Understanding the SECURE Act

The United States Congress threw a monkey wrench into the estate plans of millions by passing the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which went into effect on January 1, 2020. How will this new law impact retirement plans? Will it change how people choose to pass down retirement plans to their loved ones? We posed these questions to Franklin Drazen, an elder law and tax attorney, and founder of Drazen Rubin Law Group, a Life Care Planning Law Firm in Milford, Connecticut.

Franklin acknowledges that the SECURE Act is the most impactful legislation to affect retirement accounts in decades. Some of the changes are positive. For one, the SECURE Act increases the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. “This change helps retirees because it lets people contribute to their retirement plans longer and start their minimum distributions later,” notes Franklin. “Everyone seems to like that.”

The change that’s lighting up the phone lines for financial advisors and estate planning attorneys is the one that affects the beneficiaries of retirement accounts. Under the old law, beneficiaries who did not inherit their accounts from a husband or wife were in some cases allowed to withdraw required minimum distributions over their life expectancy, which could range anywhere from a few years to many decades. The amount of the distribution was calculated based on a few factors, including life expectancy and beneficiary age.

The SECURE Act changes that. It now requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death. The legislation provides a few exceptions to this new mandatory ten-year withdrawal rule, including spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals.

“Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy,” Franklin notes. “Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing beneficiaries to be bumped into a higher income tax bracket. Beneficiaries will also lose much of the benefit that comes from deferring income taxes while the account balances are allowed to grow.”

It’s important to note that for a husband or wife who inherits a retirement account from a deceased spouse, nothing is changing. “They can simply deposit the inherited IRA into their own retirement account,” Franklin adds.

For most Americans, a retirement account is the largest asset they will own when they pass away. “It may be beneficial to create a trust to handle retirement accounts,” Franklin advises. “A trust is one way to address the mandatory ten-year withdrawal rule under the new Act, providing continued protection of a beneficiary’s inheritance. If you want this protection, the trust must be designed specifically for this purpose.”

What’s the key takeaway? For Franklin, it’s clear: consult your estate planning attorney as soon as possible. “If you've got language in an existing trust regarding rolling over an IRA retirement account to a beneficiary, you need to go see your lawyer now,” Franklin cautions. “Something that worked under the old law may not work now. New planning tools will need to be considered by many people with IRAs.”

Franklin recommends that all estate plans be reevaluated in light of the SECURE Act. Anyone who incorporated their retirement accounts into their current estate plan will likely need to have their estate plans and documents updated to account for these changes to the law. “It’s the only way to be sure that all your money ends up where you want it to go after you’re gone.”