How SECURE Act Changed Estate and Long Term Care Planning – Part 1

At the end of 2019 Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act which made some significant changes to retirement accounts – some positive and some negative.  I wrote about it a bit when the law was passed (See posts 1/5/20 and 1/13/20).  In the year plus since the law became effective as of 1/1/20, many people are aware of the positive change.   The age at which an account owner must begin to take withdrawals (required beginning date or RBD) was extended from age 70 and 1/2 to age 72.  

Fewer know about the new limitations in using the “stretch” provisions that permitted children, grandchildren and other beneficiaries to extend the tax deferred benefits of inherited retirement accounts inherited by withdrawing the funds over their life expectancies.  Before the law changed, if I inherited my parent’s retirement account I could roll it into an inherited IRA and stretch out the distributions.  I could make those distributions over my life expectancy but needed to begin taking the first withdrawal within a year of my parent’s death.

Being younger than my parent, of course, my life expectancy is longer so by utilizing the stretch provisions I could keep more of the balance in the tax deferred account longer which allowed it to continue to grow faster.  This is a primary reason why for many years it has been a good strategy to take as little as possible from your IRA and leave as much as possible to your heirs.  

As long as the account owner named a “designated beneficiary” the stretch provisions could be utilized.  Generally, a designated beneficiary is an individual.  Failure to name one usually results in the estate being the default beneficiary.  Because the estate is not an individual this triggers the 5 year rule which says that all of the account needs to be distributed no later than the end of the calendar year which includes the 5th anniversary of the account owner’s death. 

Trusts also are not designated beneficiaries, although certain types of trusts could still qualify as designated beneficiaries.  A conduit trust qualifies as a designated beneficiary if all distributions from the retirement account are paid directly to an individual beneficiary.  Rather than considering the trust as the beneficiary, the IRS “sees through” the trust to identify the trust beneficiary, who is an individual, as the designated beneficiary.  The trust acts as a conduit hence the name.  For many clients who want their children’s inheritance to be held in trust for a period of years because of worries about spending habits, for example, it was important to name these conduit trusts as beneficiary of the retirement account to preserve the stretch provisions. 

These were the rules that were in effect for many years.  The SECURE Act, however, changed all that as of 1/1/20.  More on that next week.