Quick Intro

Earlier this year the House passed the SECURE Act, which makes changes to IRA rules that will significantly impact how IRA’s can be used as an estate planning tool and wealth transfer vehicle.

In short, the SECURE Act no longer allows for a savvy planner (through the assistance of an estate planning attorney) to “stretch” out the distributions from an IRA left to beneficiaries. In turn, this means that you won’t be able to transfer your IRA to younger beneficiaries (such as your children) with the same long-term tax-free growth that was previously possible through an IRA Trust.

Assuming the SECURE Act passes the Senate, you’ll want to immediately meet with an estate planning attorney to modify or even revoke an IRA Trust if you have one.

Even if you don’t have an IRA Trust, you likely have an IRA, will have one in the future, or have a 401k. If that describes you, then you’ll still want to meet with a financial planner and estate planning attorney to develop a new retirement and wealth transfer strategy in light of the retirement changes created by the SECRURE act.

What Is the SECURE Act of 2019?

The SECURE Act (“SECURE”) is a House bill called H.R. 1994, also known as the SECURE Act. SECURE passed nearly unanimously, by a vote of 417-3. This means that there is a great chance it will pass the Senate. However, at the moment, there are a couple of senators holding up the legislation, one being Ted Cruz.

SECURE makes quite a few changes to retirement accounts and eligibility, which affect IRA’s (Individual Retirement Account) and 401k’s too. I’ll cover some of the basics.

Increasing Accessibility to Retirement

First off, SECURE makes retirement saving a little more accessible to more individuals, particularly part-time employees. This makes sense since SECURE stands for Setting Every Community Up for Retirement Enhancement (I know, legislative acronyms are really lame).

Before SECURE, it was difficult for many employees to be eligible for 401k plans and profit-sharing plans with their employers. Employees that worked less than 1000 hours could be denied eligibility for 401k and profit-sharing plans.

Under SECURE, part-time employees working over 500 hours could be eligible for a 401k after 3 years of service with the employer. This will help many people who are not able to work full-time to have an opportunity to still take advantage of a 401k and start saving for retirement.

Delaying Required Minimum Distributions

More pertinent to this article and how SECURE affects IRA Trusts and estate planning, SECURE postpones the age requirement to begin withdrawing from your IRA.

Before SECURE, you had to start withdrawing from your IRA at age 70 ½. Required minimum distributions (RMD’s) are based on your life expectancy. The shorter your life expectancy, the larger your RMD.

You see, the government will always want to collect its taxes. You got the benefit of investing pre-tax dollars into your IRA (or 401k) and allowing those funds to grow tax free for (hopefully) many years. The only way the government can finally collect tax from you is to force you to withdraw from your IRA. Once you take a distribution from your IRA, it is treated as income and you will pay tax on that income.

Under SECURE, you can now delay the age you are required to start taking RMD’s. The new age requirement for RMD’s is 72 years old. This allows you to let your IRA grow tax free for another 1.5 years.

Great, right? Well…

SECURE Kills the IRA Trust

Here’s the biggest change from SECURE that has estate planning attorneys, accountants, and financial planners scrambling to create new strategies to help their clients stay ahead of the curve and deal with this repercussion of SECURE. To understand the impact of this change, it’s important to understand how things are now.

For many people, a good strategy has been to use IRA’s as an estate planning tool and wealth transfer vehicle. This was made possible through the use of an IRA Trust. A properly drafted IRA Trust, combined with clever planning, could allow you to leave significant assets that would continue to grow tax free for (potentially) decades for your younger beneficiaries (children or even grandchildren).

The Old Strategy

Before SECURE, when a (non-spouse) beneficiary inherits an IRA, their RMD’s are based on their life expectancy. If you leave your IRA to younger beneficiaries, you effectively “stretch” out the RMD’s over a much longer period of time. As a result, the RMD’s will be smaller, resulting in less coming out of the IRA (and thus less tax being paid) and leaving more to continue growing tax free.

Many estate planning attorneys would create an IRA Trust (often with a conduit provision) that would qualify as a beneficiary of an IRA, and then distribute the IRA per the terms of the Trust. The IRA Trust would serve as a protection of the IRA balance since inherited IRA’s are not protected in bankruptcy (per a US Supreme Court decision in Clark v. Rameker).

For many years, IRA Trusts with a conduit provision have been a go to strategy to transfer and IRA, stretch out the RMD’s, allow for decades more of tax free growth, and provide creditor protections for your beneficiaries (and sometimes even spendthrift protections to defend against beneficiaries’ spouses and even themselves).

Change is Coming

All of that is likely coming to a halt. Under SECURE, an IRA Trust would be ineffective after 10 years. Per the terms of SECURE, IRA beneficiaries would have to withdraw the account balance within 10 years of the death of the IRA owner. There are a few exceptions to this 10-year rule:

• Spouses can roll over the IRA balance into their own IRA and withdraw based on their own RMD
• Minor children can postpone the 10-year rule until they become adults
• Disabled beneficiaries
• A beneficiary within 10 years of age of the decedent

These exceptions are helpful, but they only provide a short reprieve and really don’t allow for the same type of long-term tax-free growth and wealth transfer strategy of yesteryear.

Under this 10-year rule, even your children (let alone your grandchildren) will in most cases have to distribute your IRA balance sooner than if RMD’s could be stretched out based on their life expectancy. This new provision effectively accelerates the time the government can tax all that money held in your IRA and kills the IRA (or 401k) as an incredibly effective wealth transfer vehicle.

What Should You Do Now?

Well, SECURE hasn’t passed the Senate just yet. However, given the overwhelming support from both parties in the House, it seems likely that SECURE will pass.

First thing you should do is review your estate plan and retirement plan. Do you have an estate plan at all? Do you have an IRA Trust? Who is the beneficiary of your IRA or 401k? Do you even have an IRA or 401k?

IRA Trust Modification

If you have an IRA Trust or your trust is the beneficiary of your IRA, you should immediately meet with an estate planning attorney if and when SECURE passes (or even now to get the ball rolling). You will definitely want to explore your current IRA situation and see if your estate plan is effective or could be modified to be more effective after SECURE. Chances are high that you’ll want to shift gears and implement a new, more effective tax saving strategy to transfer your estate to your family.

For many, failing to modify an IRA Trust after SECURE passes can be disastrous and result in significant income taxes, thereby destroying a previously well-laid plan.

Just an IRA?

If you have an IRA but don’t have an IRA Trust, you should still meet with a financial planner and estate planning attorney to develop a new strategy, including how much or little you should continue to contribute to your IRA (depending on your financial circumstances) and whether you should consider additional options for retirement planning and transferring your wealth to your family.

I won’t go into depth in this article on the alternative strategies as SECURE could possibly change to some extent before it passes the Senate. However, for now, it seems that one possible alternative strategy includes diverting funds from your IRA to set up a life insurance trust to provide similar benefits that were possible before SECURE. Additionally, you could also consider converting your IRA into a Roth IRA, which should only be considered after meeting with a good financial planner.

No Plan at All?

If you don’t have an estate plan in place yet, then STOP, and sign up for this free Webinar right now so you can understand why you need to get an estate plan in place ASAP.

Conclusion

Change is coming, as it always does. The House has passed the SECURE Act, which will benefit many, but also require those with plans in place to re-evaluate those plans.

If you have an estate plan and an IRA, you should meet with an estate planning attorney right away to make sure your plan won’t do more harm than good in light of the changes created by SECURE. Gone are the days of using an IRA Trust to stretch out RMD’s and allow for longer tax-free growth for beneficiaries. However, just because the rules have changed it doesn’t mean you have to stand idly by. There are alternative strategies that can achieve your desired results. Contact me using the form below for a free estate plan review and strategy session.