the secure act

How Does the SECURE Act Affect Your Estate Plan?

The SECURE Act went into effect in the beginning of 2020. The goal of this act was to address the ever-growing retirement savings crisis. However, numerous provisions of the SECURE Act also have a direct impact on families’ estate plans and retirement goals. If you have an estate plan—and in particular, if you have a trust—this is a good time to meet with your estate planning attorney to figure out if you have to make any changes.

Still looking for an estate planning attorney you can partner with as you work toward your retirement goals? Contact Garmo and Garmo today at (619) 441-2500 to set up a personalized consultation.

An Overview of the SECURE Act

The SECURE Act aims to help aging Americans use their assets, rather than outliving their retirement accounts. The bill makes it easier for small business owners to offer retirement plan options to their employees, and it also gives more part-time employees the opportunity to start building their retirement funds. Legislators created the SECURE Act in response to research indicating that the vast majority of workers will need to supplement their Social Security benefits with their own money.

Changes in Stretch Distributions

In the past, people with substantial retirement accounts chose to pass them on to their loved ones as part of their estate. Beneficiaries had a number of options to explore. They could transfer the money to their own retirement account, withdraw the funds immediately, extend withdrawals over a five-year period, or stretch withdrawals over their lifetime based on their current age. Since these distributions are taxable income, many beneficiaries chose to have payments distributed over their lifetime. This led to the lowest possible increase in their tax rate, and in many cases, did not increase their tax rate.

This is no longer an option under the SECURE Act. Under this law, those who inherit retirement accounts must withdraw all funds within ten years. This may lead to a huge jump in the recipient’s tax rate, causing a significant loss in the overall value of the fund.

Conduit Trusts vs. Accumulation Trusts

This may affect distributions to minor beneficiaries. Previously, conduit trusts were the preferred method to handle retirement accounts. The trustee of the trust would use the distributions to pay for items the minor beneficiary needed. Since the money never reached the beneficiary directly, this was ideal for taxation purposes.

This obviously has changed, now that you cannot spread payments out over the course of a minor’s lifetime. With distributions spread over a period of just 10 years, trying to drain an account for a minor beneficiary is wasteful. As a result, many estate planning professionals now recommend that funds be left in accumulation trusts for later use by the beneficiary. While this does not have the tax benefits of the previous setup, it does allow the funds to be used over a longer period of time.

Benefits of the SECURE Act

Some changes in the SECURE Act may benefit your retirement accounts. Previously, you were required to begin withdrawing funds from your 401(k) or IRA by the age of 70.5. The SECURE Act moves that up to 72 years. Additionally, the SECURE Act has eliminated the age limit for IRA contributions. If you are still working, you can still contribute to your IRA.

How to Adapt Your Estate Plan

You may be wondering how this affects you, particularly if your estate plan hinged at least partially on passing a qualifying retirement account to your beneficiaries. While you may get an overview of the SECURE Act, you can’t know exactly how it will affect your personal estate plan until you speak to an estate planning attorney. There are many nuances to this law, and your attorney will know how to best navigate these changes to achieve your estate planning goals.

Depending on your circumstances, you may need to change the type of trust you set up for your beneficiaries or remove old language in your estate plan.

Contact an Experienced Southern California Estate Planning Attorney

You’ve worked hard to leave a legacy for your loved ones. Make sure that your estate plan allows them to receive the full benefits of your lifetime of hard work. Connect with Garmo and Garmo today to make sure you have an estate plan that works for you.