The SECURE Act, or “Setting Every Community Up for Retirement Enhancement Act of 2019,” was passed right around Christmas of this past year. Its main purpose is to allow Americans aged seventy and a half and up to grow their retirement plans tax-deferred for longer. Unfortunately, the impact this policy has on estate planning practices will be detrimental.
In the past, it’s been mandatory to start withdrawing from retirement plans and IRAs at seventy and a half years old. However, because of the SECURE Act, you may now defer minimum distributions until your seventy-second birthday. You may also contribute to your traditional IRA past the age of seventy and a half if you receive earned income from employment.
The major downside of the SECURE Act for individuals hoping to have their children inherit their IRAs is the newly enforced “ten-year rule.” Before this year, beneficiaries could take minimum distributions over their lifetime. Now, they are forced to drain inherited plans within ten years of the account owner’s death, regardless of the tax consequences. This affects every retirement plan owner and beneficiary as of January 1, 2020. It does not outright increase taxes on inherited plans, but because beneficiaries are forced to pay so much sooner at their own bracket, they’ll take a hit. It’s important to note that some beneficiaries are exempt, including spouses of account owners, minor children until they reach the age of majority, some disabled or chronically ill people, and individuals fewer than ten years younger than the account owner.
This could be a huge issue for people inheriting retirement accounts through trusts because they’re designed to protect beneficiaries’ inheritances — often times from themselves. Without the ability to dictate distribution amounts and timelines, parents cannot ensure that their children will be equipped when they’re forced to “cash out” accounts after their death. If this is policy you might be concerned about, I would encourage you to schedule a meeting with a qualified trust attorney to review your estate plan and make sure that these risks are minimized.
The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. Brittany Britton is licensed to practice law in the state of California only.