Deja vu? No! It's SECURE Act #2.

How The Law Affects You and Your Retirement Beneficiaries

In a blog post last year, we shared about the SECURE Act and how that law changed the rules governing the inheritance of retirement accounts. Before the SECURE Act, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. However, under the SECURE Act, most beneficiaries are forced to empty out the retirement account by December 31 of the 10th anniversary of the retirement account holder’s death. In effect, the shorter 10-year time frame for taking distributions accelerates the income tax due, possibly bumping your beneficiaries into a higher income tax bracket and causing them to receive less of the funds in the retirement account than you may have originally anticipated.

 What does the implementation of the SECURE Act mean in an estate planning context?

It means that a conduit trust structure may not be the best choice of trust design any longer because your Trustee will be required to distribute the entire retirement account balance to most types of beneficiaries within 10 years of your death (which, as stated above, can create an income tax headache for your beneficiary). Instead, an accumulation trust, an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries, may be the better design. Conduit trusts were the more favored trust design pre-2020, so if your trust was created before 2020 and has not been amended or restated since then, you may want to review the design of your trust and the flow of income and principal to your beneficiaries. Here's an illustration of how the flow of income can be different between the two types of trusts:

So, what's all this about the SECURE Act, Round Two?

Presumably, Congress felt like anything worth doing once was worth doing twice, because on

December 29, 2022, the President signed the SECURE 2.0 Act. The SECURE 2.0 Act made

quite a few enhancements to clarify the original legislation. Most of the changes this second go-

round affects you—the retirement account owner—rather than your beneficiaries. Several of the

key enhancements are:

☑️ It raises the required beginning age for required minimum distributions (RMDs) from your individual retirement accounts to age 73 in 2023 and age 75 by 2033.

☑️ It decreases penalties for not taking RMDs to 25% of the RMD amount (down from 50%) with an opportunity to further reduce the penalty to 10% if certain actions are taken in a timely manner to correct the oversight.

☑️ It allows higher catch-up contributions for participants over 50 ($7,500 for both 2023 and 2024).

☑️ Employees will be automatically enrolled in 401(k) and 403(b) plans but may opt out within 90 days.

☑️ There is more flexibility in annuity payments paid from qualified retirement plans.

☑️ Early distributions are permitted for long-term care contracts without penalty.

☑️ Plan sponsors may match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective in 2024.

☑️ 529 plans maintained for at least 15 years may be rolled over into a Roth IRA with a $35,000 lifetime limit, effective in 2024.

SECURE 2.0 also allows exceptions to the 10% early distribution excise tax for certain situations

and events, such as:

• Qualified births and adoption expenses

• Terminally ill individuals

• Federally declared disasters

• Emergency personal expenses

• Domestic abuse victims

Review Intended Beneficiaries

With the changes to the laws pertaining to retirement accounts, now is a great time to review and

confirm your retirement account information. Whichever estate planning strategy is appropriate

for you, it is important that your beneficiary designation be filled out correctly. If your intention

is for the retirement account to go into a trust for a beneficiary, the trust must be properly named

as the primary beneficiary. You should also ensure you have named contingent beneficiaries.

If you have recently divorced or married, you need to verify that the appropriate changes are made to your current beneficiary designations. At your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.

If you are charitably inclined, now may be the perfect time to review your planning and possibly

use your retirement account to fulfill your charitable desires. You may choose to distribute your

entire retirement asset directly to a charity, knowing the organization will not have to pay tax on

the income from the plan.

One More Consideration

Following the recent changes imposed by the SECURE Act highlighted at the beginning of this

article, you may be concerned about the amount of money that will be available to your

beneficiaries following your death and the impact that the potential accelerated income tax may

have on that ultimate amount. Perhaps now is the time to explore different strategies with your

financial and tax advisors to infuse your estate with additional cash upon your death (psst…life

insurance may be a great solution).

These two new laws are changing the way Americans think about retirement accounts and their use as a wealth-transfer vehicle. We are here and are prepared to help you properly plan for your family and protect your hard-earned retirement accounts. Give us a call today to schedule an appointment in the new year to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act and SECURE 2.0 Act.

Phone: (919) 678-5761 Email: admin@leavealegacync.com