Congress recently passed legislation that might affect high-net-worth clients’ tax situations.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which passed in December, encompassed nearly 30 provisions intended to encourage adoption of employer-sponsored plans and promote lifetime income options. But the act also altered the rules for inheriting IRAs and other tools for high-net-worth estate planning.
“Probably the most remarkable change resulting from the SECURE Act is the elimination of the ‘stretch’ provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts,” said Dean Mioli, a CPA, CFP and director of investment planning at Independent Advisor Solutions by SEI in Oaks, Pa.
Under previously issued regulations, non-spouse designated beneficiaries could take distributions over their life expectancy, but for many retirement account owners who die in 2020 and beyond, beneficiaries will have only 10 years to empty the account. Within this period, there are no distribution requirements.
Designated beneficiaries will have some flexibility when it comes to timing distributions from the inherited accounts for potential maximum tax efficiency, as long as the entire account balance is taken by the end of the 10th year, Mioli said, adding that the timing of distributions will be critical and doing tax projections is recommended.
“We’re advising clients to review and, where appropriate, modify beneficiary designations promptly,” said Jim Bertles, managing director at the Palm Beach, Fla., office of Tiedemann Advisors.
There are exceptions for certain beneficiaries, he added, including surviving spouses. The exceptions also include the employee’s young children—until they reach the age of majority (this does not include grandchildren or any other children). Also exempted from the rule are disabled or chronically ill beneficiaries or an individual no more than 10 years younger than the decedent.
“Our preliminary findings are that while there is some loss of tax-deferral benefit for beneficiaries, it’s not as bad as it seems because beneficiaries have the flexibility to take distributions over the course of 10 years or wait until the end of the period,” said Tara Thompson, director of research, wealth planning and analysis at Bernstein Private Wealth Management. “Still, some clients may look to use IRA assets to fulfil their charitable goals rather than leave them for beneficiaries.”
“We’ll be looking at beneficiary designations in greater detail, particularly those who are leaving retirement accounts directly to children or non-spouse beneficiaries and to trusts for the benefit of children,” said Oscar Vives Ortiz, a CPA and member of the American Institute of CPAs’ personal financial specialist credential committee.
“Most trust documents are drafted in a way that passes required minimum distributions to the beneficiary,” Ortiz said. “Under the new rules, there technically wouldn’t be an RMD until year 10. The IRA will build over the 10-year period inside the trust and bam—a taxable distribution of the full account would occur,” Ortiz said.
The SECURE Act brings consequences for conduit trusts, according to Thompson.
“Many testamentary estate plans in place today include conduit trusts as beneficiaries for IRAs because this type of trust is guaranteed to qualify as a see-through trust,” she said. “But this structure requires that all distributions from the retirement plan are immediately disbursed to the beneficiary. Few if any estate plans in place today containing standby conduit trusts have contemplated a mandatory lump-sum distribution within 10 years to the trust beneficiaries.”
The SECURE Act also bumped the age for taking required minimum distributions from retirement savings from 70½ to 72 (an easier benchmark age to understand, Mioli said), and the age limit for making IRA contributions is gone.
For business-owning wealthy clients, the new law gives employers more time to set up retirement plans for employees, according to Charlene Wehring, a CPA and advisor with Avantax Wealth Management in Bellville, Texas. “They have until the due date of the tax return, including extensions,” she said. “This goes into effect for plans beginning after December 31, 2019.”
The act also allows unrelated small businesses to share the administrative and financial responsibilities of establishing and preserving a retirement plan, among other changes.
