Way back before the dawn of the coronavirus, when a change in the tax rules seemed like a consequential thing, Congress made a pretty significant change that few people saw coming and which upended decades of accepted wisdom on tax planning with retirement plan funds.

Passed in the waning days of December 2019, and effective as of January 1, 2020, the SECURE (Setting Every Community Up for Retirement Enhancement) Act made several changes to funding and withdrawals from retirement plans, including moving the requirement to start taking distributions to age 72 (from 70 and ½) and allowing withdrawals for certain purposes without penalty.  Most significantly for estate planning, the Act changed the long-standing rules on so-called required minimum distributions (RMDs) from retirement plans following the death of the participant.

For decedents dying before December 31, 2020, most non-spouse beneficiaries of retirement plans (which get rolled over to inherited IRAs) could stretch out the time over which they were required to withdraw funds to their actuarial life expectancy, thereby minimizing the taxable income that had to be realized from the inherited plan benefit in any given year and allowing tax-free growth in the interim.  The SECURE Act effectively said goodbye to all of that.

For most non-spouse beneficiaries, the new rules require that the balance of an inherited IRA must be withdrawn before the 10th year after the death of the account owner.  Withdrawals can be made in any amount over that time period but must all come out and be subject to income tax by the end of year 10.  The new rules do not alter the treatment of spousal beneficiaries and there are exceptions for some disabled, chronically ill, or minor beneficiaries. However for most beneficiaries, there is no longer an option to ‘stretch’ the IRA over time.

For clients, these changes may shift the calculus of how a retirement plan fits into the overall estate plan.  Most significantly, clients currently using trusts to receive plan benefits need to review their plans and possibly make changes to align the trust terms with the new rules.  The income tax consequence of the new rules may weigh in favor of naming plan beneficiaries with lower effective income tax rates and shifting other non-taxable assets to benefit heirs subject to higher rates.  Charitable planning with retirement plan assets may become even more attractive.

Whatever the outcome, it is as ever, crucial to discuss the disposition of these assets in the estate planning process.