Securing Your Financial Future After the SECURE Act

by Craig Panholzer, Esq.
and Michael L. Salad, Esq., LL.M.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) which was incorporated into an appropriations bill and became effective on January 1, 2020, includes significant changes to retirement plans.

Notably, the SECURE Act postpones the date in which an Individual Retirement Account (“IRA”) owner is required to withdraw required minimum distributions (“RMDs”) from age 70.5  to age 72 and it limits the time in which funds must be distributed to a beneficiary after an employee or IRA owner passes away.

Prior to enacting the SECURE Act, a non-spousal beneficiary of a defined contribution plan, such as an IRA, a 401(k) or a 403(b) account, could stretch distributions over their life expectancy based on a chart published by the Internal Revenue Service. However, the SECURE Act requires a non-spouse beneficiary of a defined contribution plan or eligible retirement plan to withdraw all of the funds within ten years after the year in which the account holder passes away unless the beneficiary is an “eligible designated beneficiary,” as defined in the SECURE Act.

Section 401(a)(2) of the SECURE Act states that “eligible designated beneficiaries” include surviving spouses and chronically ill individuals which is an individual who has been certified by a licensed health care practitioner as being unable to perform without substantial assistance from another individual at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity or requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.  Eligible designated beneficiaries also include disabled heirs. For purposes of the SECURE Act, an individual is disabled “if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” 26 USCS § 72(m)(7).  Surviving spouses and chronically ill individuals may withdraw plan assets during their life expectancies. A surviving spouse may roll over an IRA in the same manner that a surviving spouse was permitted to do prior to passage of the SECURE Act.

Minors are also exempt from the ten-year rule. However, after a minor beneficiary attains majority age (which varies state-by-state), the beneficiary must withdraw all funds from the plan account within ten years.  For instance, if a state deems majority age to be 18, then the beneficiary must withdraw all of the funds before that beneficiary attains 28 years of age. An eligible beneficiary also includes an individual, related or not, who is not more than ten years younger than the employee.

The SECURE Act will likely result in implementation of alternative withdrawal strategies from retirement accounts. Prior to the enactment of the SECURE Act, conduit trusts were common estate planning vehicles for retirement accounts. Conduit trusts require the annual RMD to be distributed to a trust beneficiary but the balance of the funds may remain in trust. The trust serves as a “conduit” for the benefit of the beneficiary. However, the ten-year distribution requirement created by the SECURE Act makes conduit trusts an ineffective estate planning tool in most instances.

Creating an accumulation trust, also known as a discretionary trust, as the beneficiary of a Roth IRA may create a tax-efficient distribution regime that continues for generations. Distributions from Roth IRAs are generally not subject to income taxes thereby creating an opportunity to designate an accumulation trust as a beneficiary.  An accumulation trust does not require a trustee to distribute the income from the trust.  Instead, the trustee collects the income and any profits from the sale of trust assets and holds the income in the trust until the trustee deems it is necessary to make distributions. An accumulation trust allows a retirement account holder to prevent a lump-sum distribution to a beneficiary within ten years. However, an accumulation trust must afford the trustee discretionary power to distribute the inherited funds within ten years of the account owner’s death.  The funds may remain in trust and the trustee would not have to complete distributions to the trust beneficiaries. The funds distributed from a traditional IRA will be taxed at trust tax rates, as opposed to the personal tax rates imputed to distributions from a conduit trust.

A charitable remainder trust (“CRT”) remains an attractive estate planning tool. A CRT allows a beneficiary to receive income throughout his or her lifetime.  After the beneficiary passes away, the remainder of the trust is distributed to a charity of the grantor’s choice. A CRT provides security to a loved-one along with the benevolence of providing for a charity. Appointing a CRT as an IRA beneficiary allows distributions to be stretched longer than the SECURE Act’s ten-year limit. Life insurance can replace the funds placed into a CRT in a tax-efficient manner.  The annuity payments from the CRT can be retained and used to fund a life insurance policy that names additional beneficiaries.

A silver lining from the SECURE Act is the postponement of RMDs by one and one-half years, which will provide additional time for retirement accounts to grow without being depleted by withdrawals and taxes. Additionally, the SECURE Act affords the owner of a traditional IRA additional time to convert a traditional IRA to a Roth IRA. Depending on the size of the traditional IRA, a conversion may significantly increase the amount that can be converted from a tax-deferred traditional IRA to a tax-free Roth IRA and result in a lifetime of tax savings from smaller RMDs and long-term, tax-free growth from a larger tax-free Roth IRA.

The New Year holiday generally offers time for introspection, including personal finances. Now is an opportune time to re-evaluate your estate and financial plans to ensure that your financial future is secure.

Michael Salad is a partner in Cooper Levenson’s Business, Tax and Estate Planning practice groups. He concentrates his practice on estate planning, probate, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida, New York, Pennsylvania and the District of Columbia.  Michael may be reached at 609.572.7616; 954.889.1850 or via e-mail at msalad@cooperlevenson.com.

Craig Panholzer is an associate in Cooper Levenson’s Business, Tax and Estate Planning practice groups. He concentrates his practice on estate planning, business transactions and tax matters. Craig may be reached at 954.889.1856 or via e-mail at cpanholzer@cooperlevenson.com.