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worse, every estate plan providing for stretch payments to those who are no longer Designated Beneficiaries are no longer valid and must be revised.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

While most of Washington is otherwise occupied, seven Republican Senators sent a letter to Senate Majority Leader Mitch McConnell, urging prompt passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement).

The SECURE Act passed the House of Representatives with strong bipartisan support in May by a vote of 417 to 3. The Senate was poised to pass it before Memorial Day by unanimous consent. However, at the last-minute, Ted Cruz voiced his objections, and the bill has been languishing ever since.

The letter portrays the SECURE Act as a lot of sunshine and happy news for the middle-class, the reality is much different. It contains seismic changes to IRA distribution rules in effect for over 40 years. It also permits sponsors of 401(k) plans to expand the use of annuities to provide benefits under the plan and repeals the onerous Kiddie Tax provisions, which subjected the children of soldiers killed in action to confiscatory income tax rates.

To summarize, the major provisions of the SECURE Act include:

1. Sets age 72 as the required beginning date for distributions from an IRA;
2. Requires beneficiaries of IRAs (other than surviving spouses, children under twenty-one, disabled beneficiaries, and chronically ill beneficiaries) to withdraw the entire balance of the account within ten years. Previously, the beneficiary of an IRA could stretch the payment of the IRA over their life expectancy;

It is believed the primary motivation eliminating the ability to stretch IRA payments is to speed up the payment of income tax on the distributions. While this may be true in the short run, eventually, it appears to be counterproductive. Under the current law, a forty-year-old beneficiary can withdraw the account balance over the remaining life expectancy of 43.6 years. The SECURE Act requires complete distribution within ten years;

Using the above example, upon the death of the parent, the forty-year-old child is the beneficiary of the $500,000 IRA. Using the current rules, the child would receive over $3.42 million while paying income taxes of over $1.37 million. Under the SECURE Act, if the child waits ten years to withdraw the entire balance, they would receive $983,000 and owe $393,000 in income tax. It appears they are mortgaging the future to increase revenue now;

1. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the Kiddie Tax income tax rates to the same rates applied to trusts and estates. Gold Star children receiving benefits are subject to a federal income tax rate of 39.5% on income over $12,000. An adult taxpayer does not reach this level until the income exceeds $625,000.

The SECURE Act attempts to remedy the situation by repealing the increased Kiddie Tax rates enacted by the TCJA by repealing them. However, just like the TCJA, which is poorly drafted and contains many unintended consequences, the outright repeal may adversely affect Qualified Disability Trusts for children with special needs. The Senate passed a fix much simpler and has no unintended consequences;

1. It makes it easier for plan sponsors to use commercial annuities to provide benefits in 401(k) plans. However, the Act relieves the plan sponsor from any liability if the annuity provider they select goes under, even if the plan sponsor did no due diligence, or was even negligent in selecting the annuity provider. Benefits in 401(k) plans have federal protection if a catastrophic illness occurs. Unless structured properly, the prospective annuities under the SECURE Act lose this protection and subject to a complete spend-down before any benefits are available;
2. unless the regulations regarding distributions from IRAs It makes, there is an adverse effect on distributions to disabled beneficiaries, and those with chronic illnesses.

Since May, the SECURE Act has hovered over planners like the Sword of Damocles. Since 2001 estate planning has been a moving target. The estate tax exemption amount changed continually until 2010 when the repeal of the estate tax went into effect. In 2011 the estate tax was re-instituted retroactively until 2017 when Congress doubled the estate and gift tax exemptions. However, this increased estate tax exemption must be passed by Congress again in 2026 or will revert to the pre-2018 level. Factor in the upcoming 2020 election and even more uncertainty lurks. If the election results in the Democrats gaining control of the government, there will likely be cuts in the estate and gift tax exemptions.

The specter of the SECURE Act Practitioners handcuffs practitioners like me. We are now ten weeks away from year-end, a time when we typically meet with clients about a year and planning. If Congress intends to pass the SECURE Act, let it do it now, so at least we know what to tell our clients. Doing nothing will delay my ability to provide my clients with accurate planning advice (to the extent I can due to the fluctuating tax laws).

The letter (a copy of which follows) sent to The Honorable Mitch McConnell, Majority Leader of the United States Senate was signed by:

• Tim Scott –(R) South Carolina
• Rob Portman (R) Ohio
• Thom Tillis (R) North Carolina
• Joni K. Ernst (R) Iowa
• Martha McSally (R) Arizona
• Susan M. Collins (R) Maine
• Cory Gardner (R) Colorado