CORONAVIRUS UPDATE: What We Are Doing to Protect Our Clients

Part 1 – The Secure Act (the rules changed very recently for beneficiaries)

The Secure Act: Retirement Accounts and Your Estate Plan

Beginning on December 20, 2019, the Secure Act substantially changed the rules for designated beneficiaries of retirement plans, with wide raging implications for estate planning.

The old rule used to be that upon the death of a retirement account owner, the beneficiary of the plan would be able to take required minimum distributions based on that beneficiary’s life expectancy. This was beneficial especially for younger beneficiaries with long life expectancies who could “stretch” the payments over many years, allowing the assets to stay invested in the plan longer. It was also possible for beneficiaries to receive these stretch payments if a trust for their benefit was named as the beneficiary, as long as the trust qualified as a “see-through” trust. If no beneficiary was named, or if a non-see-through trust was named as beneficiary, the entire plan had to be distributed within 5 years of the date of death of the participant. Because many clients wish to leave their assets in trust for their children, much of the focus of estate planners up until this point had been drafting trusts so that they qualified as see-through trusts in order to avoid the 5-year rule.

The Secure Act drastically changed the estate planning landscape with regard to retirement accounts. The new rule is located in section § 401(a)(9)(H), and eliminates the “stretch” payout for all designated beneficiaries except for five categories (“eligible designated beneficiaries”):
• The surviving spouse of the participant
• A minor child of the participant (until that child reaches the age of majority)
• A disabled beneficiary
• A “Chronically ill” Individual
• An individual who is not more than 10 years younger than the participant

If your designated beneficiary is one of the above individuals, then that person is entitled to a stretch payout calculated over that beneficiary’s life expectancy. If the designated beneficiary is not an individual who qualifies as an “eligible designated beneficiary,” the beneficiary must withdraw all the benefits of the retirement plan within 10 years. The 5-year rule still applies if the designated beneficiary is the participant’s estate, a non see-through trust, or a charity.

The preceding is a very basic outline of the effects of the Secure Act on retirement benefits and designated beneficiaries. These changes have implications not only on how estate planners address retirement benefits going forward, but also for existing trusts which have been named as beneficiaries of retirement plans. These implications which will be addressed in future blog posts.

If you are interested in more information on how your retirement accounts interact with your estate plan, please do not hesitate to contact the lawyers at Chepenik Trushin LLP, who are experienced, ready, and willing to help – Bart Chepenik, (305) 613-3548, Brad Trushin, (305) 981-8889, we are available 24 / 7 to answer your inquiries.

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