Impact on Estate Planning with Qualified Retirement Plans and IRAs, 0420 COBJ, Vol. 49, No. 4 Pg. 42

Position:Vol. 49, 4 [Page 42]

49 Colo.Law. 42

Impact on Estate Planning with Qualified Retirement Plans and IRAs

No. Vol. 49, No. 4 [Page 42]

Colorado Lawyer

April, 2020




This article analyzes the SECURE Act's impact on individuals with qualified retirement plans and IRAs. It focuses on changes related to estate planning.

The Setting Every Community Up for Retirement Enhancement Act of 2019, more commonly known as the SECURE Act (the Act),1 was signed into law on December 20, 2019. Among other things, the Act aims to make it easier for more people to save for retirement. The Act makes several significant changes to how and when individuals can save for retirement using qualified retirement plans and individual retirement accounts (IRAs) (collectively, retirement plans). It also drastically limits the time frames during which retirement plan benefits must be distributed to a participant’s beneficiaries. This article focuses broadly on the Act’s most significant changes as relevant to estate planners. The Act’s impact on the estate planning profession will be substantial, but because the Act is still in its infancy, unforeseen complexities and complications will inevitably result, and solutions to these issues remain uncertain. This article does not offer the best solutions to all of the issues that will arise as a result of the Act, nor should it be relied on to answer questions relating to specific situations, given the uncertainties and the wide range of possible circumstances and outcomes. Instead, the article focuses on the changes that have been enacted, the expected impact of those changes on currently established estate planning practices, and some possible alternative estate planning options available to estate planners.

DB Designated beneficiary (either a pre-SECURE Act DB, or post-SECURE Act ODBs and EDBs collectively)
EDB Eligible designated beneficiary
IRA Individual retirement account
IRC Internal Revenue Code
Non-DB Non-designated beneficiary (a beneficiary that does not qualify as a DB, such as an estate, charity, or non-see-through trust)
ODB Ordinary DB (a DB that does not qualify as an EDB)
RBD Required beginning date
Retirement plans Qualified retirement plans and IRAs
RMD Required minimum distributions
Overview of the Act The Act originated in the House of Representatives, where it passed quickly in the summer of 2019 (H.R. 1994), but thereafter stalled in the Senate and appeared to have been indefinitely delayed and virtually forgotten. In a surprise shift, however, the Act was attached to a critical spending bill in December 2019 that needed to be passed to avoid a government shutdown. The spending bill (and the Act) was quickly approved by the Senate on December 19, 2019 and signed into law by President Trump on December 20, 2019, catching estate planning attorneys and retirement plan participants totally by surprise and leaving them with many unanswered questions about the Act's operation and impact on estate planning. The changes brought by the Act affect not only who clients select as their retirement plan beneficiaries, but also how clients' estate plans (particularly trusts receiving retirement plan benefits) must be drafted going forward. RMDs Begin at 72 Before the Act's passage, owners of retirement plans (participants) were required to begin taking their required minimum distributions (RMDs) beginning on April 1 of the calendar year following the year in which the participant turned 7O½, known as the required beginning date (RBD). With more individuals continuing to work longer, retire later, and live longer, and with the progressively increasing need for the country's workforce to individually save for retirement, Congress saw a need to adjust the age at which retirement plan participants were required to start withdrawing minimum distributions. Therefore, the Act adjusted the RBD for participants to age 72.2 This change applies to retirement plan participants turning 7O½ on or after January 1, 2020. Note that those participants who are under 72 but turned 7O½ before January 1,2020 are still required to continue taking their RMDs (or begin taking RMDs on April 1 of the year after turning 7O½), pursuant to the prior laws. Traditional IRA Participants May Contribute Beyond 7OV2 Due to the increasingly vital need for individuals to save for their retirement, coupled with the fact that workers are continuing to work longer and postpone retirement, the SECURE Act eliminates the prior rule that traditional IRA participants could not contribute to their plans after reaching age 7O½. Now there is no age limit to participants contributing to traditional IRAs (other qualified retirement plans, such as 401(k)s, did not have a contribution age limit in the first place). Thus, estate planners should expect to see estate planning clients who have increasingly larger traditional IRAs. 10-Year Beneficiary Payouts Limit By far the SECURE Act's greatest impact on the estate planning profession is the elimination of stretched IRA payouts in most cases. Previously, designated beneficiaries (DBs) of retirement plans, defined as "any individual designated as a beneficiary" by the participant3 or any see-through trust for such person, could elect to receive their benefits in the form of inherited "stretch" IRAs, through which the retirement plan benefits were paid out to these beneficiaries over the course of their individual life expectancies. The stretch IRA was a widely used and popular estate planning tool because it permitted DBs to defer distributions of taxable income while allowing the benefits to grow tax-free in the retirement account. Now, for retirement plans of participants who die on or after January 1, 2020, the availability of stretch IRAs has been eliminated for all but a specific new category of DBs, as discussed below. (Note that the Act did not affect the rules regarding spousal rollovers, which remain an alternative option for surviving spouse beneficiaries.) RMDs Before the Act, Internal Revenue Code (IRC) § 401(a)(9)(B) and the affiliated Treasury Regulations provided the rules governing retirement plan required minimum distributions (RMDs) following the participant’s death. Under this section, there were two categories of retirement plan beneficiaries, DBs and non-designated beneficiaries (non-DBs). A non-DB was anything other than a DB, primarily any entity such as an estate, non-see-through trust, or charity. Under these old rules, if a DB was named on the retirement plan, he or she could elect to stretch the payment of the plan’s benefits over his or her life expectancy. Non-DBs, on the other hand, were required to receive all retirement plan proceeds within five years after the participant’s death, if the participant’s RMDs had not yet begun; or, if the participant’s RMDs had begun, over the participant’s remaining life expectancy, had he or she been still living. Significantly, the Act has changed IRC § 401 (a)(9) by (1) adding a third class of retirement plan beneficiary, named an "eligible designated beneficiary" (EDB),4 and (2) modifying the timing within which DBs must receive distributions of retirement plan benefits. An EDB is a special category of DB that includes any DB who is (1) the surviving spouse of the participant,5(2) a child of the participant who has not yet reached majority,[6] (3) a disabled individual,7 (4) a chronically ill individual,8 or (5) an individual not described above who is not more than 10 years younger than the participant.9 Whether a beneficiary qualifies as an EDB is determined as of the participant’s date of death, and, except in the case of a participant’s child who later reaches the age of majority, appears to be irrevocably fixed at such date. Under the Act, EDBs are now the only class of beneficiaries who can still use their life expectancies to stretch the payout of retirement plan benefits over their lifetime.10 Because there are now two types of DBs under the Act—EDBs, and all other DBs that do not qualify as EDBs—they must be carefully distinguished because the distinction has significant consequences. Therefore, for purposes of this article, DBs will be referred to either as EDBs or ODBs, meaning all other "ordinary" DBs. While the Act did not change who or what constitutes a DB and a non-DB, it modified the timing for distributions to DBs depending on whether the DB is an ODB or an EDB. ODBs are no longer eligible for a stretch payout and must receive all retirement plan benefits within 10 years following the participant's date of death (the 10-year payout).11 Note that, while the Act does not expressly so provide, estate planning professionals generally believe that the 10-year payout is intended to operate similar to the five-year rule,12 which preceded the Act, so that all retirement plan benefits must be paid to the beneficiary by December 31 of the tenth year following the participant's date of death. Thus, the 10-year payout may actually span the course of up to 11 tax years. Similar to the old five-year rule, the 10-year payout does not require any distributions to be made in years one through nine; it requires only that the retirement plan benefits be distributed in full by the end of the tenth year. This affords the beneficiary some degree of flexibility in determining when and how to receive distributions, depending on need, income, and current and expected future tax brackets. However, in most circumstances,...

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