SECURE Act Presents Hurdles for IRA Owners’ Estate Plans

By Stephen J. Silverberg
New York Elder Law Attorney

Passing the SECURE Act on December 19, 2019, has changed how retirement account distributions must be made. Congress’ timing made it impossible for professionals to comply with the new law before its effective date of January 1, 2020.

By passing the SECURE Act, the IRS changed the definition of a Designated Beneficiary for IRA and retirement plans. This is important as only Designated Beneficiaries, as defined by the IRC §409(a)(9), may stretch the payment of an IRA over their life expectancies.

Under the SECURE Act, the only Designated Beneficiary eligible for stretch IRA treatments are:
1. Surviving spouses;
2. Minors under the age of majority (but they must withdraw the entire balance within ten years after attaining the age of the beneficiary);
3. An individual who is less than ten years younger than the account holder;
4. Disabled beneficiaries; or
5. Chronically ill beneficiaries.

For the latter two categories, the original statute contradicted existing regulations and rulings.

A task force of the National Academy of Elder Law Attorneys (of which I was a member) prepared an issue brief for the Congressional Joint Commission on Taxation pointing out the problematic issues. I am glad to announce the Joint Committee found our issues valid and amended the law to allow those beneficiaries to stretch their benefits. Since the law is two days old, we are reviewing the statute to assure our issues were properly addressed.

Everyone else is no longer a Designated Beneficiary and must receive the entire account balance, including accrued interest, within ten years. Unlike the prior law, those beneficiaries have to take minimum distributions over the ten year period. The beneficiary can allow the account to accumulate income tax free if the account is distributed by the end of the ten-year period.

To make matters worse, every estate plan providing for stretch payments to those who are no longer Designated Beneficiaries are no longer valid and must be revised.

There may be other options available. Many reputable estate planners have been blanketing the internet with seminars on how to handle the new act. Personally, while I agree with many of their conclusions, it would appear that except for limited circumstances, taking immediate action may be counterproductive, until a careful analysis of the law is complete.

Many suggestions involve the purchase of life insurance using distributions from IRAs to pay the premiums. While this may be acceptable to many clients, some clients are averse to insurance or may be uninsurable. Other solutions offered are charitable remainder trusts. While they may be acceptable to some clients, the deferral is not as efficient as the deferral under the old rule, and the charity must receive at least 5% of their trust assets.

If the wrong option is selected, it may be impossible to correct.

If you have questions, please call the office at 516-307-1236.

About the Author
Stephen J. Silverberg is nationally recognized as a leader in the areas of estate planning, estate administration, asset preservation planning, and elder law. He is a past president of the prestigious National Academy of Elder Law Attorneys (NAELA), and a founding member and past president of the New York State chapter of NAELA.