In December 2019, Congress passed, and the President signed into law what is generally referred to as the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”). Generally effective January 1, 2020, the SECURE Act significantly modifies many requirements for employer- provided retirement plans, individual retirement accounts (“IRAs”), and other tax-favored savings accounts. As many of the SECURE Act’s provisions go into effect this year, it is important for you to consider how these new tax rules may affect your current estate plan and retirement-planning situation.
This memorandum highlights various elements of the SECURE Act that have changed the estate planning and retirement-planning landscape. Not all of the changes brought on by the SECURE Act are addressed in this memorandum. Some of the SECURE Act changes might provide you and your family with tax-savings opportunities. However, many SECURE Act changes are not favorable, and you may need to take steps to minimize their impact. After careful review of this memorandum, please schedule a conference with one of our attorneys if you would like to discuss these matters with respect to your or your family’s specific estate planning situation. We recommend that all clients with significant IRAs or employer-provided retirement accounts schedule a conference to discuss the effect
of the SECURE Act on their personal estate and financial planning.
Elimination of “Stretch” IRAs for Many Beneficiaries.
For the death of a retirement account participant or an IRA owner occurring before January 1, 2020, a beneficiary, whether a surviving spouse or another individual, was generally allowed to stretch out the tax-deferral advantages of such retirement account or IRA by taking distributions over the beneficiary’s life or life expectancy (often referred to as the “stretch” or a “stretch IRA”). However, as a result of the SECURE Act, for most deaths of a retirement account participant or an IRA owner occurring on or after January 1, 2020, complete distribution of such retirement account or IRA to most non-spouse beneficiaries will generally be required by December 31 st following the ten-year anniversary of the retirement account participant’s or IRA owner’s death. This new payout period for beneficiaries of a retirement account and IRA is referred to as the “ten-year rule.” So, for most non-spousal beneficiaries, the “stretch” payout strategy may not be available for many estate plans.
Beneficiaries who are excepted from application of this new ten-year rule and who are permitted to continue using the “stretch” payout method – however, sometimes with modified rules – include:
- The surviving spouse of the retirement account participant or IRA owner;
- Minor children of the retirement account participant or IRA owner;
- Chronically ill individuals;
- Disabled individuals; and
- Any other individual beneficiary who is not more than ten years younger than the retirement account participant or IRA owner.
Additionally, certain types of trusts created to take advantage of the “stretch” under prior law may no longer be tax efficient because of other changes made by the SECURE Act. The SECURE Act may require complete distribution of retirement accounts or IRAs that are payable to certain types of trusts by December 31 st following the five-year anniversary of the retirement account participant’s or IRA owner’s death. These types of trusts are relatively common because they were designed to take advantage of the “stretch” under prior law.
Required Minimum Distribution Age Raised to 72.
Before the SECURE Act, retirement account participants and IRA owners generally were required to begin taking required minimum distributions (“RMDs”) from their retirement plan account or IRA account by April 1 st following the year that such participant or owner reached age 70 ½. The SECURE Act has changed this age from 70 ½ to 72 for participants who attain age 70 ½ after December 31, 2019. This change means that participants and owners who are not yet 70 ½ may postpone taking RMDs longer than before the SECURE Act, thus deferring income taxes on such RMDs.
Repeal of the Maximum Age for Traditional IRA Contributions.
Prior to the passage of the SECURE Act, traditional IRA contributions were not allowed once an individual had attained the age of 70 ½. Starting January 1, 2020, the prohibition against making traditional IRA contributions after the IRA owner is required to take RMDs has been removed. New SECURE Act rules allow an individual of any age to make contributions to a traditional IRA as long as the individual has compensation, which generally means earned income from wages or self-
2020 Estate Tax Exemption Update.
Unrelated to the SECURE Act, in late December 2017, the President signed into law what is generally referred to as the Tax Cuts and Jobs Act (the “TCJA”). Prior to the TCJA taking effect in 2018, the first $5 million (adjusted for inflation in years after 2011) of transferred property was exempt
from estate and gift tax. For individuals dying or gifts made in 2018, this “basic exclusion amount,” as adjusted for inflation, would have been $5.6 million for an individual, or $12.4 million for a married couple with proper planning and estate administration allowing for the unused portion of the deceased spouse’s exclusion to be added to that of the surviving spouse (referred to as “portability”).
The TCJA temporarily doubles the amount that may be excluded from transfer taxes. For individuals dying and gifts made from 2018 through 2025, the TCJA doubles the base estate and gift tax exemption from $5 million to $10 million for an individual. After indexing for post-2011 inflation, the exemption amount is $11.58 million for an individual in 2020, and $23.16 million for a married couple utilizing the available portability techniques. A related transfer tax called the generation-skipping transfer (“GST”) tax is designed to prevent avoidance of estate and gift taxes by “skipping” transfers to younger generations. The TCJA does not specifically mention generation-skipping transfers, but since the GST exemption amount is based on the basic exclusion amount, generation-skipping transfers will also benefit from the post-2017 increased exclusion. The increased exclusion amount provided by the TCJA is set to sunset in 2025 and may be unavailable to individuals who die or make gifts beginning in 2026.
While immediate action may not be warranted in all cases, we advise you to consult with your estate planning attorney concerning the impact of the current federal law on your estate plan. Please call to schedule an appointment with one of our attorneys if you have any questions regarding your estate plan in general or specifically as to recent legislative developments.