Major Estate Planning Law change goes into effect on January 1, 2020
In October, we published an article regarding the future of the Estate Tax in 2020 and addressed the passage of House Resolution 1499 by the House of Representatives on May 23, 2019. This is known as the Setting Every Community Up for Retirement Enhancement Act, otherwise known as the SECURE Act. In our October article, we mentioned that this was a good time to contact our office to update your estate plan. We encourage you to do so now with this sudden change.
In a rather surprising move, the House voted 297-120 to advance a bill to the Senate for approval as part of a spending and budget bill. This bill would allocate $1.4 trillion to fund the government through September. Without this funding, the government was set to enter a shutdown on Friday, December 20, 2019. This bill is expected to be signed into law on Wednesday, December 18, 2019, and the President is expected to sign the bill into law by Friday, December 20, 2019 in order to avoid a government shutdown.
Attached to this bipartisan spending bill is the SECURE Act. The passage of the SECURE Act amounts to a tax increase and an attack on the accumulation of intergenerational family wealth.
Prior to the passage of the SECURE Act, a non-spouse beneficiary of an IRA, such as an adult child, would be permitted, subject to certain exceptions, to withdraw the balance of the IRA over the course of the beneficiary’s lifetime. This would save the beneficiary substantially in income taxes during their lifetime.
However, after the passage of the SECURE Act, that is no longer the case. Under the new law, a non-spouse beneficiary will be required to draw out the entire balance of the inherited IRA over a 10-year period and pay income taxes on those distributions.
This creates a significant issue for a family’s estate planning strategy that would require an update. For example, many families have utilized a Revocable Living Trust as their primary estate planning vehicle. After the death of the surviving spouse, the Trust would direct that the Required Minimum Distribution (RMD) from their Retirement Account be paid into a Conduit Trust within the Revocable Living Trust, thus requiring a stretch distribution over the course of the beneficiary’s lifetime. This is no longer the case. The Retirement Account must be distributed to the beneficiary, even with the Conduit Trust, within the 10-year period under the SECURE Act.
If you currently have a Revocable Living Trust which is directed to receive your retirement account following the death of the surviving spouse, contact our office to update your estate plan as this strategy is no longer recommended.
Another strategy that increased in popularity in recent years is the creation of a Standalone Retirement Accumulation Trust. The main strategy surrounding these trusts are that the RMD would be paid into the accumulation trust, the income from the RMD would be distributed to the beneficiary, and the principal would be allowed to accumulate inside the trust for future growth. In addition, these trusts have significant asset protection advantages over a Conduit Trust inside of a Revocable Living Trust. These trusts can still be effective from both a tax planning perspective and an asset protection perspective in light of the SECURE Act. However, these trusts now require necessary amendments, changes, and strategies to comply with the SECURE Act.
What Should You Do?
If you have retirement accounts, it is important that you contact our office to schedule a time to review your existing estate plan and implement any necessary changes in light of the SECURE Act.
Please contact our office at (513) 241-0400 or e-mail us at email@example.com to schedule a time to review your existing estate plan to comply with the SECURE Act.
We look forward to hearing from you!