New Qualified Retirement Account Law Impacts Estate Plans

On December 19, 2019, and in order to avoid a government shutdown, Congress passed appropriations bill H.R. 1865, known as the “Further Consolidated Appropriations Act, 2020”, and the President has now signed it into law.  This appropriations bill also incorporated the provisions of the “SECURE Act” (formerly H.R. 1994), which makes sweeping changes to qualified retirement plans (IRAs, 401k plans, etc.) under IRC §401(a)(9).  These changes become effective for the plans of individuals dying after December 31, 2019.

This new law has several provisions that may actually benefit individuals during their lifetime, such as:

• Eliminating the maximum age for contributions to IRAs; and

• Extending the age when most individuals must begin taking Required Minimum Distributions (“RMDs”) from 70½ to 72.

However, this new law also contains major changes which can negatively impact certain beneficiaries of retirement plans after an individual’s death, such as:

• Eliminating the current life expectancy or “stretch-out” withdrawal method for most beneficiaries. Prior law allowed beneficiaries of inherited IRAs to withdraw the funds slowly over their life expectancy, resulting in income taxation of the benefits as the funds are withdrawn incrementally; and

• Requiring all funds to be withdrawn within 10 years of the account owner’s death, dramatically accelerating the income tax impact on these benefits.

Thus, the new SECURE Act directly impacts retirement accounts and the estate plans of individuals who own them.  Effective January 1, 2020, most beneficiaries of retirement accounts (other than surviving spouses, minor children, disabled and chronically ill persons) will have to withdraw all proceeds from these retirement accounts within 10 years, and pay the income tax on such withdrawals.

• Individuals should immediately obtain and review their retirement account beneficiary designations, particularly any beneficiary designations which include a trust as beneficiary.

• Individuals should also review their Wills and Revocable Trusts, because if an estate plan contains a Credit Shelter Trust, a Marital Trust, a Family Trust or Disclaimer Trust which will receive retirement account proceeds, individuals must update the terms of these trusts to avoid the immediate distribution of the retirement account benefits within 10 years of the account owner’s death. 

The IRS has not yet issued its Regulations addressing all of these changes, so there are still some unknowns.  Nonetheless, since the law will be effective on January 1, 2020, individuals need to revisit their estate plan, including their retirement account beneficiary designations, with estate planning counsel now to determine how the SECURE Act may impact their specific plans and goals.  

For more information about the SECURE Act, please contact your attorney, Greg Shelley or any member of the Estate Planning Group of Bose McKinney & Evans.