Also Modifies IRA “Stretch” Rules and Creates New Estate Planning Challenges

By Mike Sitrick, DuPage Foundation

In December, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was among several pieces of legislation signed into law as part of a congressional appropriations bill. The Act seeks to improve our current retirement savings policy by implementing several new rules to encourage Americans to either begin saving for retirement or add to established plans. However, the Act has a number of implications of which investors, advisors, and charitable gift planners should be aware.

Key Implications of the SECURE Act:

  • Increases the age when IRA owners must take a Required Minimum Distribution (RMD) from their accounts from 70½ to 72. The age change applies to anyone who turns 70½ after January 1, 2020. Those who turned 70½ beforehand must continue under the old rules.
  • Removes the age limit for contributions to traditional IRAs so that people may continue to invest after 70½ and beyond. Note: There remains no age limit for Roth IRA contributions.
  • Keeps the age when Qualified Charitable Distributions (QCDs) are allowed at 70½. Account owners may still start to make QCDs from their IRAs directly to their favorite charities at age 70½ with a maximum limit of up to $100,000 per individual and $200,000 per married couple annually. QCDs are not deductible as charitable contributions but do create the tax benefit of lowering the donor’s adjusted gross income.
    Planning Tip: QCDs made by donors between the ages of 70½ and 72 now create a planning opportunity as these donors may make charitable distributions during that time to reduce IRA account balances and future taxable income. Gifts made after age 72 will do the same while also counting toward the fulfillment of donors’ Required Minimum Distribution (RMD) obligations. Note: QCDs may not be contributed to donor-advised funds or private foundations but can be made to qualified charities, religious organizations and many of the funds here at IPCF.
  • Eliminates the “stretch” provision for most “non-spouse” beneficiaries of inherited IRAs and other retirement accounts. Those who inherit retirement accounts in 2020 and beyond will now be subject to a new 10-year rule in which their entire inherited account must be distributed by the end of the 10th year following its inheritance (some exceptions apply). Note: This change in the law has significant implications for many people’s estate plans and for inherited IRAs owned by trusts. Consider reaching out to your estate planning attorney and other trusted advisors to determine how this change in the law has likely affected you and to identify any changes that may be necessary to your plans.
    Planning Tip: Individuals looking to mimic “stretch” IRA distributions throughout one or more beneficiaries’ lives, while receiving a charitable deduction on estate taxes, may consider naming a Charitable Remainder Trust (CRT) as a beneficiary on a retirement plan. Once established, a CRT can receive retirement plan assets (as well as other assets) at the IRA owner’s death. Following the donor’s death, the CRT will make annual distributions, based on a fixed percentage, to one or more named non-charitable beneficiaries throughout the beneficiaries’ lifetimes (or for a term not to exceed 20 years). Upon the death of the beneficiaries or completion of the payout term, any remaining CRT assets will be distributed to a named charity (such as Illinois Prairie Community Foundation). Due to their charitable nature, CRTs will not owe income tax on the distribution received from the donor’s retirement plan, nor will the CRT be taxed on income earned within the trust. This allows the distributed IRA assets contained in the CRT to continue to grow tax deferred beyond the SECURE Act’s 10-year mandatory distribution period. Trust beneficiaries will owe income tax on the annual distributions they receive from the CRT but their tax rate will be calculated based upon the character of the income earned rather than the entire distribution taxed as ordinary income under a non-CRT traditional IRA RMD.

For more information about the impact of the SECURE Act, contact your estate planning, financial and tax advisors. They can help you identify opportunities under the new Act and modifications that may be needed regarding your current strategies.

Charitable gifts of retirement assets during life and at death remain one of the most powerful and tax-wise strategies for supporting your favorite causes and charities. As you consider your goals for 2020, don’t hesitate to email or call us at 309-662-4477 to discuss your plans. We are happy to work with you and your team of advisors to help you craft a solution that’s right for you.