New Year – New Resolutions – New Tax Law Changes

January 2020

We all make New Year’s resolutions related to various aspects of our lives on an annual basis. This year, we suggest your New Year’s resolution involves checking beneficiary designations on all accounts, but most importantly your retirement accounts. Why is this more important in 2020 than in previous years? The SECURE Act was signed into law on December 20, 2019, and the rules controlling inherited retirement accounts changed drastically as the ball dropped and we welcomed 2020.

What is the SECURE Act and what does it do? Also referred to as Setting Every Community Up For Retirement Enhancement Act of 2019, the new law is intended to enhance opportunities for retirement planning. However, the SECURE Act will also create estimated billions in tax revenue over the next 10 years, and it is this change that can impact your estate planning.

What does this mean for you and your estate plan? Distributions of retirement benefits with respect to individuals who die after December 31, 2019, now require that all designated beneficiaries, other than “eligible designated beneficiaries” receive a full payout of the deceased individual’s retirement plan by the end of the tenth year following the account holder’s death (“10 year rule”).

The five classes of eligible designated beneficiaries, who may not be subject to the 10-year rule include:

  1. the surviving spouse of the decedent;
  2. a child of the decedent who has not reached the age of majority;
  3. a disabled individual;
  4. a chronically ill individual; and
  5. an individual who is not more than 10 years younger than the decedent.

This is a significant change in U.S. tax law as it removes the ability for a younger beneficiary to “stretch” the retirement account distributions over their lifetime while deferring the tax associated with such distributions. Instead, all distributions for those who are not eligible designated beneficiaries MUST be completely withdrawn by the end of the tenth year following the death of the account owner.

What does this mean for you? You need to check your beneficiary designations and review your estate plan. If you have questions about the SECURE Act or how it may impact your legacy planning, please contact a member of the FMJ Trusts & Estates practice group at (952) 995-9500 or by emailing estateplanning@fmjlaw.com.

FMJ’s Trusts & Estates group consists of David Ness (Shareholder), Karen Schlotthauer (Senior Counsel), Matthew Jensen (Associate), and Nicole Flaherty (Associate).