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An Overview of Certain Changes Impacting Estate Planning under The SECURE Act

The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) was passed on December 20, 2019, with most of its provisions taking effect as of January 1, 2020. The SECURE Act introduces a number of changes relating to the design and operation of both tax-qualified retirement plans as well as IRAs. However, this overview will focus on three notable changes that will be relevant for the estate planning implications of retirement plans and IRA assets.

1. Repeal of the Maximum Age For Traditional IRA Conditions

Pre-SECURE Act: Prior to the SECURE Act, only taxpayers under age 70 1/2 were permitted to make deductible contributions to a traditional IRA. Further, taxpayers could exclude from their gross income qualified charitable distributions (QCD) made from their IRA(s) of up to $100,000 per year.

SECURE Act: Under the SECURE Act, taxpayers who are still employed will now enjoy an additional tax-advantaged savings opportunity, as the new law repeals the age limit on traditional IRAs and allows taxpayers to contribute regardless of their age. However, such taxpayers will need to consider any possible limitations on making contributions to both an employer-sponsored retirement plan and a traditional IRA.

The SECURE Act also reduces the QCD exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after the taxpayer attains age 70 1/2, over the amount of all prior year reductions.

2. Increase in the Required Minimum Distributions (RMD) Age

Pre-SECURE Act: Employer-sponsored retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules. Under prior law, the RMD rules generally required taxpayers in employer-sponsored retirement plans and IRA owners to start taking RMDs from their plans on April 1st of the calendar year in which the taxpayer reached age 70 1/2, or, if the taxpayer did not own 5% or more of his or her employer’s business, following the later of the calendar year in which the taxpayer reached age 70 1/2 or retired.
SECURE Act: Although employer-sponsored retirement plans, traditional IRAs and individual retirement annuities are still subject to RMD rules, the SECURE Act now shifts the age for RMDs from 70 1/2 to 72 for retired taxpayers who attain age 70 1/2 after December 31, 2019 (n.b., taxpayers who attained age 70 1/2 in 2019 are still under an obligation to take RMDs in 2020).

The SECURE Act does not change the age at which taxpayers may make QCDs from their IRA(s). This creates a new planning opportunity, as taxpayers may reduce their gross income during the additional 2-year period that IRA distributions do not count as RMDs (relating to the time period between the attainment of age 70 1/2 and the attainment of age 72) by taking a charitable deduction on QCDs made from their IRA.

3. Elimination of the “Stretch IRA” Income Tax Deferral Strategy for Retirement Plan Beneficiaries 

Pre-SECURE Act: Under prior law, if a taxpayer’s death was after the required beginning date of the RMDs but before his or her interest was completely distributed, the distribution plan in effect at such taxpayer’s death had to either continue unchanged until depletion of the interest or be fast-tracked. If the taxpayer’s death was before his or her required beginning date, such taxpayer’s interest generally had to be distributed by December 31st of the calendar year containing the 5th anniversary of the taxpayer’s death. However, in the latter case, distributions to a designated beneficiary could occasionally be stretched over such a beneficiary’s lifetime or over a period not longer than his or her life expectancy. This strategy helped prolong withdrawals and maximize the life of an IRA, resulting in tax deferral on those assets. Under prior law, a designated beneficiary could be any individual designated by the taxpayer or trusts meeting certain conditions.

SECURE Act: The changes introduced by the SECURE Act adjust the after-death minimum distribution rules. The rules no longer vary depending on whether the taxpayer died before or after his or her required beginning date. The SECURE Act requires distribution of the taxpayer’s entire interest to the designated beneficiary by December 31st of the calendar year containing the 10th anniversary of the taxpayer’s death (the 10-year rule). Surviving spouses may still elect to delay distributions until December 31st of the year that the taxpayer would have attained age 70 1/2 or 72, as applicable.

There is an exception to the 10-year rule that is available for eligible designated beneficiaries. The SECURE Act defines an eligible designated beneficiary as an individual who, on the taxpayer’s death, is any of the following:

  • The taxpayer’s surviving spouse;
  • A minor child of the taxpayer;
  • Disabled and chronically ill individuals[1]; and
  • Any other individual who is not more than 10 years younger than the taxpayer.

Under the exception, distributions must begin the year following the year of the taxpayer’s death, but the “stretch” strategy under prior law can still be utilized. There is one caveat: once a minor child reaches the age of majority, the balance of the interest must be paid out within 10 years after such date.

This change in the law affects trusts designated as beneficiaries of IRAs. The SECURE Act will now require trustees of conduit trusts[2] to distribute the entire IRA to trust beneficiaries within 10 years, defeating the purpose of asset protection. Although asset protection may still be achieved by way of discretionary trusts[3], it is important to keep in mind that IRA distributions to discretionary trusts will be exposed to higher income taxes. In 2020, trusts reach the maximum 37% tax bracket with undistributed taxable income of more than $12,950.

The SECURE Act introduces many changes beyond the three items referenced above, and it is important to consider the different planning opportunities and how these changes may affect your estate and retirement planning goals.


[1] As defined in Section 401(a)(9)(E)(ii)(IV) of the Internal Revenue Code.

[2] Conduit trusts provide that any and all distributions coming into the trust on an annual basis must be distributed out in the same year to the rightful beneficiary. These trusts were meant to provide asset protection of the underlying principal of the IRA.

[3] Discretionary trusts grant the trustee the discretion to withhold incoming IRA distributions and to accumulate such distributions with trust principal.

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