August 2020
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC 

Congress passed a new law in December of 2019 that became effective January of 2020. The new law is titled “Setting Every Community Up for Retirement Enhancement Act” (SECURE). We will cover a few of the provisions from this new law in this article which will have some impact on many of our clients.

Just after the new act became effective in January, Covid-19 hit the U.S. Since February, the coronavirus has dominated our thinking.

I recommend you review the primary beneficiary and contingent beneficiaries of every individual retirement account (IRA), Roth account, and other retirement accounts.

The SECURE Act forces all of us to review these retirement accounts and the beneficiaries that we chose years ago. I have included some examples of different retirement accounts that are outlined below.

The “Stretch” provisions have been eliminated in your retirement accounts for certain beneficiaries. Under the old Stretch rules you could leave your retirement account to your children and they could take some income each year for their expected lifetime.

The new SECURE Act requires that most children and grandchildren take all of the account value as taxable income within a 10 year period.

There are five types of beneficiaries that continue to get the longer lifetime Stretch payout option. These five beneficiaries are called “Eligible Designated Beneficiaries” (EDB’s):

  1. The surviving spouse.
  2. A minor child under the age of majority. When they reach 18 or 21, the 10-year rule starts.
  3. A disabled person.
  4. A chronically ill person who is certified to have an indefinite illness that is expected to be lengthy in nature.
  5. A beneficiary who is not more than 10 years younger than the account participant.

This list covers a lot of people, but there are challenges that we all need to think about.

The following are four problems that may affect your family:

  1. If your children are the beneficiaries, are they in a high or low income tax bracket? If they retire in five years, after you are deceased, they may want to wait to take the payments over years six through 10.
  2. Inherited Roth accounts are also subject to the new 10 year payout rule. Would it help your heirs if you convert your traditional IRA to a Roth during your lifetime? Would you rather pay the income tax for the conversion now based on your tax bracket, or let the retirement funds be paid to your child or children if they are possibly in lower tax brackets?
  3. It may be a good idea to leave your IRA accounts to beneficiaries in a low tax bracket and leave personal appreciated assets (“i.e. – appreciated stocks or real estate”) to higher income heirs.
  4. Your trust documents may need some new wording. The SECURE Act focuses on the language in your trust document. Is it considered a “Conduit Trust” or is it considered an “Accumulation Trust”? You should talk with your estate attorney or call us to review your documents.

Conduit Trusts
Conduit Trusts could be a problem. For these trusts all distributions that come from the retirement accounts to the trust must be passed through to the designated beneficiary. Now under the SECURE Act a retirement account must be paid out within 10 years. The retirement account will not last for the beneficiary’s lifetime.

Accumulation Trusts
Accumulation trusts allow the trustee to accumulate retirement account distributions in the trust for the lifetime for one or more beneficiaries. It will no longer be necessary to determine the age of the oldest beneficiary of a See-Through Accumulation Trust because the payout is now no more than 10 years, and not the life expectancy of the beneficiary.

Remember that a trust which has taxable income of $12,500 per year or more will be in the maximum tax bracket of 37%. Most beneficiaries would be in a lower tax bracket.

New Ideas to Consider

  1. Name several beneficiaries for your retirement account. If income is divided over two or more individuals rather than one beneficiary the taxes paid may be less.
  2. An old idea that is getting a lot of attention is a “Charitable Remainder Trust” (CRT). If an IRA, Roth, or other retirement account is left to children or grandchildren then the payout will most likely be a maximum of 10 years. If the retirement assets are left to a CRT the payments can be stretched for the lifetime of the beneficiary or up to 20 year certain.

When the beneficiaries are deceased the assets in the CRT will ultimately go to one or more charities, but this is a way to stretch the annual payments over more than 10 years.

All of you have worked hard during your careers to accumulate assets in your retirement accounts. I am sure that you want your chosen beneficiaries to get the maximum benefit. Because of the rules in the new SECURE Act you need to talk with your advisors about the names that you have chosen, possibly years ago, for your primary beneficiary and your contingent beneficiary.

If we can be of help in reviewing any of these ideas, please call us at 317.849.9559. We would be happy to assist you.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .