How to Prepare for Estate Planning Under the SECURE Act

On January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act took effect. It has become the largest retirement reform to have an impact on the economy since the Pension Protection Act of 2006 was enacted. The SECURE Act was first drafted to address the difficulty many Americans experience when trying to save and invest for retirement. The main changes made by the act affect contribution plans such as 401Ks, individual retirement accounts (IRAs), defined benefit pension plans, and more. 

Why the SECURE Act Was Passed

It’s no secret that many Americans struggle to save and invest for their retirement. As the rate of inflation raises and life expectancies grow longer in each generation, it is currently recommended that a minimum balance of $1 million is saved for retirement to live comfortably. Multiple reports have found that the majority of Americans aren’t quite there yet. 

• Northwestern Mutual published a troubling study in 2018 that found that one in five American adults have no retirement savings at all. 
• In 2019 wealth management giant Vanguard reported that the median 401(k) balance for those aged 65 and older was just $58,035.
• The US Bureau of Labor Statistics released data in 2018 that showed just 55 percent of the adult population participates in a workplace retirement plan. 

Previous legislation with similar goals such as the Family Savings Act and the Retirement Enhancement and Savings Act failed to gain traction. The SECURE Act built upon the propositions in these and finally passed Congress to become law in December 2019, coming into effect on January 1, 2020.

The SECURE Acts Biggest Changes to Estate Planning

While the SECURE Act makes many changes to retirement, it also makes changes to estate planning as well. 

One of the biggest changes affects inherited individual retirement accounts or IRAs. Before the act took effect, the beneficiary of an IRA could defer taxation over their lifetime by withdrawing the minimum distributions. The beneficiary was only required to pay income tax on the withdrawals. This tax deferral was based upon the age of the beneficiary, so the younger they were the longer the deferral. 

Now thanks to the SECURE Act, most beneficiaries of retirement account owners who passed away after January 1, 2020, must now completely withdraw assets from their inherited IRA or 401(k) accounts within 10 years of the owner’s death. The beneficiary will have to use their own income and tax bracket to come up with the best strategy for withdrawal, as they will be required to withdraw larger sums of money at one time and will be taxed on it.

There are a few exceptions to this new rule. The following beneficiaries retain the ability to defer taxation over a longer period of time:

• Surviving spouse
• Minor children
• Disabled persons
• Chronically ill persons
• Beneficiaries who are no more than 10 years younger than the deceased account owner

It’s suggested that some retirement account owners should consider increasing the death benefit of their life insurance policy thanks to another change under the SECURE Act. Increasing the benefit can help to mitigate any tax liability for their beneficiaries. 

Another large change caused by the SECURE Act affects families with an accumulation trust. The tax rate for trusts is now much higher than the individual tax rate. If you currently have a trust set up through your estate plan it’s important to have your attorney review the language in a conduit trust. Doing so can help you to avoid any unintended consequences caused by changes stemming from the implementation of the SECURE Act. 

The SECURE Act still allows participants and their spouses to continue using the same estate planning tools for one another. The one difference is that the 10-year payout period of an IRA will commence after the surviving spouse passes away.

Estate Planning With Morris Hall PLLC

If you’re looking for an Arizona or New Mexico estate planner to help you navigate your best options under the SECURE Act, contact Morris Hall PLLC. Our knowledgeable attorneys can work with you to put together a personalized and comprehensive will and trust. We have been serving our clients for over 50 years and are members of the American Academy of Estate Planning Attorneys. To learn more about our estate planning services and how the SECURE Act may affect you, call us today at 888-222-1328.