If you have kept up with current events, you know that January 1st marked a significant change to retirement accounts. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which became effective January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of your retirement accounts: The SECURE Act requires most non-spouse beneficiaries to withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death, rather than over their own life-expectancy. The major impact, of course is the acceleration of the income tax due on any inherited accounts. This is a win for Uncle Sam, as the government will receive the income tax on the retirement account faster; however, because of the acceleration, non-spouse beneficiaries will end up with less of the value than anticipated.
If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill these charitable desires. Because charitable organizations do not feel the impact of the income tax problem, designating a charity as direct beneficiary of your qualified retirement accounts (rather than non-tax dollars) would be a tax efficient means to plan to provide for charities after your death.
Alternatively, a charitable remainder trust may provide a solution. Such a trust would allow you, the grantor, to retain or name beneficiaries to receive an annual income stream from the retirement account. At the end of the term, the remaining funds would go to a charity named in the trust agreement. When the trust is created, the net present value of the remainder interest must be at least 10 percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon the plan participant’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust. Depending on the value of the retirement account, the age of the trust beneficiaries, and the current tax rate, the deduction will likely cover a large portion of the retirement account.
There are still a lot of questions surrounding the SECURE Act and the extent of the impact on taxpayers. Proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances is imperative to ensure your estate planning goals are accomplished. Schedule an appointment today to meet with us for guidance on how the SECURE Act could impact your estate plan.