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The SECURE Act* has significantly altered the estate planning landscape for qualified retirement accounts, including, but not limited to, Individual Retirement Accounts (“IRAs”), 401(k)s, 403(b)s, 457(b)s, and Roth IRAs (collectively, “retirement accounts”). Individuals should review and update their current estate planning documents and current beneficiary designations for their retirement accounts to ensure these documents will carry out their estate planning goals.

Prior to the passage of the SECURE Act, individual beneficiaries of retirement accounts could establish inherited retirement accounts and withdraw the funds from those accounts over their life expectancies. This allowed the retirement account funds to grow without being subject to income tax until they were distributed to the beneficiary (and in the case of inherited Roth IRAs and inherited Roth 401(k)s, both the growth and the distributions were income tax free). The required minimum distributions (“RMDs”) from inherited retirement accounts each year were percentages of the remaining funds in the inherited retirement accounts, and those percentages increased each year. Younger retirement account beneficiaries with long life expectancies could benefit significantly from these minimum distribution rules, as they were only required to withdraw small percentages from their inherited retirement accounts each year, and the remaining funds could continue to grow and defer income taxes (or, for Roth accounts, completely escape income taxes). In addition, individuals could designate certain qualified trusts (“qualified trusts”) as beneficiaries of retirement accounts that would allow the beneficiaries of the trusts to use their own life expectancies to withdraw the RMDs. Most qualified trusts required the RMDs to be distributed from the trusts to or for the benefit of the beneficiaries immediately after they were received by the trusts. Inherited retirement accounts that took advantage of this life expectancy payout method were known as “Stretch IRAs.”

The SECURE Act largely eliminated the Stretch IRA for retirement account owners that die after 2019 and replaced it with a new scheme which generally requires an individual beneficiary (or a qualified trust for an individual beneficiary) to withdraw the entire inherited retirement account balance by December 31st of the 10th year after the retirement account owner’s death (the “10 year rule”). The 10 year rule will significantly accelerate the payment of income taxes for most retirement accounts, and will likely result in more income taxes as retirement account beneficiaries are pushed into higher income tax brackets because of larger inherited retirement account distributions.

Certain categories of beneficiaries will still be able to use a Stretch IRA. These beneficiaries include surviving spouses, disabled or chronically ill individuals (as defined by federal law), and individuals less than 10 years younger than the retirement account owner. In addition, qualified trusts for the benefit of these individuals may also still use Stretch IRAs. Note that surviving spouses may also continue to rollover inherited retirement accounts into their own retirement accounts under the SECURE Act. Minor children beneficiaries of the retirement account owner, or qualified trusts for the benefit of such minor children, may use the child’s life expectancy for RMDs until the child becomes an adult, but must switch to the 10 year rule thereafter.

In addition to the acceleration of income taxes, the 10 year rule will result in beneficiaries receiving the entire balance of a retirement account much quicker than retirement account owners may have planned or anticipated. This could be particularly problematic with minor beneficiaries or beneficiaries who require protection from their creditors through the use of a trust. Prior to the SECURE Act, qualified trusts generally offered an ideal solution for these beneficiaries because RMDs each year were generally small, which allowed most of the funds of an inherited retirement account to remain within the control of a responsible trustee, grow on a tax deferred basis, and maintain maximum creditor protection. By eliminating the Stretch IRA, the SECURE Act has severely limited the ability of most qualified trusts currently drafted to carry out the intentions of retirement account owners. Fortunately, retirement account owners have the opportunity to modify their retirement account beneficiary designations and/or their qualified trusts to better align with their goals in the new era of the SECURE Act and prevent the premature distribution of significant assets to a minor beneficiary or a beneficiary unprepared to receive and manage those assets.

If you have questions about the SECURE Act or any other estate planning matter, please contact a member of Poyner Spruill’s trusts and estates team.

*The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) was signed into law by President Trump and became effective January 1, 2020.

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