Estate planning for retirement assets just got more interesting.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law on December 20. It was passed as part of H.R. 1865, Further Consolidated Appropriations Act, 2020. The actual text is available at (pdf link). See Division O.

From an estate planning perspective, some of the more notable provisions of the SECURE Act are:

  • Elimination of “stretch out” for inherited IRAs and 401(k) plans unless payable to one of the following (referred to as an “eligible designated beneficiary”):
    • Surviving Spouse,
    • Minor Child,
    • Disabled Beneficiary [as defined in I.R.C. § 72(m)(7)],
    • Chronically Ill Individual [as defined in I.R.C. § 7702B and modified to add that the disability is indefinite and lengthy], or
    • Beneficiary who is not more than 10 years younger than the participant.
  • For everyone else, the distribution period for inherited IRAs and 401(k) plans is 10 years; i.e., benefits have to be distributed over a period not to exceed 10 years from the date of the participant’s death. After a minor child reaches the age of majority, the 10 year rule applies to him or her as well.
  • Repeal of the maximum age for making traditional IRA contributions (currently age 70 1/2).
  • Increase in the age for taking required minimum distributions from 70 1/2 to 72.

The SECURE Act also allows for penalty-free withdrawals of up to $5,000 from a retirement plan in connection with the birth or adoption of a child. In addition, it adds certain apprenticeships to the definition of “qualified higher education expenses” for purposes of Section 529 plans.

The SECURE Act may have unintended consequences for estate planning clients with substantial retirement assets. This is particularly true for those clients who have made retirement assets payable to a trust, whether for a surviving spouse, children, grandchildren or others. The language commonly used in these trusts could cause retirement assets to be paid out to the beneficiaries faster than intended. This would subject the retirement assets to creditors, divorcing spouses, and the financial mismanagement of beneficiaries. Accordingly, in light of the SECURE Act’s changes to the stretch out rules, it is imperative for clients with substantial retirement assets to have their estate plan reviewed by knowledgeable counsel.

Posted by Joel D. Roettger, JD, LLM, EPLS