Navigating the SECURE Act: Implications for Estate Planning with Retirement Accounts

The enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019 marked a significant shift in the landscape of retirement and estate planning. This legislation introduced changes that affect how retirement accounts are managed after the account holder’s death, specifically altering the distribution rules that estate planners have relied upon for years. This summary explores these changes, detailing the implications for various beneficiaries and offering strategic advice for estate planning under the new law. For more information, including comparisons of the strategies highlighted below, view the related webinar.

Related Speaker Series Webinar:
“Your Client Wants to Name a Trust as the Retirement Plan Beneficiary … Now What?”
January 22, 2025, 4pm ET

Understanding the Key Changes of the SECURE Act

The SECURE Act has primarily reformed the distribution options available to beneficiaries of retirement accounts such as IRAs and 401(k)s. Here’s an outline of the pivotal changes:

End of the “Stretch IRA”: Previously, beneficiaries could extend distributions from an inherited retirement account across their lifetime, a strategy known as the “Stretch IRA.” This approach minimized their annual taxable income and maximized tax-deferred growth. The SECURE Act replaced this with a 10-year rule for most beneficiaries, requiring the entire balance to be distributed within ten years.
Exceptions for Eligible Designated Beneficiaries (EDBs): The act retains the stretch provision for EDBs, including spouses, minor children (until they reach majority), disabled individuals, chronically ill individuals, and any other individual not more than ten years younger than the decedent. These beneficiaries can still take distributions over their life expectancy.

Detailed Implications for Beneficiaries

The SECURE Act’s changes necessitate a reassessment of beneficiary designations and the potential tax burdens on inherited retirement assets. Here’s how different beneficiaries are affected:

Spouses: Still able to stretch distributions over their lifetime, spouses continue to have the most flexibility, including options for rollovers to their own IRAs.
Minor Children: They can use the stretch option until they reach the age of majority, after which the 10-year rule applies.
Non-Eligible Designated Beneficiaries: This includes adult children and other relatives who are now subject to the 10-year distribution rule, potentially leading to higher tax liabilities.
Non-Individuals and Trusts: Trusts, unless specifically designed to qualify as see-through trusts, face the 5-year rule where Roth IRAs are involved and where traditional IRAs whose owners died before their required beginning date are involved. For traditional IRAs whose owners died on or after their required beginning date, the owner’s remaining life expectancy replaces the 5-year rule. This category requires careful planning to avoid accelerated and potentially taxable distributions.

Strategic Estate Planning Post-SECURE Act

To adapt to the SECURE Act’s regulations, estate planners need to consider new strategies that align with their clients’ goals. Here are several approaches:

Use of Trusts: Given the limitations on stretch IRAs, trusts such as Conduit Trusts and Accumulation Trusts offer alternative means to control and protect inherited IRA assets. Conduit Trusts are required to pass all distributions directly to beneficiaries, potentially increasing tax burdens to the beneficiary and allowing access to the funds. Accumulation Trusts, however, allow trustees to retain distributions within the trust, providing control over when beneficiaries receive distributions and managing their tax implications.
Roth IRA Conversions: Converting traditional IRAs to Roth IRAs may become more attractive under the SECURE Act. Although conversions generate taxable income in the year of conversion, Roth IRAs offer tax-free growth and distributions, which is particularly advantageous under the 10-year distribution rule.
Charitable Planning Options: Implementing Charitable Remainder Trusts (CRTs) as beneficiaries of retirement accounts can provide a stream of income to human beneficiaries for their lifetime, or, for younger beneficiaries up to 20 years, with the remainder interest going to charity. This strategy benefits from extended tax deferral and supports philanthropic goals.
Flexible Drafting of Trust Documents: With the new complexities introduced by the SECURE Act, drafting trust documents that provide flexibility to adjust to the beneficiaries’ changing circumstances and the evolving legal landscape is crucial. This might include provisions that allow for later determination of whether distributions should be stretched based on the beneficiary’s status as an EDB or adjusted to meet the 10-year rule requirements.

Conclusion

The SECURE Act has transformed the strategy behind retirement and estate planning, making it essential for advisors and clients to stay informed and consider innovative approaches to managing retirement accounts. By understanding these changes and utilizing strategic planning, one can effectively navigate this new environment, ensuring that beneficiaries receive their inheritances in a tax-efficient manner that aligns with the account owner’s wishes.

Author Profile

Salvatore LaMendola Esq.

Salvatore J. LaMendola, Esq. has been a member of the Trusts and Estates Practice Group at Giarmarco, Mullins and Horton, P.C. since 1996. Sal received his J.D. from the Notre Dame Law School and holds a B.B.A. from the University of Notre Dame. His main practice areas are general estate planning; amending irrevocable trusts through trust decanting, exercises of power of appointment, and other techniques; pre-death and post-death planning for IRAs and other retirement plans; and charitable planning with charitable remainder trusts, charitable lead trusts, and private foundations. Sal is a member of the Probate & Estate Planning Section of the State Bar of Michigan. He is also a regular continuing education presenter for legal education webinar providers Rossdale of Miami, FL and Strafford of Dallas, TX. He also serves on Strafford’s Estate Planning Advisory Board and on the InterActive Legal Practice Advisory Board.