Secure Act 2.0
On December 29, 2022, President Joe Biden signed a new omnibus spending package into law. The signed bill is over 4,000 pages long and covers $1.7 trillion worth of government spending. One of the most important parts of this bill (making up some 400 pages of the legislation!) is the SECURE 2.0 Act of 2022. This “new” SECURE Act represents the next phase of the American retirement system, and it provides a number of technical updates and clarifications to the original SECURE Act that passed in 2019. Much of these updates are viewed positively, but what does this act mean for your estate plan?
How does the Secure Act Affect my Estate Plan?
The SECURE 2.0 Act itself carries forward the “10-year Rule” under which most non-spouse beneficiaries of retirement accounts must distribute the funds in an inherited retirement account within ten years of the decedent’s passing. This rule effectively eliminated the “stretch” IRA for most beneficiaries, though, certain beneficiaries called “eligible designated beneficiaries,” can still use some version of the stretch. The currently recognized EDBs include:
- a surviving spouse of a decedent,
- minor children of the decedent, and
- individuals who are disabled or chronically ill.
As planners, we often combine these exceptions to the 10-year rule with trust-based estate planning. In order for a trust to qualify for either the 10-year rule or the longer “stretch” allowed for EDBs, the trust must be drafted as a “see-through” trust. Failing to do so means that the retirement proceeds that are intended to be paid-out according to the 10-year rule or a stretch, must instead be paid-out within five years, a much less favorable tax position for the beneficiary or trust.
The original SECURE Act’s 10-year rule was ambiguous and did not clarify whether a beneficiary subject to the 10-year rule was required to take distributions over the course of the ten-year period, of if they could wait to fully distribute the account at the ten-year deadline (allowing for ten years of tax-deferred growth). The SECURE 2.0 Act doesn’t directly address this question either but does pave the way for the IRS’s proposed regulations on this question to take effect.
The IRS’s current position on the 10-year rule is complicated and sets forth a hybrid approach: If an account holder died before the account holder was required to start taking required minimum distributions (RMDs), then a ten-year beneficiary can wait until the end of the tenth year after the account holder’s death before taking any distributions. If, however, an account holder died after they were required to start taking RMDs, then a ten-year beneficiary must follow two rules: (1) during the nine years after the account holder’s death, the beneficiary must take distributions based on their life expectancy, and (2) by the end of year ten, the beneficiary must distribute the remaining balance of the account.
Overall, these proposed regulations that are likely being ushered-in by SECURE 2.0 mean that it’s time to review how your retirement accounts fit within your estate plan – your choice of plan beneficiary matters now more than ever. Contact NC Planning to discuss how the Secure Act 2.0 may impact your estate plan and your family.