Major changes to the United States retirement system come into effect in 2020. A shift in the way inheritances and retirement accounts are treated for tax purposes could compel family offices and wealth planners to shake up their estate plans.
The Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE Act, is part of the Trump administration’s efforts to revamp the country’s retirement system. Eliminating the age restriction on traditional individual retirement account (IRA) contributions is a key provision of the new act, according to Market Watch.
“The SECURE Act has a robust new set of rules that will hugely benefit this country’s workforce,” said retirement planning expert Richard Rausser, Senior Vice President of Pentegra, in a press release. “It was long overdue that the government recognize that the average life expectancy of Americans has been increasing along with people’s willingness and ability to work longer.”
The act also makes it easier for small businesses to provide their employees retirement solutions, according to op-ed by Steve Bulger, the U.S. Small Business Administration’s Atlantic regional administrator.
However, the act could potentially increase the tax burden for wealthy retirees and family offices that have included provisions to transfer retirement accounts to their heirs in their estate plans. The Secure Act requires most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. “This is a big anti-taxpayer change for financially comfortable folks,” according to Market Watch.
Before the act passed, inheritors could gradually drain the IRA over several years to extend their tax benefits, a strategy that is widely known as the ‘Stretch IRA’. With the 10-year rule now in effect, this strategy is no longer viable for families with substantial wealth in their retirement accounts.
The rule also impacts family offices that have set up a “conduit” or “pass-through” trust as the beneficiary of retirement accounts. If the legal language of a trust is based on the Stretch IRA strategy, it could complicate the tax burden for the beneficiary, according to Jamie Hopkins, director of retirement research at Carson Group and a finance professor of practice at Creighton University’s Heider College of Business. “This is nothing short of a disaster for trust planning,” Hopkins says in an article published on Kiplinger.
Hopkins recommends a thorough review of the family trust and estate plan to mitigate the impact of the new SECURE act.
This article originally appeared on Markets Currents Wealth Management.
