Probate & Tax Section: SECURE 2.0 ACT Brings Additional Estate Planning Opportunities

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This Section additionally allows the surviving spouse to delay taking RMDs until the deceased spouse would have reached the age at which RMDs were required.3 For example, Frank (age 73) and Lisa (age 68) are married. If Lisa predeceased Frank, even though his age would require him to take RMDs, he could delay distributions from Lisa’s IRA for another 5 years. With more options for surviving spouses, attorneys should work with clients’ accountants and advisors before recommending a course of action during an estate administration.

CATCH-UP CONTRIBUTIONS LIMITS ARE INCREASED AND INDEXED FOR INFLATION4

One of the biggest benefits of a retirement plan is its tax deferred nature. However, Congress sets annual limits on the amount that individuals can contribute to their accounts. The “catch-up” contributions allow individuals, aged 50+, to save additional funds in order to better prepare for retirement.

Thankfully, SECURE 2.0 raised the maximum catch-up for most workplace plans to $7,500 and indexed the $1,000 increase for inflation. Beginning in 2025, most individuals aged 60-63 can contribute an additional $10,000 or 150% of the regular catch up amount, whichever is greater, and these dollar amounts are indexed for inflation. For workers earning more than $145,000, all catch-up contributions must be to after-tax accounts, like a Roth IRA, starting in 2024.5

Effect On Special Needs Trusts

Under the SECURE Act, the beloved stretch IRA became a thing of the past for many beneficiaries who were converted to the 10-year payout rule. Luckily, the Act preserved this option for eligible designated beneficiaries, including beneficiaries of Special Needs Trusts.

Generally, when naming a trust as a retirement asset beneficiary, the ability to stretch distributions relies on having only living persons as countable beneficiaries. Under the old rules, if a client wanted multiple beneficiaries for their retirement assets, they were restricted to an applicable multi-beneficiary trust (AMBT). An AMBT is an accumulation trust restricted for the use of multiple beneficiaries, whom one or more qualifies as a disabled or chronically ill person, as defined by Congress. Such trusts ensure that beneficiaries can maintain their eligibility in certain means-tested programs, such as SSI and Medicare. If a charity (which is not a living person) was named as one of the countable beneficiaries of the trust, the trust would not qualify for stretch distributions. SECURE 2.0 now permits a qualified charity to be named as a current or remainder beneficiary of the AMBT while still allowing stretch payments over the life expectancy of the disabled or chronically ill beneficiary—provided certain other requirements are met.6

Importantly, the charity must also be a qualified charity.7 This is different than charitable interests in a donor-advised fund. Donor Advised Funds are not qualified charities; naming one as a remainder beneficiary of AMBT would disqualify it for the stretch option. Improperly designed trusts would force complete trust distributions under the five-year rule.

The SECURE 2.0 Act fix only applies starting in 2023. It does not apply to cases where the owner of the retirement account died after the SECURE Act’s effective date and before the enactment of the SECURE 2.0 Act. The changes made by the SECURE 2.0 Act will benefit those who are charitably inclined, providing them with additional flexibility while preserving the tax savings for special needs beneficiaries of AMBTs.

Conclusion

SECURE 2.0 introduced many changes to the rules regarding retirement plans. Thankfully, now participants may save more and retain assets in their retirement accounts for a longer period, allowing for compound growth without income tax for a longer time. Additionally, penalties imposed on inadvertent mistakes are now more manageable. Attorneys now have more opportunities to work with their clients’ accountants and financial advisors to determine how these changes impact each unique situation.

1 SECURE 2.0 Act at Sec. 107.

2 Id. at Sec. 327.

3 Treasury Regulation 1.401(a)(9)-5, Q&A-5(a)(1)

4 SECURE 2.0 Act at Section 109.

5 Id. at Sec. 603

6 Id. at Sec. 337.

7 See, Internal Revenue Code (I.R.C.) § 408(d)(8)

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