Category: Estate Planning

January 6, 2020

The SECURE Act: Elimination of the “Stretch” Option for Certain Beneficiaries of Inherited Retirement Assets

Micah G. Snitzer

The Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) took effect January 1, 2020, revising federal rules that govern the administration of qualified retirement plans (e.g., 401(k) and 403(b) plans) and IRAs.  Among the changes effected by the new law is the shrinking of the class of beneficiaries who can “stretch” out their required minimum distributions (“RMDs”) from such accounts over their expected lifetime.  This stretch of RMDs was a tax benefit, because it allowed the beneficiary to defer income tax, keeping assets in the tax-favored vehicle as long as possible, where they could grow without diminishment; it is only upon distribution that the assets would be subject to income tax.

The SECURE Act imposes a maximum 10-year payout rule for retirement accounts inherited from someone dying in 2020 or later, unless the named beneficiary is the surviving spouse of the deceased owner, is disabled or chronically ill, is not more than 10 years younger than the deceased owner, or is a minor child of the deceased owner.  In the case of a minor child, the 10-year payout rule does apply, but that clock does not begin to tick until the child reaches the age of majority.

A beneficiary subject to the 10-year payout rule has some flexibility in timing distributions.  In contrast to a beneficiary utilizing the lifetime stretch, who will have to take an annual RMD, a beneficiary subject to the 10-year payout rule is not required to take an annual RMD over the 10-year period.  Instead, the beneficiary may wait until the last day of the 10-year payout period to take any distribution at all, as long as the entire inherited account is distributed to the beneficiary by the end of the 10th year after death of the owner.

The lifetime stretch option for RMDs, more broadly available under prior law, is now available only to the surviving spouse of the deceased owner or to a beneficiary who is disabled, chronically ill, or not more than 10 years younger than the deceased owner.  Except for trust beneficiaries falling into this preferred class, the inclusion of special language in a trust’s governing instrument no longer facilitates the RMD lifetime stretch-out for retirement accounts payable to a trust.

Should you panic?  No.

Although many notices and alerts in our industry call for everyone to rethink their retirement account beneficiary designations and the language of their estate planning documents, most clients will not need any revision to their estate planning documents to achieve or preserve the best available tax efficiency in light of the SECURE Act.

This is not a “change XY and Z in response to the new law, or else you will incur/accelerate tax” situation.  Rather, it is a situation of “a tax deferral previously available is now less available.”

Many clients name their spouse, individually, or one or more charitable institutions as beneficiary(ies) of retirement assets; no change to these arrangements is necessitated by the SECURE Act.

Many clients name children, grandchildren, or other individuals as beneficiaries; in most cases, such beneficiaries will no longer be able to stretch their RMDs, but unless that fact prompts the account owner to want to change his/her beneficiaries altogether, s/he need not revise anything in reaction to this law change, either.

Some clients name trusts for individuals as beneficiaries of retirement accounts.  In many instances, these trusts will have been drafted with special (“conduit”) language in order to qualify, under old rules, for the RMD stretch-out based upon the life expectancy of the individual trust beneficiary(ies).  That special conduit language had a potential downside, tolerated under old rules because of the tax efficiency it afforded, but now that it no longer achieves its intended tax result in all situations, its downside may be unwanted, prompting some to amend their trusts to remove the conduit language.  The downside is that a conduit trust requires all amounts distributed to the trust from a retirement account be, in turn, distributed from the trust to the individual trust beneficiary(ies).  That may not be objectionable in all situations (e.g., a trust that grants its beneficiary a unilateral right of withdrawal over all trust assets at some age falling in the range of 20-36, anyway), but some clients may prefer to have the trust accumulate amounts drawn down from retirement accounts, retaining them in the trustee’s hands rather than distributing them out to the individual beneficiary(ies).  These clients may wish to consult their Pasternak & Fidis estate planning attorney to discuss revising the trust. The SECURE Act may make a Roth conversion and/or obtaining additional life insurance more appealing to certain clients, or it may prompt some to direct more retirement assets to charity.  At your next periodic review with your estate planner or certified financial planner, you may wish to explore whether these options make sense for your plan.

December 18, 2019

How to Disinherit Your Spouse in Maryland: A Preview of Maryland’s New Elective Share Law

Anne W. Coventry

We don’t often get the question, “Can I disinherit my spouse?” but the subject has been fraught with consternation for Maryland estate planners for many (many, many) years; we used to have to answer it with “it depends.” We will soon have greater certainty—for decedents dying on or after October 1, 2020, it’s going to […]

December 16, 2019

How to Succeed in Business Succession Without Your Family Crying*

Oren Goldberg

* With thanks to playwrights Abe Burrows, Jack Weinstock, and Willie Gilbert, and composer and lyricist Frank Loesser, without whom the world would lack the wonderful play, “How to Succeed in Business Without Really Trying” (1961) This is a story of three different people with a similar issue, but very different concerns. Each of them […]

July 18, 2019

Trusts and Divorce

Roxy Araghi

Trusts are an important tool that families can use to protect assets and pass wealth to future generations. When the beneficiary of a trust is facing divorce, he or she will be concerned that the trust assets and income may be vulnerable to a spousal claim. Such a claim can include equitable division of property, spousal or child support, and an […]

July 16, 2019

Saving to Pay for Education Expenses: The Basics of 529 Accounts

Adam P. Swaim

One of the largest expenses a family will incur is very likely the cost of a child’s education. In order to encourage early participation in saving for education expenses, Section 529 of the Internal Revenue Code permits states to provide tax-advantaged savings plans (“529 plans”). A 529 plan account may be used to help pay for a beneficiary’s tuition […]

July 26, 2018

OPINION: Electronic Wills? Maybe, But Not Like This

Anne W. Coventry

B22-0169, the Electronic Signature Authorization Act of 2017, is pending before the DC Council, and it is dreadful.  The Uniform Law Commission (ULC), relevant sections of the DC Bar, and a number of DC Fellows of the American College of Trust and Estate Counsel (ACTEC) have submitted, formally or informally, written opposition to the bill.  […]