Passage of SECURE Act (Affecting Tax Deferred Retirement Accounts) Necessitates Estate Plan Review for Most Clients


The budget bill passed and signed by President Trump on December 20, 2019 included the SECURE Act which made significant changes to the treatment of retirement plans that affects almost all estate plans. Prior to the SECURE Act, clients were able to leave retirement accounts to family members or trusts for the benefit of family members (“Qualified Trust”) in ways that would qualify for “stretch” treatment. The individual or Qualified Trust would be able to stretch the inherited retirement account over the beneficiary’s lifetime, meaning the beneficiary would only have to take distributions from the inherited account based upon his or her own life expectancy. Such stretch treatment allowed the IRA to grow tax-free for a longer period of time and deferred income taxes by minimizing distributions.

The SECURE Act has eliminated stretch IRAs for all but a few limited categories of beneficiaries, which include the surviving spouse, minor children of the decedent, disabled and chronically ill individuals, beneficiaries that are less than ten years younger than the account owner and certain Qualified Trusts for the benefit of individuals in each category. Now, other than for those categories of beneficiaries listed above, all inherited retirement accounts must be withdrawn within ten years of the decedent’s date of death.

For clients with significant tax deferred retirement accounts, the SECURE Act will undoubtably affect their current estate plan. Certain Qualified Trusts, particularly those for surviving spouses, may need amendments in order to still qualify for the more favorable stretch treatment. Clients who have minor grandchildren or trusts for grandchildren as their beneficiaries may have unintended consequences because minors only qualify for stretch treatment if the minor is the child (not grandchild/nice/nephew) of the decedent. Almost any client using a Qualified Trust as a beneficiary needs to make sure that their desired goals will still be met with the new ten year payout period. Charitably inclined clients that have not previously listed a public charity or private foundation as the beneficiary of their retirement accounts may want to look at their estate plan to see if the beneficiary should be changed. Clients that have beneficiaries who are disabled or chronically ill may want to revise their estate plans to provide that retirement accounts are specifically allocated to the special needs trust because, if properly drafted, those special needs trusts can still take advantage of stretch treatment; whereas, the non-disabled beneficiary would be required to withdraw the funds within 10 years. Clients may also need to evaluate whether a Roth conversion for their traditional IRA could be beneficial or implement the use of a charitable remainder trust to benefit both charitable and non-charitable beneficiaries. Clients who are current beneficiaries of an inherited account may also need to consider additional planning for future beneficiaries as the ten-year rule will apply to the next beneficiary of the inherited account.

As each client’s assets and planning goals are different, a careful consideration of each estate plan will be required to make the necessary changes that take into account the SECURE Act.

This summary is provided as an informational tool. It is not intended to be and should not be considered legal advice, and receipt of this information does not establish an attorney-client relationship.