The SECURE Act of 2019 and Your Estate Plan

In December 2019, then-President Trump signed into law the Setting Every Community Up for Retirement Enhance­ment (SECURE) Act—the first major retirement-related legislation passed since 2006. Indeed, the SECURE Act of 2019 contained many provisions that changed the way Americans plan for retirement. Yet some of the changes also affected the estate plans of affluent Americans.

More than two years later, SECURE Act 2.0 is making headway in Congress. Moreover, possible changes to the tax code are on the horizon. If you haven’t updated your estate plan recently, now may be a good time to revisit it and look for potential tax planning opportunities before it’s too late.

What Did the SECURE Act of 2019 Change?

The SECURE Act of 2019 made several notable changes to American retirement plans. For example, it increased the required minimum distribution (RMD) age from 70 ½ to 72. It also removed the contribution age limit for traditional IRAs.

Indeed, these changes have been beneficial for many retirees. However, one of the perceived drawbacks of the SECURE Act of 2019 was the elimination of the “stretch IRA” for non-spousal beneficiaries of inherited IRAs.

Prior to 2020, a beneficiary who inherited a traditional IRA could stretch RMDs over their lifetime. Under the SECURE Act, however, non-spousal beneficiaries (with certain exceptions) now have a 10-year window to draw down the entire account balance. Without proper planning, this change may result in meaningful tax consequences for non-eligible designated beneficiaries, especially those in high tax brackets.

Three Estate Planning Strategies to Consider in Light of the Secure Act of 2019

The removal of the stretch provision undid a valuable estate planning strategy for many American families with large IRAs. Fortunately, there are other strategies you can build into your estate plan in light of the SECURE Act of 2019. These strategies may help you preserve more of the wealth you plan to pass on to future generations.

#1: Roth Conversions

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA via what’s called a backdoor Roth or Roth conversion. With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate. Then, you can make withdrawals tax-free if you’re over age 59 ½ and satisfy the five-year rule.

In addition, Roth IRAs don’t have RMDs. That means you can let your funds grow tax-free until you need them or transfer them to a beneficiary. That said, inherited Roth IRAs do have RMDs. As such, a secondary step may be necessary to manage your beneficiaries’ taxable burden.

For example, you can create a trust for the benefit of your IRA beneficiary(ies). After converting your traditional IRA to a Roth, you’d name the trust as its beneficiary. You can then outline a distribution schedule so that upon your death, the trust beneficiary receives tax-free distributions per your wishes.

It’s important to note that Roth conversions can be complicated and don’t make sense for everyone. Be sure to consult a trusted advisor before taking advantage of this option.

#2: Charitable Remainder Unitrusts

Another option is to use a charitable remainder unitrust (CRUT) as an alternative to the stretch IRA. As opposed to a charitable remainder trust (CRT), a CRUT allows the owner to make additional contributions after the first year. Moreover, the CRUT beneficiary isn’t required to make withdrawals.

You can fund a CRUT all at once with your entire IRA distribution. Alternatively, you can fund it over several years. Your IRA distribution is considered taxable income. However, you can offset the tax consequences with the tax deduction you get from funding the trust.

The trust then pays income to your beneficiary(ies) over their lifetime or for a set period up to 20 years. While these payouts are considered taxable income, stretching them out over many years can make your beneficiary’s annual tax liability more manageable. At the end of the period, any remaining trust balance transfers to a qualifying charity of your choice.

Keep in mind that CRUTs can be complex to set up and maintain. In addition, the IRS has many rules regarding charitable remainder trusts that may not make them a viable estate planning strategy for some people. Be sure to consider the potential benefits and drawbacks before altering your estate plan.

#3: Life Insurance

Life insurance has traditionally been a useful estate planning tool for many families. At a very high level, you purchase a life insurance policy so that your beneficiaries can use the proceeds to cover the tax consequences of inheriting part or all of your estate.

However, life insurance may offer additional advantages following the SECURE Act of 2019. For instance, one helpful strategy may be using life insurance within a CRUT.

Payouts from a CRUT are subject to “tiering” for taxation purposes. If the assets in a CRUT generate ordinary income, capital gains, and tax-free income, the tiering rule defines how the beneficiary pays taxes on distributions.

If you fund a CRUT with an IRA and all of the assets are taxable, you can use the proceeds to buy a life insurance policy within the CRUT. First, you won’t pay any taxes on this conversion. Meanwhile, assets distributed to your beneficiary are also income tax-free.

The SECURE Act of 2019 Won’t Affect Everyone’s Estate Plans

The SECURE Act of 2019 indeed warrants a review of your estate plan. However, the new rules may not require you to make any changes. It’s important to consider your financial circumstances, your beneficiaries’ circumstances, and family dynamics as you develop and update your estate plan. Many of these strategies may ultimately be too complex for your needs.

In addition, a trusted financial advisor and estate planning attorney can help you develop a plan to efficiently transfer your assets. SageMint Wealth provides both financial planning and estate planning services for our clients. If you’d like to learn more about how we help our clients secure their legacy and provide for future generations, please get in touch. We’d love to hear from you.