Category: Probate

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.

February 15, 2018

State Estate and Inheritance Taxes after the Tax Cuts and Jobs Act

James D. Saintvil

The doubling of the federal estate tax exemption under the Tax Cuts and Jobs Act—from $5.49 million in 2017 to $11.18 million in 2018 ($11.4 million as of January 1, 2019)—has moved many wealthy Americans away from the impact of the federal estate tax. However, state estate taxes and state inheritance taxes remain a factor in estate planning for residents of […]

October 17, 2017

“To my descendants, per stirpes…” (or… How do we pass the Packers’ tickets to our grandkids?)

Anne W. Coventry

Years ago, I described to a close friend (let’s call her Cathy) the difference between a division among descendants per stirpes and a division among the same descendants per capita at each generation.  In the midst of my explanation, Cathy suddenly exclaimed, “Oh!  You mean like the Packers’ tickets?”  This was a Eureka! moment; yes, […]

October 14, 2016

Nancy Fax named Lawyer of the Year in Trusts & Estates for DC Area for 2017

Pasternak & Fidis

Best Lawyers named partner Nancy Fax the Trust and Estates Lawyer of the Year in DC, Maryland and Virginia. Because the publication uses peer nominations to develop its selective list, we are especially proud of this recognition. Congratulations, Nancy! Additional Pasternak & Fidis attorneys were recognized as best lawyers in Maryland in their respective fields: Jan White in Collaborative Law: […]

May 16, 2016

Maryland enacts laws on Trusts and Digital Assets to take effect in October 2016

Anne W. Coventry

For a long time, the rule in Maryland has been that a divorce revokes the provisions of a will that benefit the former spouse, but we did not have the same rule for revocable trusts.  Beginning October 1, 2016, the same rule will apply to revocable trusts—divorce will revoke those provisions of the trust that […]

May 11, 2016

The PRINCE Act and “Name and Likeness” Rights: Sword and Shield?

Alex S. Tanouye

Lawmakers in Minnesota are acting quickly to pass the PRINCE Act, which is intended to protect one’s – specifically, Prince’s – name, voice, and likeness from unauthorized use for a 50-year period after death.  The law is aimed at protecting Prince’s legacy and the right of his estate to control future marketing of and revenues […]