CAREFULLY CONSIDER THE EFFECT OF THE SECURE ACT ON YOUR ESTATE PLAN

By:  Joel N. Goldblatt, Sidney M. Levine and Andrew D. Arons of Williams, Bax & Saltzman, P.C.

October 19, 2020

Congress recently passed and the President signed into law the SECURE Act, landmark legislation that may affect how you plan for your retirement as well as how you design your existing estate plan. Not all of the changes are favorable, and there may be steps you can take to minimize their impact. Leaving qualified retirement plans and IRA’s to your revocable trust may cause unanticipated income tax issues for the beneficiaries of the trust that can be avoided. We are recommending that our clients review their estate planning documents and beneficiary designation forms to determine if they are maximizing the income tax advantages and achieving their goals.

THE PROBLEM NAMING A TRUST AS BENEFICIARY OF AN IRA OR QUALIFIED RETIREMENT PLAN.

Under the old rules, naming individuals as a beneficiaries of qualified plans or IRAs permitted them to roll over the benefits they received into inherited IRAs and take distributions based on their life expectancies,  thereby stretching out the tax-deferral advantages of the plan or IRA (in the IRA context, this is sometimes referred to as a "stretch IRA"). Under the new law this ability to roll over and take out distributions based on life expectancy generally applies only to Eligible Designated Beneficiaries. Persons who are not Eligible Designated Beneficiaries must take distributions over 10 years, and for them the stretch IRA is now history.

The following are Eligible Designated Beneficiaries: (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not attained majority (who then within 10 years of reaching age 18 must take all the money by age 28); (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Eligible Designated Beneficiaries may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020) except for those who are minors who reach age 18 and must take the benefits by age 28.

When one names a trust as the beneficiary of the qualified plan or IRA, this can inadvertently accelerate the distributions from the qualified plan or IRA. This can happen even if the trust beneficiary would take the distributions based on life expectancy if the trust beneficiary were named, individually, as beneficiary of the qualified plan or IRA. To avoid this problem, the trust must have proper language, and if the trust has multiple beneficiaries, all of them must Eligible Designated Beneficiaries.

That is not to say that a trust should never be designated as beneficiary of qualified plans or IRAs. In some instances, naming a trust as the beneficiary of the IRA or qualified plan is desirable. Examples include second marriages, special needs beneficiaries who will be disqualified from governmental assistance if moneys come directly to them, or beneficiaries who are very young, cannot handle money or have creditors or substance abuse issues.  And if a trust is designed as a “conduit” trust for the benefit of an Eligible Designated Beneficiary, long term deferral is still possible.

Given the change in the law noted above, the wording we formerly used in your documents may need to be revised. We suggest you do the following:

1. Have your estate planning documents reviewed;

2. Review your beneficiary designation forms to determine whether your qualified plan or IRA names your trust;

3. Determine what you are trying to achieve and whether there are special circumstances that require naming your trust as a beneficiary

4. Revise your estate planning documents to address this, other recent changes in trust law and any other changes you feel are necessary given a change in your goals or factual circumstances.

Note that even if you name an individual as the beneficiary of the IRA or qualified plan, should he or she pass-away before you, your trust could wind up with this asset. So revisions and thought with respect to how your trust is structured is needed regardless.

SUMMARY OF THE SECURE ACT AS IT RELATES TO INDIVIDUALS.

Repeal of the Maximum Age for Traditional IRA Contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required Minimum Distribution Age Raised From 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Expansion of Section 529 Education Savings Plans to Cover Registered Apprenticeships and Distributions to Repay Certain Student Loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses did not include the expenses of registered apprenticeships or student loan repayments.

For distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiaries’ participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are permitted to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Penalty-Free Retirement Plan Withdrawals for Expenses Related to the Birth or Adoption of a Child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable Non-Tuition Fellowship and Stipend Payments are Treated as Compensation for Ira Purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-Exempt Difficulty-Of-Care Payments are Treated as Compensation for Determining Retirement Contribution Limits.

Many home healthcare workers do not have taxable income because their only compensation comes from "difficulty-of-care" payments that are exempt from taxation. Because those workers do not have taxable income, they were not previously able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

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To address any questions about the SECURE Act or to discuss its effect on your current estate plan, we encourage you to contact any of us ( goldblatt@wbs-law.com, levine@wbs-law.com or arons@wbs-law.com) at your convenience.