Time to Review Your Retirement Plan Beneficiary Designations! Considerations Post-SECURE Act

The SECURE Act became effective on January 1, 2020, and it has dramatically changed the landscape for retirement account estate planning by implementing new rules regarding the inheritance of retirement accounts by a deceased plan participant’s beneficiaries.

One of the biggest changes is the elimination of lifetime stretch rules.  Where previously designated beneficiaries were able to calculate the required minimum distributions (RMDs) from an inherited account using their own life expectancy — thereby “stretching” the withdrawals over his or her lifetime — the SECURE Act mandates that inherited retirement accounts be distributed in full within 10 years following the death of the plan participant unless the beneficiary falls into one of five categories:

  • Surviving spouse
  • Surviving minor children
  • Disabled beneficiaries
  • Chronically ill beneficiaries
  • Beneficiaries less than 10 years younger than the plan participant

Spouse as Beneficiary

A surviving spouse named as beneficiary of a retirement account is still entitled to stretch the required minimum distributions over his or her lifetime as well as roll over any inherited benefits into his or her own IRA.  In addition, when a trust created to benefit a spouse is named as beneficiary of a retirement plan, the required distributions may still be stretched over the spouse’s lifetime if the terms of the trust require that all required distributions go to the surviving spouse.

Children as Beneficiaries

With a few limited exceptions, children named as beneficiaries of retirement accounts will be subject to the accelerated 10-year payout of benefits.  This applies to adult children and to trusts set up for adult children.  If the beneficiaries are minor children or a trust for minor children, the 10-year accelerated payout will not begin until the child reaches the age of majority.  Grandchildren and other minors are immediately subject to the 10-year rule.

Trust as Beneficiary

Prior to implementation of the SECURE Act, lifetime stretch rules could apply to a trust as long as the trustee was required to distribute the RMD to the beneficiary of the trust annually.  This type of trust is known as a “conduit trust” and under the SECURE Act, conduit trusts are now subject to the 10-year distribution rule, which may lead to adverse income tax consequences.  In light of this change, planners may want to consider an accumulation trust.  Although an accumulation trust is also subject to the 10-year rule and trust payouts may be subject to a higher income tax rate, this type of trust allows the assets to remain in the trust and gives trustees discretion in making payouts to the beneficiary beyond the 10-year period.

Our attorneys at Hall Benefits Law are familiar with benefit plans of all kinds. We work with clients nationwide to set up and monitor benefit plans, make changes as necessary based on business realities and changing laws, and help handle problems when they occur. Reach out today to learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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