On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020, makes the most dramatic changes to retirement account laws seen in the past decade. While most popular media has focused on the impact of the SECURE Act during the original retirement plan owner’s lifetime, the Act also makes potentially catastrophic changes to the tax treatment of retirement plans for beneficiaries upon the account owner’s death.
How did this creep up as a last-minute surprise?
Well, over the past decade, a few different bills have been proposed that would make changes to the retirement plan rules, but most of these bills never made it out of committee or gained any major traction. This year’s SECURE Act was the first rule change that appeared to be gaining momentum. Earlier this year, the SECURE Act was passed by the House, but it later stalled out in the Senate. With the Senate embroiled in impeachment hearings, it seemed that the SECURE Act was off the table for 2019. And with 2020 being an election year, it was anyone’s guess as to whether the SECURE Act would resurface and gain enough traction to get passed into law.
However, in what seems like an all-too-common-move, when Congress passes a major bill, they often tack on other bills and rule changes. Such is the case with the SECURE Act—it got thrown back on the table as part of the end-of-year spending bill that kept the government open.
So we spent some time over the holidays in 2019 to write an 18-page memorandum detailing the changes under the law and outlining some of the potential planning strategies going forward. Spoiler alert: it's not as straightforward as it used to be. You can download the memo at SecureActMemo.CarolinaFEP.com
If you are a current or past Carolina Family Estate Planning Client: If our office has helped you set up your estate plan, and you would like assistance figuring out how the SECURE Act impacts you and your planning, please visit and complete the questionnaire on that page. Members of our VIP Inner Circle maintenance program will receive priority review. Based on your responses, we will follow up with the next steps for reviewing or updating your planning and the associated legal fees. Given the enormity of these changes and the number of clients impacted, we appreciate your patience, as we expect to be working with clients throughout 2020 and beyond to review and update their plans. SecureActSurvey.CarolinaFEP.com
The Government Just Pulled the Rug Out from Under Many Retirees
We see this story on a daily basis in our office: Clients who have worked hard and lived within their means their entire lives to save for retirement. Nearing or in retirement, they continue to live within their means in order to "save for a rainy day," or, alternatively, to leave a legacy to their children and grandchildren that will help pay for education or a starter home. For many of these clients, a majority of their savings is in their retirement plans, and they only need the required minimum distribution from their retirement accounts to live on. They are able to maximize the inheritance they leave their loved ones.
Under the old rules, when our client died, they had the opportunity to leave these retirement plans to their children and grandchildren and preserve tax-deferred status for the lifetime of their beneficiaries. The children and grandchildren were only required to take small distributions from the accounts each year. While the distributions were subject to income taxes, the rest of the account got to continue to grow tax-deferred.
Congress has decided that it now wants to get its hands in the cookie jar sooner. So, while our clients have relied on these rules and have dutifully saved for decades, the SECURE Act makes sweeping changes to how these accounts will be taxed upon the owner's death. Most of these clients will need to update their estate plans.
Under the new SECURE Act rules, beneficiaries will now be required to fully distribute inherited retirement plans within 10 years of the owner's death. This will result in an acceleration of how quickly the account will be taxed. And, because the distributions will be larger, it will trigger even higher taxes in many cases by pushing the beneficiaries into higher tax brackets.
Savvy beneficiaries will compare different strategies, such as withdrawing a portion of the plan each year for 10 years, rather than taking a lump sum distribution in Year 10. However, the way many estate plans have been drafted would force beneficiaries to take a lump sum distribution in Year 10, ensuring in many cases the worst possible tax treatment.
We've written an 18-page memorandum detailing the changes under the law and outlining some of the potential planning strategies going forward. You can download the memo at SecureActMemo.CarolinaFEP.com
In particular, as it relates to estate planning and tax planning, the SECURE Act creates a potential looming tax disaster for your future beneficiaries. I highly recommend that you download and review our full memorandum highlighting the issues, but for those who want the quick “cliffs notes” version:
While everyone’s particular planning goals will vary, if we were to try and simplify who should be concerned about the new rules and the impact on their estate plan, here’s how we would break it down:
If You Have a Trust Named as a Beneficiary
If you have any type of trust designated as a beneficiary on your Retirement Plan beneficiary designation forms, you should have your current estate planning reviewed to determine whether (1) the trust should be modified; and/or (2) the beneficiary designation should be modified.
If You Have Your “Estate” Named as a Beneficiary
If you have designated your “Estate” as a beneficiary on your Retirement Plan beneficiary designation forms, you should have your current estate planning reviewed to determine whether (1) any living or testamentary trusts should be modified; and/or (2) the beneficiary designation should be modified.
If Your Retirement Plans Combined Total Is Less Than $500,000: Least Affected
If you are retired or nearing retirement, and your Retirement Plans will be a significant source of your retirement income, it is more likely that your accounts will be consumed during your lifetime and additional planning may be less urgent.
However, if you have a high income and you expect your accounts to keep growing (either because you are continuing to contribute to them, or you are retired but only withdrawing Required Minimum Distributions), then a retirement plan analysis may be beneficial for examining the potential benefits of Roth Conversions and other planning strategies.
If Your Combined Retirement Plans Total $500,000 to $1,000,000: Moderately Affected
If you are retired or nearing retirement, a portion of your Retirement Plan may be consumed during lifetime. The effect of spreading out distribution of the remaining funds over 10 years versus the beneficiaries' life expectancy may not have a significant impact.
However, if you have a high income and you expect your accounts to keep growing, additional planning may be beneficial.
A review of your current estate planning may be beneficial, including review for whether planning makes use of trusts which may need to be updated in light of the new rules (e.g., Conduit Trusts).
A retirement plan analysis may be beneficial for examining the potential benefits of available planning strategies.
If Your Combined Retirement Plans Total More Than $1,000,000: Major Impact
There is a high likelihood that a significant chunk of these accounts will be left to beneficiaries, often in trust.
A review of your current estate planning is urgently recommended, as any trusts likely need to be updated.
A Retirement Plan Analysis for examining the potential benefits of various planning strategies is urgently recommended.
What Are Your Next Steps?
The SECURE Act brings HUGE changes that impact many of our clients from over the years. We are hard at work helping our clients review their existing plans and figuring out the best strategy for their goals going forward.
If you are a current or past Carolina Family Estate Planning Client: If our office has helped you set up your estate plan, and you would like assistance figuring out how the SECURE Act impacts you and your planning, please visit SecureActSurvey.CarolinaFEP.com and complete the questionnaire on that page. Members of our VIP Inner Circle maintenance program will receive priority review. Based on your responses, we will follow up with the next steps for reviewing or updating your planning and the associated legal fees. Given the enormity of these changes and the number of clients impacted, we appreciate your patience, as we expect to be working with clients throughout 2020 and beyond to review and update their plans.
If you are not already a client: The new law puts a wrinkle in planning that used to be fairly straightforward to implement. Particularly if you fall into any of the impacted categories above, this is NOT the kind of thing you want to approach willy-nilly. Specifically, there are many attorneys out there who dabble in estate planning "on the side." Their clients are the ones I worry about the most. You don't want to mess this up.
If you need help setting up your estate plan or reviewing your options under the SECURE Act, please give us a call at 919-443-3035 to discuss your situation and determine if you should come in for a Vision Meeting.