The SECURE Act and Retirement Account Planning Opportunities

Feb 1, 2022 | IRS / Tax Guidance, Podcasts, T&E Administration

“The SECURE Act and Retirement Account Planning Opportunities,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Doug Stanley, ACTEC Fellow from St. Louis, Missouri. A significant new federal law called the SECURE Act has fundamentally changed how we plan with retirement accounts. ACTEC Fellow Laura Fine from New Orleans, Louisiana will explain planning opportunities in light of the SECURE Act. Welcome, Laura.

Thank you for having me today. I’m very glad to be here. So, today we’re going to talk a little bit about the SECURE Act, which went into effect January 1st of 2020, and enacted some really major changes to the way that we plan with retirement accounts. One of the changes it made was it changed the beginning date for starting to take required minimum distributions for plan participants to age 72. One of the bigger changes that it made was in how beneficiaries of retirement plans can take out the plan proceeds.

The old rule was that most plan beneficiaries could take it out over their lifetime, according to their own life expectancy. And the rule now is that most beneficiaries are going to have to take out the entire plan within 10 years of the death of the plan participant.

Eligible Categories of Beneficiaries

There are five categories of individuals who are not subject to this 10-year rule, which we’re going to talk about in a little more depth in just a second. One of the interesting things about this 10-year rule, it’s modeled on the old 5-year rule and it allows these plan participant beneficiaries to take out the plan proceeds in this 10-year period at any time that they want within that 10-year period. So, they could choose to take it all out in year one. They could choose to take it out a tenth each year. It just has to be completely empty by year 10.

We’ll talk about these five categories of individuals who can still use their life expectancy, and this is a surviving spouse, a minor child of the plan participant, a disabled individual, chronically ill individual, and someone who is not more than 10 years younger than the plan participant.

These five categories of people are called “eligible designated beneficiaries.” The surviving spouse gets the most benefits and has the best options available to him or her. And they can still roll over that plan from their deceased spouse into their own plan. They can wait until they turn 72 to start taking their required minimum distributions, and then they’ll use their life expectancy to calculate required minimum distributions going forward. Now, when the spouse dies, the next beneficiary who inherits the plan is going to have to take out the plan within 10-years of that death.

Minor Children and the Age of Majority

For minor children, that minor child, while they’re under the age of majority can use their life expectancy, and it’s only once they attain the age of majority that they have to now use the 10-year rule. This is only available for biological or adoptive children of the plan participant. Step-children and grandchildren do not qualify.

One question that I thought I had the answer to going into this was, what was the age of majority. I thought, oh, it’s probably either 18 or 21, depending on the state. And it’s actually not that clear because SECURE references another part of the Internal Revenue Code, which states that children are not treated as attaining the age of majority if they’re enrolled in a specified course of study and under the age of 26. So, it’s not clear what constitutes a specified course of study. It could be law school, medical school, or underwater basket weaving. Nobody really knows, and we don’t have a lot of guidance on that.

Disabled Beneficiaries

Disabled individuals, if someone qualifies for Social Security Disability, they’re going to automatically qualify as disabled for purposes of SECURE and they have to have been disabled at the time of the plan participant’s death.

Chronically Ill Beneficiaries

Chronically ill individuals, it’s similar to the disabled individual, but the qualifications are a little different. It’s just someone who has been certified by a licensed healthcare practitioner as being unable to perform at least two activities of daily living for a period of at least 90 days. And activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Or someone who requires substantial supervision, to protect them from threats to their health and safety because they have severe cognitive impairment.

The SECURE Act and Beneficiaries

The less than 10 years younger category of eligible designated beneficiaries is pretty self-explanatory. So, SECURE is only going to apply to deaths that occur in 2020 and beyond. For people who died prior to 2020, those beneficiaries of those plans can continue to use the old rules. It’s only once those beneficiaries die and there are new beneficiaries that these SECURE rules are going to be applied.

Using trusts to make them the beneficiaries of retirement plans have gotten a lot more complicated. It was never super easy in the first place, but now it’s gotten significantly more complicated and if we have eligible designated beneficiaries who are beneficiaries of this trust, then we should be able to continue to use their life expectancy to calculate required minimum distributions. But estate planners are going to have to be quite careful when they’re drafting these trusts to make sure that it will all comply.

And if there’s a spouse who’s going to be a beneficiary, then there are a lot of issues with that unless the spouse is the beneficiary of a conduit trust. And then the spouse should still be able to use his or her life expectancy.

There are also some opportunities for charitable beneficiaries. A lot of people enjoy the flexibility of being able to make qualified charitable distributions. The plan participant can still do that. They can start doing that was not changed by SECURE, so it’s 70-and-a-half, and they have to decide to do that pretty early in the year because if the first distribution out of the account is going to be deemed to be a required minimum distribution, so they need to set up that qualified charitable distribution ahead of time to make sure that they don’t run into that issue. And there is a limit on that of $100,000 per year.

A lot of my clients really love making charities be beneficiaries of these plans because it’s just so much more tax efficient to have a charity be the beneficiary because the charity is going to get 100 cents on the dollar of the plan, whereas now we’re looking at most beneficiaries having to take out the entire plan proceeds within 10 years. And that is it for me today. Thank you so much.

Thank you, Laura, for your interesting presentation on retirement account planning opportunities.

Additional SECURE Act Resources

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