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The SECURE Act: How it Affects Estate Planning and What to Do

With the introduction of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in effect as of January 1, 2020, new and big changes have been made that affect one large aspect of retirement accounts: the payout process for beneficiaries. Previously, those who inherited someone’s retirement account were able to spread withdrawals from the account over the course of their lifetime. However, under the SECURE Act, beneficiaries are now required to withdraw all funds from an account within a 10 year period.

Essentially, this ten-year rule will raise the amount of income taxes that beneficiaries pay because of the faster rate of required withdrawals. With this new act in place, it’s important to review your retirement account and plan your estate accordingly.

 

There are, however, four categories of beneficiaries that the SECURE Act does not affect in this way:

  1. A surviving spouse
  2. A chronically ill or disabled beneficiary
  3. Any adolescent or young child
  4. Individuals less than ten years younger than the owner

 

A Spouse As a Beneficiary

Spouses will still be able to spread withdrawals from an account over the course of their lifetime. They will also be able to transfer funds from an inherited account into their own IRA. This is convenient because often estate plans are designated to an individual’s spouse as a beneficiary. Similarly, if the terms of a trust designate that an entire retirement accounts funds go to a spouse, withdrawals of those funds may still be taken out over the course of that spouses’ lifetime.

 

A Chronically Ill or Disabled Beneficiary

Chronically ill or disabled beneficiaries will also be able to stretch withdrawals from an inherited retirement account throughout their lifetime. The same specifications apply to trusts that designate an entire retirement account to go to that person.

 

Adolescent or Young Children as Beneficiaries

Beneficiaries under the age of 18 do not apply to the ten-year rules until they reach the age of 18. Therefore, there is no required amount that they must withdraw yearly until they are a legal adult. Once an adolescent or child reaches the age of 18, they will then be applicable to the ten-year rule and must withdraw all funds from an account within that time. The ten-year rule applies to any grandchild designated as a beneficiary.

 

Individuals Less Than Ten Years Younger Than the Account Owner

The requirement to withdraw all funds from an inherited retirement account within ten years does not apply to any beneficiary that is less than ten years younger than the benefactor. This means that any individual that this applies to will be able to stretch withdrawals from an account over the course of their lifetime as well.

 

What This Means For Estate Planning

It’s important to plan your estate carefully to ensure that those who will be inheriting an IRA know what their potential payout period will be. If any of the above positions apply to a beneficiary (besides an adolescent or child) they will have the ability to span withdrawals over the course of their lifetime. If none apply, they will have to plan withdrawals over the course of ten years. When planning your estate, knowing how the SECURE Act will or will not affect your chosen beneficiaries is an important thing to keep in mind.

 

Do you need help planning your estate in accordance with the SECURE Act? Get in contact with us today! Our attorneys live and practice in Ventura, Santa Barbara, and San Luis Obispo counties. We are a client business service and provide prompt and cost-efficient legal services with a specific expertise in estate planning.