Understanding the SECURE Act

The SECURE Act, signed into law at the end of December and effective Jan. 1, 2020, has sent estate planning attorneys, financial advisors, accountants and insurance professionals into a frenzy to figure out how the law will impact their clients’ retirement and estate plans. Most advisors agree that the increase in required minimum distribution (RMD) age from 70½ to 72 is a good thing, with the added bonus of eliminating the confusion around the half-year calculation. What is likely to impact the planning community significantly, however, is the elimination of the stretch IRA for almost all non-spouse beneficiaries.

The SECURE Act requires designated beneficiaries who are not eligible designated beneficiaries to withdraw all assets of an inherited account by Dec. 31 of the tenth year after the death of the plan owner. Before the SECURE Act, these beneficiaries were able to “stretch” distributions from inherited retirement accounts over their lifetimes. For many beneficiaries, this meant the distributions had less impact on their income for tax purposes, i.e., the distributions did not push the beneficiary into a higher – or at least a significantly higher – tax bracket. Now, beneficiaries are not required to take RMDs within the 10 years, but the entire balance must be distributed within that 10-year period. This change can be particularly problematic if the beneficiaries are in their 40s and 50s and at the peak of their earning years.

Brian Eagle and Carol Greer of Eagle & Fein, P.C. have been studying the potential ramifications of the SECURE Act.

“With the passage of the SECURE Act, many of our clients’ planning that included deferring taxes on retirement accounts is being disrupted. The income taxes for the next generation will be significantly accelerated when they inherit these accounts. For most, the post-death deferral will only last 10 years. This is one of the largest tax increases in a very long time,” said Eagle, J.D., managing attorney at Eagle & Fein, P.C. and longtime member of CICF’s Cornerstone Council. Eagle recently held a seminar for Indianapolis advisors looking to learn more about how the SECURE Act would impact their clients. One solution Eagle, Greer and others have identified is to make the beneficiary of the retirement account a charitable remainder unitrust (CRUT).

The CRUT makes payments for the surviving spouse and child(ren) for life or a term of years. The IRA goes to the CRUT tax-free, and the SECURE Act rules are avoided entirely. Then, over their lifetimes or term of years, the beneficiaries would receive income from the CRUT at a lower rate and without the 10-year deadline now imposed by the SECURE Act for most non-spouse beneficiaries. At the end of the beneficiaries’ lifetimes, the remaining balance is distributed to charity.

“We have been diligently analyzing this issue for our clients, and we are finding that by coordinating charitable planning with the retirement accounts’ beneficiaries, we can extend the deferral period, provide appropriately for their loved ones, and create a legacy at the same time. We are encouraged by the opportunity to demonstrate how considering a charitable remainder trust as the beneficiary of these tax-deferred retirement accounts will allow our clients’ families to direct the deferred taxes through philanthropy.  This is a win-win for clients that are even slightly charitably inclined,” said Greer, associate attorney at Eagle & Fein, P.C. and new Professional Advisor Leadership Council member at CICF.

CICF can help your clients navigating the new rules of the SECURE Act and looking for tax-smart solutions for their estate and financial planning. By naming a charitable fund at CICF the remainder beneficiary of a CRUT, the plan owner has maximum flexibility in creating a charitable legacy in addition to providing for his or her heirs. Any of CICF’s charitable fund types can be the remainder beneficiary of a CRUT:

  • Donor-Advised Fund: allows the plan owner’s grandchildren or other heirs to participate in his or her philanthropic legacy by working together to recommend grants to non-profits in the plan owner’s honor.
  • Donor-Designated Endowment Fund: allows the plan owner to designate one or more charitable organizations to be benefitted every year with distributions from the fund.
  • Donor Field-of-Interest Endowment Fund: allows the plan owner to designate an interest area to benefit. CICF’s expert staff then determines the best organizations in central Indiana doing work in that interest area each year and makes grants from the fund.
  • Scholarship Fund: allows the plan owner to provide for education expenses for students meeting criteria set by the plan owner.
  • CICF’s Unrestricted Endowment Funds: allows the plan owner to ensure that their philanthropic assets will be used to address the greatest needs in Central Indiana from year to year.

Contact us today to learn more about how CICF can help your clients rethink their retirement planning in light of the SECURE Act and utilize a charitable remainder unitrust or other philanthropic vehicles in their tax-smart estate and financial planning.

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