How the SECURE Act Will Change How Retirement Accounts are Handled

The new SECURE Act will drastically change the way estate planning practitioners handle retirement accounts such as IRA’s and 401(k) plans.


On December 20, 2019, President Trump signed into law the SECURE Act, a new law that deals with the tax rules governing the distributions from and the contributions to retirement accounts.   The law went into effect on January 1, 2020.  The new law made some big changes.  Below is a list of some of the changes:


-the old law prohibited individuals from contributing to a traditional IRA after age 70 ½.  Now, individuals can make contributions even after turning 70 ½.


-the old law required for “Required Minimum Distributions” (RMD’s) to begin at age 70 ½.  Now, individuals can wait until age 72 to begin taking RMD’s


-the old law allowed certain beneficiaries to inherit retirement accounts and receive periodic distributions over the course of their life expectancy.  Now, most individuals who inherit a retirement account must receive all funds in the account within 10 years of the account holder’s death.


The new law makes some pretty drastic changes.  Perhaps the most drastic change for estate planning purposes is the third change noted above.  Because most individuals must now liquidate an inherited retirement account within 10 years of receiving it, there will be dramatically different tax consequences under the new law and the intent of the original account holder could be defeated if proper estate planning tools are not utilized.


For years, the IRS has recognized the estate planning techniques of “Accumulation Trusts” and “Conduit Trusts”.  These trusts essentially allowed an individual to name a Trust as the beneficiary of a retirement account once the account holder died.  Following the death of the account holder, the Trust, as beneficiary, would become the owner of the retirement account.  If an individual named an “Accumulation Trust” as the beneficiary of his/her retirement account, the trust could act as a vehicle to keep some of the funds in a retirement account in the trust and thus allow the funds to grow without being distributed.  These trusts were incredibly valuable tools to allow retirement accounts with large principals to grow and thus provide for multiple generations of the account holder’s family after his/her death.  These trusts were also valuable in that they provided large tax savings.


With the new law being passed, individuals who have “Accumulation Trusts” will need to reevaluate the estate plan they have in place.  A trust may no longer be the best beneficiary for a retirement account.  This is because, under the new law, the funds in a retirement account will need to be distributed within 10 years of the account holder’s death.  The tax bill will be larger and the account holder’s intent of keeping the money for future generations will not happen.


There are ways to address this such as using retirement account funds to purchase an annuity or life insurance.  The life insurance proceeds can then be distributed to a Trust once the account holder dies.  With life insurance and proper estate planning in place, the account holder’s intentions can still be realized for the most part.


As mentioned above, the new law makes many dramatic changes.  If you have a retirement account, whether or not you currently have estate planning in place, it would be wise to meet with your lawyer and financial planner to understand how you and your family will be affected by the new law.