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SECURE 2.0 Act - How It Affects You and Your Retirement Account Beneficiaries

On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act). The previous SECURE Act in 2020 made several changes to retirement planning:

  • It increased the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age.

  • It eliminated the age restriction for contributions to qualified retirement accounts.

  • It requires that most designated beneficiaries withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death.

Eligible Designated Beneficiaries Exempt from the 10-Year Rule

The SECURE Act provided a few exceptions to the mandatory 10-year withdrawal rule with a list of eligible designated beneficiaries:

  • Spouses

  • Beneficiaries who are not more than 10 years younger than the account owner

  • The account owner’s children who have not reached the age of majority

  • Disabled individuals and chronically ill individuals

New Provisions in the SECURE 2.0 Act

The SECURE 2.0 Act made quite a few enhancements to clarify the original legislation. Several of the key enhancements are summarized below:

  • It raises the RBD age for RMDs to 73 in 2023 and 75 by 2033.

  • It decreases penalties for not taking RMDs to 25 percent of the RMD amount and 10 percent of IRAs if corrected timely.

  • Employees will be automatically enrolled in 401(k) and 403(b) plans but may opt out within 90 days.

  • Higher catch-up contributions are allowed for participants over 50 ($7,500 in 2023).

  • There is more flexibility in annuity payments paid from qualified retirement plans.

  • Early distributions are permitted for long-term care contracts without penalty.

  • Qualified charities can be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust.

  • Plan sponsors may match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024.

  • 529 plans maintained for at least 15 years may be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024.

Exceptions to the Early Distribution Rule

The SECURE 2.0 Act allows exceptions to the 10 percent early distribution excise tax, including the following:

  • Qualified births and adoption expenses

  • Terminally ill individuals

  • Federally declared disasters

  • Emergency personal expenses

  • Domestic abuse victims

The new provisions and exceptions in the SECURE 2.0 Act may change the decisions you have made for your intended beneficiaries and alter the path to achieving your long-term goals.

Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act and SECURE 2.0 Act, the shorter 10-year time frame for taking distributions will accelerate income tax due, possibly bumping your beneficiaries into a higher income tax bracket and causing them to receive less of the funds in the retirement account than you may have originally anticipated. Eligible designated beneficiaries exempt from the 10-year rule may still have the opportunity to benefit from future retirement plan growth.

Review Your Revocable Living Trust or Standalone Retirement Trust

We may have addressed the distribution of your retirement accounts in your living trust, or we may have created a retirement trust that would handle your retirement accounts at your death. Your trust may have included a conduit provision, which requires that retirement distributions be immediately distributed to or for the benefit of the beneficiaries (rather than being held in trust). With the SECURE Act’s passage, a conduit trust structure may not be the best choice any longer because the trustee will be required to distribute the entire retirement account balance to most types of beneficiary within 10 years of your death (which, as discussed above, can create an income tax headache for the beneficiary).

Under the current rules, if a person dies prior to their required beginning date for RMDs, then designated beneficiaries will not be required to take out RMDs during the 10-year payout period (but would need to take full distribution by the end of the 10-year payout period). However, if the person died after their required beginning date, the beneficiary must continue to take out RMDs on an annual basis (with full distribution at the end of the 10-year payout period; different distribution rules may apply to different types of beneficiaries, and eligible designated beneficiaries may be subject to different rules.). We should discuss the benefits of an accumulation trust, an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.

Consider Additional Trusts

For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory 10-year withdrawal rule under the SECURE Act, providing continued protection of a beneficiary’s inheritance.

If you have beneficiaries with a disability or chronic illness, you may want to consider a special needs or supplemental needs trust. Beneficiaries are exempt from the mandatory 10-year payout rule, giving them more time for the retirement account to grow tax-deferred.

Review Intended Beneficiaries

With the changes to the laws pertaining to retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, they must be named on a beneficiary designation form. You should ensure that you have listed contingent beneficiaries as well.

If you have recently divorced or married, you will need to ensure that the appropriate changes are made to your current beneficiary designations. At your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.

Other Strategies

Although these new laws may be changing the way we think about retirement accounts, we are here and are prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill your charitable desires.

A charitable remainder trust can use annuity and unitrust payments to mimic the “stretch” provided by using life expectancy. Assets are funded into the trust and then liquidated or sold by the trust. The money from the sale is then invested to produce a stream of income. The sale avoids capital gains tax at the trust level because the trust is liquidating the account and is tax-exempt. However, the noncharitable recipient of the income stream will still be responsible for income tax on the distributions. In contrast, you may distribute your entire retirement asset directly to a charity, and they will not have to pay tax on the income from the plan. Additionally, If you have a significant estate, there may be an estate tax charitable deduction.

Following the recent changes to the SECURE Act, you may be concerned about the amount of money that will be available to your beneficiaries following your death and the impact that the potential accelerated income tax may have on that ultimate amount. We can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death.

Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act and SECURE 2.0 Act.

The information contained in this blog is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice.

While the information on this blog is intended to be accurate and timely, we make no guarantees or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information contained or referenced in the blog. Any reliance you place on such information is therefore strictly at your own risk.

The transmission and receipt of information on the blog do not form or constitute an attorney-client relationship. Readers should not act upon this information without seeking professional counsel. The content of this blog contains general information and may not reflect current legal developments or information.

We disclaim all liability for actions you take or fail to take based on any content on this blog to the fullest extent permitted by law. Do not send us confidential information until you speak with our attorney and receive our authorization to send that information to us.

Please note that this disclaimer applies to all content on the blog, including but not limited to, any articles, posts, pages, comments, or other material posted on the blog by attorneys, staff, guest authors, or members of the public. Please consult an attorney for advice about your individual situation.

Estate Planning 101: Laying the Foundation for a Secure Future

Introduction:

Estate planning, at its core, is about securing the future. It involves determining how your wealth will be distributed upon your death and putting necessary mechanisms in place to ensure that your intentions are followed. While it may seem grim to contemplate these aspects, establishing an effective estate plan can provide you and your loved ones with immense peace of mind. This blog post outlines the basics of estate planning and discusses the critical components that make up a solid plan.

Understanding Estate Planning:

Estate planning goes beyond drafting a will. It includes decisions about how your assets will be managed, who will care for your minor children if necessary, and steps to limit potential taxes and fees. It can also incorporate plans for incapacity, ensuring that your medical wishes are respected if you become unable to communicate or make decisions.

Key Components of Estate Planning:

  1. Wills: A will is a legal document that outlines how you want your property distributed upon your death. It allows you to name an executor, the person who will manage your estate's distribution. If you have minor children, a will is where you can nominate a guardian for them (although this can also be done in a standalone document).

  2. Trusts: A trust is a legal entity where one party (the trustor) gives another party (the trustee) the right to hold property or assets for the benefit of a third party (the beneficiary). Trusts can help reduce estate taxes, protect your estate from creditors and lawsuits, and avoid probate, a time-consuming and public legal process to distribute your assets after death.

  3. Power of Attorney: This legal document allows you to appoint someone to handle your affairs if you're unable to do so. There are two types: a durable power of attorney for financial matters and a healthcare power of attorney for medical decisions.

  4. Advance Healthcare Directives: Also known as living wills, these outline your wishes for end-of-life medical care. They take effect if you're unable to communicate or make decisions due to a severe illness or incapacitation.

  5. Beneficiary Designations: Certain assets, like life insurance policies or retirement accounts, are distributed upon death based on beneficiary designations. It's vital to keep these up-to-date and ensure they align with your overall estate plan.

  6. Estate Taxes: Depending on the size of your estate, federal and/or state estate taxes may be due upon your death. Some estate planning strategies can help reduce the overall tax burden.

Creating an Estate Plan:

Estate planning can be complex, and the stakes are high. As such, it's beneficial to engage with a competent estate planning attorney who can provide valuable guidance and help avoid common pitfalls. The process typically involves:

  1. Taking inventory of your assets: Identify all your assets, including property, investments, retirement savings, insurance policies, and any debts.

  2. Setting objectives: Decide who will receive your assets and when. Think about whether you want to provide for certain personal matters, like education for children or grandchildren, donations to charities, etc.

  3. Implementing the plan: This involves drafting the necessary documents such as wills, trusts, powers of attorney, etc. It's best to consult with an attorney licensed in your state during this phase.

  4. Regular reviews and updates: Your estate plan should be reviewed and updated regularly, especially when significant life events occur (like marriages, divorces, births, deaths, or substantial financial changes).

Conclusion:

Estate planning is an essential part of financial planning and takes a considerable amount of thought, time, and professional help. Yet, the security and peace of mind it provides for you and your loved ones make it well worth the effort. Always remember that while estate planning begins with a good plan, it should also adapt and change as your life and laws evolve.

The information contained in this blog is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice.

While the information on this blog is intended to be accurate and timely, we make no guarantees or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information contained or referenced in the blog. Any reliance you place on such information is therefore strictly at your own risk.

The transmission and receipt of information on the blog do not form or constitute an attorney-client relationship. Readers should not act upon this information without seeking professional counsel. The content of this blog contains general information and may not reflect current legal developments or information.

We disclaim all liability for actions you take or fail to take based on any content on this blog to the fullest extent permitted by law. Do not send us confidential information until you speak with one of our attorneys and receive our authorization to send that information to us.

Please note that this disclaimer applies to all content on the blog, including but not limited to, any articles, posts, pages, comments, or other material posted on the blog by attorneys, staff, guest authors, or members of the public. Please consult an attorney for advice about your individual situation.