Naming Beneficiaries on Retirement Accounts Under the SECURE Act

Naming Beneficiaries on Retirement Accounts Under the SECURE Act
An interview with Katherine A. Southard, Esq.

On December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and then on December 29, 2022, the SECURE 2.0 Act (the Act) was signed into law, creating major changes for IRA Beneficiaries. More specifically, the SECURE Act changed the rules for required distributions from inherited IRAs and, in most cases for non-spouse beneficiaries, eliminating the ability to “stretch” the distributions over one’s life expectancy.

To help clarify how the passage of the SECURE Act has affected naming beneficiaries, we interviewed Katherine A. Southard, Esq. founder of Southard Estate Planning, a boutique law firm located in New York.

R.W Rogé & Company, Inc. (RWR): What are some considerations when naming beneficiaries of an account?
Katherine A. Southard, Esq. (KS): In many cases, naming specific individuals as your IRA beneficiary will be most suitable. But there are certain issues where it would not be advisable – like naming minor children or children with special needs.

RWR: How does the Act affect naming a non-spouse beneficiary?
KS: The Act does not have the same extensive impact as the original SECURE but does require most non-spouse beneficiaries who inherit retirement accounts on or after January 1, 2020, to withdraw the full balance within 10 years. If the decedent had begun their Required Minimum Distributions (RMD), the beneficiary is required to take an annual distribution with the remaining balance being fully distributed by the end of year 10. If a beneficiary fails to withdraw full amount within 10 years, the balance is subject to a 25% exercise tax (dropped from 50% under the original SECURE Act). The IRS has waived the penalty for missed 2021 and 2022 RMDs.

RWR: How does the Act affect Eligible Designated Beneficiaries (EBD) which is defined as a surviving spouse, a disabled individual, a chronically ill individual, a minor child under age 18, or an individual who is not more than ten years younger than the account owner?
KS: EDB’s are allowed to stretch out the distributions over their lifetime, instead of the 10-year term that would apply in most cases to non-spouse beneficiaries. Starting in 2024, an older surviving spouse can elect to be treated as the younger deceased spouse. This will allow RMDs to be delayed until the deceased spouse would have reached their age for mandatory distributions, which can be very valuable. Plus, if the surviving spouse dies before RMDs begin, the survivor’s beneficiaries will be treated as if they are beneficiaries of the deceased spouse. This can allow them to stretch distributions over their lifetime if they are EDB, instead of the 10-year term that would apply in most cases after the survivor’s death.

RWR: How does the Act impact naming a Trust as beneficiary of an IRA account?
KS: A lot depends on the type of trust; there are accumulation trusts and conduit trusts. The Secure 2.0 Act provides more flexibility in planning with trusts.

Accumulation Trust
An accumulation trust gives the Trustee the discretion to either pay out or to retain, in trust, any IRA distributions. Using an accumulation trust would give discretion to a qualified Trustee in determining whether to pay out or retain the distributions received from the IRA. As a result, this would allow the Trustee to safeguard the assets by leaving the IRA asset in trust as protection from creditors, beneficiaries that are too young or too immature to manage the assets, and can shield the assets from divorce, and/or generation skipping tax advantages. Keep in mind, the SECURE Act has declared age of majority is 21 years, regardless of state law. Also, an accumulation trust will likely result in additional income taxation, more commonly if the distributions from the IRA are retained in the trust and not distributed to the beneficiaries(y).

Conduit Trust
A conduit trust requires that all distributions from retirement accounts be paid out immediately to the beneficiary. If the trust is not set up as a see-through trust, it would trigger a five-year payout. A conduit trust will not protect the assets from creditors past the 10-year period. If you name your spouse as an EDB and your children as primary beneficiaries of the same qualifying, see-through trust, it could cause the need to distribute the qualified retirement plan assets in 10 years. This means you would lose out on the stretch and the ability to spread the income tax burden over a longer period of time at lower tax rates.

(RWR): Does this affect retirement plan account owners who have already named Trusts as beneficiaries?
(KS): Fortunately, most of the changes in SECURE 2.0 should have a minimal effect on current estate planning documents. The biggest change to be considered pertains to when the participant died after beginning their required minimum distributions. The payouts are required in each year of the 10-year term after the death of the decedent. Initially, it was believed that a beneficiary could defer the distribution during the term until the end of the 10-year rule. Consult with your estate planning attorney to determine whether you are required to take distributions from IRA assets held in the trust.

(RWR): Are there any other details about the SECURE Act, SECURE Act 2.0 – or estate planning in general – that investors should know?
(KS): The SECURE 2.0 Act created a significant benefit for unused funds in 529 plans. Beginning in 2024, unused funds in a 529 plan can be transferred to a Roth IRA via a direct trustee-to-trustee transfer in the name of the original 529 plan beneficiary. This opens the door to do much more with your loved one’s education savings than just paying for college.

Estate planning, in general, is extremely important. A well-drafted estate plan can protect your family, your assets, and your legacy. It’s also important to work with advisors and attorneys that are familiar with estate planning language, and it’s a good idea for them to all work together to provide you with the best possible service.

If you or someone you know would like to schedule a complimentary discovery call with our team of knowledgeable CERTIFIED FINANCIAL PLANNERS™ (CFP®), please contact us at 631.218.0077 or or click here. We would be happy to discuss how our process can help you Plan, Achieve, and Live® the life you want.

R.W. Rogé & Company, Inc. is an independent, fee-only financial planning and investment management firm serving clients locally and virtually across the country, with Long Island, New York, Beverly, Massachusetts, and Naples, Florida office locations. R.W. Rogé & Company, Inc. was founded on a “client first” culture and proudly commits to acting in your best interest as a fiduciary, since 1986. To learn more about how we do this, click here.

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