, require adjusting financial and retirement planning for clients. The biggest change is not in what happens during your life, it is what happens after your death. 

Under the prior law, if you had started taking required minimum distributions, died and designated a beneficiary for your retirement account, that designated beneficiary could either roll over the retirement account into a new retirement account (if the designated beneficiary is your surviving spouse) or they could “inherit” your IRA and continue to take required minimum distributions from the account. The SECURE Act changes the calculation of the minimum required distribution from your life expectancy to the life expectancy of the designated beneficiary. This means that if you had a life expectancy of 10 years when you died, your required minimum distribution would be roughly 10% of the retirement account assets. If, however, you died and your child inherited the retirement account, they would withdraw the funds based on their life expectancy. If your child is age 70, their life expectancy is 27.4 years, so the payout would be 3.7% of the retirement account assets. 

Under the new law, designated beneficiaries are divided into two classes, designated beneficiaries and eligible designated beneficiaries. Qualified eligible designated beneficiaries are: 1) a surviving spouse, 2) a minor, 3) a person with a disability, or 4) a person who is not more than 10 years younger than you. Surviving spouses can continue to roll over your retirement account as they could under the prior law. Eligible designated beneficiaries can continue to withdraw their minimum required distribution based on their life expectancy, so long as either the minor beneficiary is a minor, or a disabled beneficiary remains disabled. A designated beneficiary, however, must withdraw all of the retirement assets within 10 years of inheriting the retirement account. 

The result is that if you planned on having your designated beneficiary of your retirement account be able to stretch the required minimum distributions over their life expectancy, they will not be able to do so, unless they qualify as an eligible designated beneficiary. If the beneficiary is not eligible, they must withdraw the assets within 10 years, though there is no requirement that they withdraw the assets in equal annual installments. The beneficiary can wait until the final year to do so. 

The law does not make much of a difference if your retirement account is not a significant part of your estate (generally below $80,000), or you plan on donating your retirement account to charity. It does, however, make a significant difference if you plan on using the retirement assets to fund a trust for a surviving spouse or other beneficiary. Many of the trust terms under the prior law to allow for a stretch payment are no longer permitted. This may result in significantly higher income taxes paid by the trust after your death.

Planning suggestions have been circulating thick and fast. There is no one fix for this change to the law, unfortunately. It does, however, require that you discuss revision of your estate plan with your estate planner this year. 

Matthew Erskine is managing partner at Erskine & Erskine LLC.