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SECURE Act: How It May Change the Face of Retirement Planning

On May 23, 2019, the U.S. House of Representatives passed H.R. 1994, also known as the SECURE Act, by a vote of 417 to 3. The SECURE Act is now headed to the Senate, where a nearly identical bill (the Retirement Enhancement Savings Act, aka RESA) is pending. Due to its overwhelming bipartisan support, experts believe the SECURE Act, perhaps with minor adjustments made in the Senate, will easily become law.

Key provisions of the SECURE Act include:

  • Increasing the required beginning date (RBD) for required minimum distributions (RMDs) from 70 ½ to 72
  • Repealing the maximum age for contributions to traditional IRAs
  • Adding exceptions for penalty-free withdrawals by an account owner
  • Requiring certain beneficiaries to withdraw inherited account balances within 10 years of the account owner’s death

It is the requirement in this last bullet point that has estate planning attorneys concerned. While this provision helps the government recoup the revenue lost by increasing the RBD from 70 ½ to 72, it does so by accelerating the tax due from a beneficiary of an inherited retirement account. Under the current “life expectancy” rules, when an account owner dies, non-spouse beneficiaries can “stretch” required minimum distributions (RMDs) over their individual life expectancies. Many estate planners include “conduit” provisions in their clients’ trusts to ensure the trust will qualify as a designated beneficiary of a retirement account, though the RMDs are still passed through to the trust’s primary beneficiary using their life expectancy and taxed as income to that beneficiary. When a conduit trust is used, RMDs are subject to creditor claims, but the undistributed account balance is protected from creditors, predators, or simply bad choices made by beneficiaries. (This was especially important after Clark v. Rameker, in which the U.S. Supreme Court declared that inherited IRAs were not afforded bankruptcy protection because they were not true “retirement accounts.”) Conduit trusts have been considered to be best practice by many estate planning attorneys and a safe haven for their clients and intended beneficiaries.

Under the SECURE Act, conduit trusts would be ineffective after 10 years, as the retirement account balances must then be paid directly to the trust’s beneficiaries—whether or not the beneficiaries are ready to receive them. There are a few exceptions to this accelerated payout rule, including spouses and minor children (until they reach the age of majority). The Senate’s RESA Act isn’t quite as harsh: It allows the IRA to stretch up to $450,000, but any amount over that limit must be withdrawn within 5 years of an account owner’s death. While we don’t yet know what the final law will entail, it is clear that the days of lifetime stretch IRAs are limited.

Looking ahead, we recommend that practitioners think twice before simply including conduit trusts as a default planning strategy. Some experts are suggesting practitioners “fix” existing conduit trusts for clients. You may want to use this as an opportunity to reach out to clients and (strongly) suggest they review their existing estate plans. Standalone retirement trusts with accumulation provisions, which permit assets to remain in trust for a beneficiary even if the RMDs must be taken (and taxes paid) within the required time frame, may be a useful alternative when planning for certain types of beneficiaries. In addition, clients with large retirement accounts and charitable inclinations may want to consider planning with charitable remainder trusts, in which a qualifying tax-exempt charity can receive the retirement distribution from which it will make annuity payments in one lump sum without income tax consequences. Clients who have inherited large retirement accounts and will be forced to liquidate them within 10 years may want to consider creating irrevocable life insurance trusts to purchase life insurance policies—for both estate tax planning and to provide asset protection for their intended beneficiaries.

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