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PCS Client Alert: The SECURE Act

The end of the decade brought with it drastic changes to retirement benefits, some of which may affect your estate planning.

The SECURE Act (officially named the Setting Every Community Up for Retirement Enhancement Act of 2019) was signed into law on December 20, 2019. This Act increases access to tax-advantaged retirement accounts and eases compliance burdens for plan sponsors. On the estate planning side, this Act severely limits the ability to “stretch” the tax deferral benefit of inherited retirement accounts. This Alert provides a brief summary of the Act.

Partial Elimination of the IRA Stretch

Under prior law, IRAs and other qualified plans that were left to a non-spouse individual, such as a child or grandchild, could be withdrawn annually over the course of that beneficiary’s life expectancy, resulting in favorable income tax deferral. The SECURE Act removes that benefit by requiring that most retirement assets inherited in 2020 and beyond be distributed within a 10-year period, effectively accelerating the depletion of inherited accounts.

Note that this 10-year distribution period does not apply to “eligible designated beneficiaries,” defined as (i) the surviving spouse, (ii) a minor child of the plan participant (though the 10-year period will commence when that child reaches the age of majority), (iii) a disabled beneficiary, (iv) a chronically ill beneficiary, or (v) a beneficiary who is less than ten years younger than the plan participant.

The SECURE Act is a major change in the law and creates the need for you to review your estate plan and beneficiary designations with your Wiggin and Dana attorney. The limited stretch for your beneficiaries may create an income tax burden much sooner than anticipated. Additionally, if retirement plans pass through your estate plan into a trust for your beneficiaries, those trusts should be reviewed to determine (a) if the trusts will qualify for the 10-year distribution period and (b) if the retirement accounts and the new rules change the underlying structure of your plan (such as age distribution trusts for children or grandchildren, asset protection trusts, or equalization clauses among beneficiaries). Additionally, there may be planning opportunities available to offset the loss of the income tax deferral, including the use of charitable trusts or life insurance. We look forward to reviewing your plan with you to review the impact of this new law.

Although the loss of the stretch feature will be seen as a negative change for many clients (or their beneficiaries), the SECURE Act includes several provisions designed to boost the usefulness of retirement plans for the individual saving for retirement.

Increased Age for Required Minimum Distributions

Prior law required retirement account owners to begin taking “required minimum distributions” (“RMDs”) at age 70 ½. But for those account owners who are not 70 ½ by the end of 2019, that beginning date is extended to age 72. By delaying the initiation of RMDs, you can allow time for additional asset growth, as well as an additional deferral of income recognition.

No Age Limitation on IRA Contributions

Prior to the SECURE Act, an individual over the age of 70.5 could not contribute to an IRA. The Act has eliminated this restriction and repealed the age cap for traditional IRA contributions.

Increased Access to Retirement Plans for Small Business Owners and Part-time Employees

The Act will make it simpler for small business owners to set up and offer 401(k) plans. Small companies can band together to open 401(k) multiple-employer plans (MEPs) (also referred to as pooled employer plans (PEPs)), reducing cost and administrative burdens. MEPs are currently permissible, but only for related businesses, such as businesses with a common owner; the SECURE Act has eliminated this nexus requirement.

Prior to the SECURE Act, employees who did not work at least 1,000 hours during the calendar year were not eligible to participate in their employer’s defined contribution plan. The Act will provide access for eligible part-time and temporary employees who have worked at least 500 hours per year for at least three consecutive years to participate in employer-sponsored retirement plans.

Increased Annuity Options

Prior to the SECURE Act, annuities were offered in less than 10% of 401(k) plans, largely due to liability concerns about annuity providers. The Act seeks to remedy this by including a provision that provides a fiduciary safe harbor to 401(k) plan sponsors who include annuities among offerings to plan participants.

Annual Lifetime Income Disclosure Statements

In order to gain a better understanding of what your monthly income might be when you retire, the SECURE Act requires 401(k) plan administrators to provide annual lifetime income disclosure statements to plan participants. These statements will show how much income the lump sum balance in the retirement account could yield.

The disclosure statements will not be released until one year after the IRS issues interim final rules, creates a model disclosure statement and releases assumptions that plan administrators can use to convert account balances into annuity equivalents.

Penalty-Free Withdrawals for the Birth of a Child or an Adoption

Under the SECURE Act, an owner of a 401(k), IRA or other retirement account may withdraw up to $5,000 following a qualified birth or adoption of a child without paying the 10% early-withdrawal penalty tax. The distribution must occur within one year of the child being born or the adoption being finalized. Note that if you are married, each spouse can withdraw $5,000 from his or her own retirement account without penalty.

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About this Author

Michael Clear Estate and Trust attorney Greenwich Wiggin and Dana

As a Partner in the firm's Private Client Services Department, Michael regularly counsels clients on the far-reaching financial implications of estate planning, estate and trust administration, probate litigation, and business succession planning. Yet he is also a trained counselor with insight into the family dynamics these matters can effect. Known for his empathy and good humor, he helps clients take prudent action in the face of indecision, hopefully resolving contested issues before litigation.

Michael's estate planning practice includes assisting individuals and families in...

Veronica Bauer Estate Planning Attorney

Veronica R.S. Bauer is a Partner in the firm's Private Client Services Department in Palm Beach, Florida. Veronica focuses her practice on estate planning, estate and trust administration and charitable planning and administration.

Her practice includes assisting individuals and families with tax-efficient and practical estate, gift and income tax planning. She also assists fiduciaries and beneficiaries through estate settlement and trust administration matters

Robert Benjamin Estate Planning Attorney Wiggin and Dana

Bob has over three decades of experience as an estate planning and probate lawyer and previously served as Chair of Wiggin and Dana's Executive Committee (2009–2015). He is a Partner in the Private Client Services Department and counsels foreign and domestic clients in matters relating to estate planning, probate, and the taxation and administration of trusts and estates. He often works with clients who have complex estate planning needs, such as family business owners and artists. He is also a resource to lawyers at other firms in situations where difficult family dynamics or complex...

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Karen Clute Tax attorney New Haven Wiggin and Dana

Karen is committed to helping clients navigate ever-changing tax and fiduciary rules. As a member of the firm's Private Client Services Department, Labor and Employment Department, and Philanthropy Practice Group, Karen has a wide-ranging practice grounded in a deep understanding of the intersections of personal-, community-, and employment-related tax, fiduciary, and financial concerns.

She advises individual clients about a broad range of estate planning issues, with an emphasis on estate and income tax planning. She works with executors and trustees on fiduciary matters and...

Daniel Daniels Estate planning lawyer Wiggin Dana

For three decades, Dan has dedicated himself to counseling families in preserving wealth from generation to generation. His clients include affluent individuals, family offices, business owners, C-suite executives and private equity and hedge fund founders. He assists them in estate and business planning, trust and estate administration, probate litigation, and more.

Dan has been named by Worth magazine as one of the top 100 trust lawyers in the United States. He is one of six trust and estate lawyers in Connecticut ranked in Band 1 by the international ranking service ...