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The Effect of SECURE Act 2.0 on Estate Planning

In 2019, Congress passed the original SECURE Act. The law fundamentally impacted estate planning by eliminating the “lifetime stretch” for most individual retirement account (IRA) beneficiaries. Previously, an IRA beneficiary could take distributions from an inherited IRA over their life expectancy.

The “lifetime stretch” permitted families to maintain the tax-deferred nature of the IRA and continue to accumulate assets. The SECURE Act limited the “lifetime stretch” to spouses, disabled or chronically ill individuals, minor children of the plan owner, and beneficiaries less than ten years younger than the plan owner. All other beneficiaries, including adult children and trusts, must apply a 10-year rule. Under this rule, the beneficiary must withdraw the entire value of the inherited retirement account within ten years.

In January 2023, Congress passed SECURE Act 2.0, modifying and clarifying the rules of the original SECURE Act. One clarification addressed how the distributions had to be made, were annual distributions required, or could the entire distribution occur in year 10? Under SECURE Act 2.0, Congress settled the question by stating that a beneficiary, as a minimum, must take the annual required minimum distribution each year and fully exhaust the account no later than year 10. In a rare acknowledgment of Congress’s opaqueness in the original rule, SECURE ACT 2.0 said no penalties would be imposed for failing to take the RMDs before the act’s passage.

What does this mean for your planning? Assuming you leave the IRA to a non-spouse, most beneficiaries will not be eligible to stretch the distributions. That removes the impetus to leave IRAs to your youngest beneficiaries when deciding which beneficiary should receive which asset. Previously, estate plans would often leave IRAs to grandchildren because of the rules for stretch distributions. At least for adult beneficiaries, this advantage is largely eliminated.

Similarly, under prior rules, trusts had a five-year exhaustion rule, so it was not recommended that IRAs be left to trusts but to individuals to take advantage of the stretch. Now trusts are under the same ten-year rule as individuals, so depending on the nature of your estate plan, it may no longer be disadvantageous to leave an IRA to a trust, at least from a distribution requirement. There likely remain tax considerations when determining whether to leave the IRA to an individual or trust.

Another big change by SECURE Act 2.0 concerns 529 Education Plans. Secure Act 2.0 provides a way to roll unused 529 funds into a Roth IRA beginning in 2024. The beneficiary of a 529 Plan can roll up to $35,000 from a 529 to a Roth IRA without the funds being subjected to the 10% penalty for withdrawals for non-educational expenses. There are limiting rules to prevent an individual from opening a 529 and immediately rolling the funds into a Roth IRA as a backdoor to bypassing the IRA contribution limits. The 529 account must have been open for at least 15 years before the rollover. The rollover funds are limited to the annual contribution amount ($6,500 for 2023), meaning it will take five years to move the maximum amount allowed from the 529 to the Roth IRA.

The SECURE Act also addressed issues with leaving a retirement account to a Supplemental Needs Trust. A disabled beneficiary is one of the beneficiaries entitled to take advantage of a “lifetime stretch.” Previously, if a charity was the remainder beneficiary of the Supplemental Needs Trust, the trust could not take advantage of the lifetime stretch. SECURE Act 2.0 now allows for a charitable remainder beneficiary without losing the stretch for the primary disabled beneficiary.

The SECURE Act and SECURE Act 2.0 significantly changed longstanding retirement and estate planning. It is advisable to speak with your estate planning attorney to discuss if these changes warrant updates to your estate plan.


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