When Will the SECURE Act Become Law?
On May 23, 2019, by a vote of 417 to 3, the US House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (H.R.1994). The SECURE Act will now head to the Senate for review. How long the Senate may take to pass its version of the Act, also known as the Retirement Enhancement Savings Act (RESA), is unclear. Think Advisor reports that the Senate review process may take several months if consent is unanimous. If there is no unanimous consensus, the Senate may have a debate and amendment process. Senate Finance Committee Chairman Sen. Chuck Grassley commented that he felt it was unlikely that the bill would proceed under those circumstances and that another option would be to attach the bill to another piece of “must-pass” legislation. If that is the case, Grassley indicated that the process may take months. Due to its overwhelming bipartisan support, experts believe the SECURE Act, perhaps with minor adjustments made in the Senate, will easily become law. However, Pensions & Investments reports that, there may be one or more Senators anonymously holding up the unanimous passage of RESA, and that it is likely due to the House stripping provisions from the SECURE Act provisions that would have allowed funds in 529 college savings plans to be used for home schooling costs and supplies for K-12 students. Despite these holdups, it seems likely that these bills will become law. Once passed by the Senate, the law will have an effective date of December 31, 2019.
How Will the SECURE Act Impact Estate Plans?
If passed, the bill will have a major impact on estate planning for retirement accounts. Required minimum distributions will no longer be able to be stretched over the course of a beneficiary’s life expectancy, but instead will need to be distributed over a 10-year span. This won’t apply to a surviving spouse, a minor beneficiary, or a disabled beneficiary. Instead, this will mostly impact adult beneficiaries who are inheriting a retirement account from their mom or dad. This bill also repeals the maximum age for contributions to traditional IRAs, raises the Required Beginning Date from 70.5 to 72, and adds exceptions for penalty-free withdrawals by an account owner.
It is the change to the required minimum distributions – changing from distributing these inherited retirement accounts over a beneficiary’s life expectancy to being required to be distributed over a 10-year span – that will impact client’s estate plans the most. Under the current rules, when a retirement account owner dies, non-spouse beneficiaries can “stretch” required minimum distributions (RMDs) over their individual life expectancies. The problem with naming a non-spouse-individual as a beneficiary of a retirement account is that the retirement account is not protected from the beneficiary’s creditors. (This was due to the U.S. Supreme Court’s decision in Clark v. Rameker in 2014. This means that if the beneficiary gets sued, goes bankrupt, or gets divorced, that inherited retirement account is not protected and can be lost to that creditor.
Because of this, many estate planning practitioners will designate a trust as a contingent beneficiary of a retirement account so that the retirement account assets will be protected from the beneficiary’s creditors. In doing so, we include “conduit” provisions in our clients’ trusts to ensure the trust will qualify as a designated beneficiary of a retirement account. When utilizing this strategy, RMDs are still passed through to the trust’s primary beneficiary using their life expectancy and taxed as income to that beneficiary. When a conduit trust is used, RMDs (the money that is actually distributed to the beneficiary) are subject to creditor claims, but the undistributed account balance is protected from creditors.
Under the SECURE Act, because we will no longer be able to use the life expectancies of the individual beneficiaries under the trusts to calculate the required minimum distributions, these retirement accounts will only have asset protection for the beneficiaries for a period of 10 years. After that, all of the money will be forced into the hands of the beneficiary. The Senate’s version (RESA) would allow the IRA to stretch distributions over the beneficiary’s life expectancy for up to $450,000 of the account, but any amount over that limit would need to be taken out within 5 years of the account owner’s death. For very wealthy individuals with large retirement accounts, this will result in a massive income tax burden, especially where the family only has one or two children who will bear the brunt of the income tax burden.
What Can Clients Do to Minimize the Impact of the SECURE Act?
Because we don’t know what the final version of the Act will look like and what provisions will be made into law, it is difficult at this point to strategize solutions for clients. Some options being suggested include a shift towards life insurance as a wealth transfer vehicle, using Roth conversions, and for the charitably inclined individual, using Charitable Remainder Trusts to offset this income tax nightmare.
We will be analyzing the changes to the law to determine the best planning strategies moving forward. Our firm is a member of Wealth Counsel – an organization of more than 3,500 estate planning attorneys across the United States. As such, we will have access to the best strategies out there for clients who will be significantly impacted by this legislation.
Future Updates on the SECURE Act
If anyone is interested in reading the text of the legislation, or if you simply need help sleeping at night, click here for the text of H.R. 1994: https://www.congress.gov/bill/116th-congress/house-bill/1994/text
We will be tracking this legislation closely and will provide our clients with an update as to the effects on their plan once the picture has become clearer. This shift in the law is just another example of the importance of working with an estate planning attorney who focuses solely on this area of the law. Contact us today if you would like to discuss how these potential changes in the law will affect your estate plan.
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Zach Wiegand is a Minnesota probate attorney and estate planning attorney and the owner of Gold Leaf Estate Planning, LLC. Gold Leaf Estate Planning is an estate planning law firm that also handles probate and trust administration in Minnesota. We serve the Twin Cities metropolitan area with a focus on estate planning for clients in Burnsville, Eagan, Savage, Prior Lake, Lakeville, Apple Valley, Eden Prairie and the South Metro as well as clients in Woodbury, Lake Elmo, Maplewood, Oakdale, St. Paul and the East Metro. Our firm has offices in both Burnsville and Woodbury (Lake Elmo). The firm also handles probate in Dakota County, Washington County, Scott County, Hennepin County, and Ramsey County and most other counties in the Twin Cities Metro area. Zach has been named a Minnesota Super Lawyer – Rising Star for 2017, 2018, and 2019, and he is a member of WealthCounsel – a national organization of estate planning attorneys dedicated to practice excellence. You can contact Zach via e-mail at firstname.lastname@example.org or by calling (952) 658-6503. Gold Leaf Estate Planning is located in Burnsville at 3000 County Road 42 W., Suite 310, Burnsville, MN 55337 and in Woodbury/Lake Elmo at 8653 Eagle Point Boulevard, Lake Elmo, MN 55042.