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
TRUST
AND ESTATE LAW
THE SECURE ACT IMPACT ON ESTATE PLATING WITH
QUALIFIED RETIREMENT PLANS AND IRAS
By
EMILY L. BOWMAN, J.
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), 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.
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ABBREVIATION KEY
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Act
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SECURE Act
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DB
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Designated beneficiary (either a pre-SECURE Act
DB, or post-SECURE Act ODBs and EDBs
collectively)
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EDB
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Eligible designated beneficiary
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IRA
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Individual retirement account
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IRC
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Internal Revenue Code
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Non-DB
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Non-designated beneficiary (a beneficiary that
does not qualify as a DB, such as an estate,
charity, or non-see-through trust)
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ODB
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Ordinary DB (a DB that does not qualify as an
EDB)
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RBD
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Required beginning date
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Retirement plans
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Qualified retirement plans and IRAs
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RMD
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Required minimum distributions
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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.
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 participant 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), 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,(2) a child of the
participant who has not yet reached majority,
[6] (3) a
disabled individual, (4) a chronically ill
individual, or (5) an individual not described
above who is not more than 10 years younger than the
participant. 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.
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). 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, 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,...
