SECURE Act and Your Estate Plan: 4 Steps to Take Now

Filbrandt & Company Reports
Volume 20, Issue 8

Executive Summary:

In this Market Update, you will learn:

  • How the SECURE Act may impact your estate plan
  • Why beneficiary designations are more important than ever
  • Steps you can take to minimize the impact to your plan
  • Simple strategies to consider to meet your goals

One of the most unaddressed and misunderstood areas we see working with university professionals is in the area of estate planning.  The SECURE Act adds another layer to the puzzle and will have a significant impact on individuals who have large balances in pre-tax accounts.  Did you know that a $1,000,000 pre-tax account left to a trust that does not contain the appropriate language could incur $368,337 in federal income taxes alone at today’s trust income tax rates?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019; it was the most substantial and far-reaching legislation affecting retirement planning in a very long time.  Much has been written on the topic, and it will impact nearly everyone, but its impact will vary depending on individual circumstances.  University professionals have a unique financial profile which often includes significant pre-tax retirement assets as a percentage of overall net worth.  It's important to understand how the SECURE Act will impact you and your estate plan.

The First Step - Determine How The Act Will Impact Your Financial Goals

To understand how the Act will impact your goals, you must first have a solid understanding of your goals.  For many individuals, this involves living a comfortable retirement, leaving money to heirs, and supporting charitable causes.  This is a good start, but now more than ever, a closer look at these general goals is needed.  Who do you want to leave money to, how much, and when?  Will there be beneficiaries other than a spouse?  Are any of them minors?  If you have charitable goals, do you want to bestow substantial gifts during your lifetime or upon your death?  The answers to these questions will be important as you work through the other action items.

The Second Step - Review Your Beneficiary Designations

For many financial assets (ex. retirement accounts, life insurance, bank and investment accounts), beneficiaries are identified when accounts are established and have not been reviewed since.  It has always been important to review these periodically.  Life events such as marriage, new children/grandchildren, divorce, or death of a beneficiary may necessitate a change.  A change in your goals or a significant shift in your financial situation may also warrant an update.  

The SECURE Act introduces a new reason to review your beneficiaries.  Under the Act, not all beneficiaries are treated equally from a tax perspective.  In the past, beneficiaries of retirement assets could "stretch" the distributions (and the income tax due) over their lifetimes.  This remains true for eligible designated beneficiaries - surviving spouse, certain disabled or chronically ill beneficiaries (as defined by the Internal Revenue Code), and individuals who are not more than 10 years younger than the decedent.  For other beneficiaries, including children, grandchildren, and trusts, the Act will have a significant impact on when those distributions occur and when the resulting income tax will be due.
Individual beneficiaries who do not qualify as eligible designated beneficiaries will have ten years to fully distribute the assets (and pay taxes).  With no required minimum distributions until the tenth year, there is greater flexibility for the beneficiary to determine how much and when to take distributions.  However, it accelerates taxes that would have previously been able to be deferred over a longer time period.
What happens if a trust is the beneficiary of a retirement or pre-tax account like an Individual Retirement Account (IRA)?  It depends on the type of trust, is it a conduit or accumulation trust?  And the language in the trust, does it allow discretionary payments to beneficiaries or does it restrict payments to only required minimum distributions?  If you have a trust named as a beneficiary of a retirement or pre-tax account, it will be important to understand how your trust will work under the new legislation to ensure your trust continues to meet your goals.  This may necessitate a meeting with your financial advisor and/or attorney.

The Third Step - Review Your Gifting Strategy

Whether you want to pass assets to heirs or to a favorite charity, the mechanism and timing of those gifts can make a big difference.  The SECURE Act preserved the ability to make Qualified Charitable Distributions (QCDs) from IRAs.  This tool allows an IRA owner who is over the age of 70 1/2 to make gifts to qualified charities of up to $100,000 each year, exempt from income taxes.  This is an especially powerful tool under the existing tax law, because it allows individuals to make large charitable gifts in a tax-efficient manner while preserving after-tax assets that can be transferred to heirs.  Naming a charity as the beneficiary of pre-tax accounts is another tax-efficient option.

Charitable Remainder Trusts (CRTs) are another good option for charitably-minded individuals.  A CRT allows a donor to generate an income stream for a non-charitable beneficiary with the remainder passing to one or more charities.  This tool has been receiving a lot of attention since the passing of the SECURE Act because, if funded with pre-tax dollars, it provides a way to stretch out the distributions, and the associated income tax, over a lifetime rather than being forced to withdrawal everything within at 10-year window while also accomplishing a charitable goal.

The Fourth Step - Develop A Coordinated Plan Around Your Beneficiaries

Begin with a balance sheet of your current finances.  List all the assets you own (home, insurance, investment/retirement/bank accounts, CDs, real estate), how they are titled (individually, jointly, in trust), the dollar value, and the primary/contingent beneficiaries.   It would also be important to note whether or not the asset is a pre-tax asset like a traditional IRA or retirement account.   

It is important not to let taxation drive a financial plan, but it is prudent to consider the most tax efficient way to accomplish your goals.  There are some simple strategies to consider as you build your plan.  For example, leaving pre-tax assets to a surviving spouse who can stretch the distributions (and related income taxes) over their lifetime may be more efficient than leaving those same assets to an adult child who would have just ten years to take the distributions.   As mentioned above, funding charitable goals with pre-tax assets when possible is worth considering given the higher standard deduction, increased limitations of itemized deductions, and the new rules imposed by the SECURE Act.  If your plan involves leaving assets in a trust for your beneficiaries, it may make sense to fund the trust with after-tax assets to the extent possible. 
Using your goals, the asset list you assembled, and considering the strategies discussed, are there updates that should be made to more efficiently align your current plan with your goals?

Plan for Your Future

While reading this report, you may have had an “a-ha” moment — realizing the SECURE Act could adversely impact your estate plan.  To ensure you are updating your estate plan correctly, and to identify and review your unique situation as it relates to retirement, investment planning, and estate planning, please contact us.  Call us at 800-431-9740, or visit our website at and click the contact tab to schedule a no-obligation appointment to speak with one of Filbrandt & Company’s retirement planning specialists.

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