What is the SECURE Act, and how will it affect my Missouri estate plan?

What is the SECURE Act?

In the world of estate planning, change is on the horizon. The Setting Every Community Up for Retirement Enhancement (SECURE) Act takes effect on January 1, 2020, and fundamentally changes how IRAs and certain retirement benefits are treated post-death.

The SECURE Act only applies to retirement plans that are inherited after January 1, 2020. In other words, existing inherited IRAs are grandfathered under the previous rules -- so if you inherited an IRA and you’re taking distributions over your life expectancy, there will be no change for you. The new law applies to someone who dies after 2019.

The SECURE Act is a bi-partisan bill that contains 29 separate provisions. The changes discussed below will likely have the largest impact on the way we navigate estate planning moving forward.

Will the SECURE Act affect my Missouri estate plan?

The answer is likely yes. To ensure your estate plan (Missouri or otherwise) continues to work as intended, it is recommended you contact your estate planning attorney, CPA, and financial advisor to review and (if necessary) update your plan to take into account the following changes in law.

Change #1: Money can spend more time in IRAs and 401(k)s before RMDs begin.

The new law increases the age of minimum required distributions (RMDs). In the past, you had to begin withdrawing from your retirement accounts when you turned 70½. Under the new law, the age is raised to 72. This change allows your money to grow tax deferred for another year-and-a-half.

Change #2: Older workers can contribute to their IRA after age 70½.

The SECURE Act eliminates the age cap for traditional IRA contributions. Under the old rules, once you turned 70½ you were no longer eligible to invest in a traditional IRA. The SECURE Act changes that. As long as you’re working, you are eligible to contribute into your traditional IRA.

Change #3: Increased 401(k) options for small businesses.

The SECURE Act increases the tax credits available to small businesses in order to offset the cost of retirement plans. In the past, small businesses that started a retirement plan were only able to get a $500/year credit. Under the new law, the ceiling is raised to $5,000.

The law also allows small businesses to join group plans alongside other companies. Joining a group plan cuts administration and management costs and ideally makes higher-quality plans available to more small businesses and their workers.

Change #4: Stretch IRAs are eliminated.

The death of the “stretch IRA” will likely have the most impact on your estate planning. Under the old rules, if you inherited a non-spouse’s IRA, one of the options that you had with regard to distributions was to take distributions over your life expectancy. This allowed many people to defer the taxes owed on IRAs for decades down the road. Under the SECURE Act, that is no longer an option. The new law dictates that all inherited IRAs must be distributed within 10 years of the IRA owner’s death.

There are a few exceptions to the 10-year SECURE Act payout rule. Those heirs who meet the definition of a new term, “eligible designated beneficiaries,” are not subject to the 10-year payout rule. Eligible beneficiaries include:

  • Surviving spouses.
  • Chronically ill heirs as defined in Code Section 72(m)(7).
  • Disabled heirs as defined in Code Section 7702B(c)(2) with certain modifications.

These eligible beneficiaries can withdraw plan assets over their life expectancy.

Minor children are also considered eligible beneficiaries so that the 10-year payout will not apply to them. However, when the minor reaches the age of majority the 10-year rule will apply so that the plan assets will have to be paid out by year 10, age 28.

Conclusion:

The SECURE Act will have a significant impact on many estate plans. These changes (particularly #4) should prompt you to dust off your planning documents to determine whether the death of the "stretch IRA" will impact your distribution plan. Furthermore, it is highly recommended that you contact a qualified estate planning attorney to review your documents to ensure your existing plan matches your current wishes and applicable law. This may result in:

  • Revision of beneficiary designation forms;
  • Revision of wills and trusts that include "stretch IRA" provisions;
  • Modification of existing trusts that include deferred distribution provisions but were not modified before the IRA plan owner's death to address how the SECURE Act might undermine the intent of the trust; and/or
  • Complete overhaul of estate plan to account for the new treatment of IRA accounts under the SECURE Act.