In the world of financial planning, advising clients about managing their retirement assets is a cornerstone of providing a comprehensive financial strategy. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act), passed in 2019, introduced sweeping changes to retirement legislation and has significantly impacted planning strategies, particularly around qualified retirement accounts and trusts. This article aims to outline key considerations financial advisors need to bear in mind when guiding clients in this new landscape.

Before diving into the details, let’s briefly revisit the salient provisions of the SECURE Act. The Act abolished the “stretch IRA” provision for most non-spouse beneficiaries, replacing it with a 10-year distribution rule for inherited IRAs and defined contribution plans. This has substantial tax implications for beneficiaries and alters the effectiveness of certain types of trusts in estate planning.

Trusts have traditionally been used as beneficiaries of retirement accounts to control post-death distributions, protect the assets from creditors, and manage tax efficiency. However, the SECURE Act's 10-year rule means that most non-spouse beneficiaries must withdraw all funds within a decade of the account holder’s death, potentially bumping the beneficiary into a higher tax bracket.

Here are some key points to discuss with your clients:

Understanding the Changes

It’s critical that clients comprehend the implications of the SECURE Act on their retirement and estate planning. It may be beneficial to revisit their current plan, especially if they have named a trust as the beneficiary of a retirement account.

Evaluating Trust Beneficiaries

The effectiveness of conduit and accumulation trusts, the two most common types of trusts used as IRA beneficiaries, has been significantly impacted. Conduit trusts, which previously provided stretched distributions over the beneficiary's life expectancy, are now limited to a 10-year term. Accumulation trusts, which allowed trustees to hold onto distributions, are also affected due to the accelerated distribution timetable. Advisors should assess whether maintaining these trusts still meets the client's needs and goals.

All GoGo Estate include conduit trust provisions. This means that if the trust is beneficiary to a qualified account, the trustee will be required to distribute the qualified funds within the 10-year limit imposed by the SECURE Act.

Considering other Trust Structures

Other types of trusts may become more appealing post-SECURE Act. For instance, Charitable Remainder Trusts (CRTs) provide income to beneficiaries over a specific period, after which the remainder goes to a charity. They offer tax benefits and could provide a stretch-like effect. Clients with significant retirement assets and charitable inclinations may find CRTs an appealing option.

At this time, GoGo Estate does not offer sophisticated trust planning. We anticipate providing more sophisticated planning in the future, so be sure to look out for updates from GoGo Estate.

Exploring Roth Conversions

The SECURE Act’s 10-year rule could mean a substantial tax bill for beneficiaries. To mitigate this, consider Roth conversions. Converting a traditional IRA to a Roth IRA allows the account holder to pay tax now at their current rate, so the beneficiaries can withdraw the funds tax-free. This strategy requires careful planning and modeling due to the tax implications for the account holder.

Life Insurance as an Alternative

Clients might consider using life insurance as an estate planning tool. By withdrawing funds from retirement accounts, paying the tax, and investing in a life insurance policy, they could potentially provide beneficiaries with a tax-free death benefit. Compare this strategy with other options to ensure it suits the client’s financial situation and goals.

Beneficiary Reviews and Updates

Encourage clients to review their beneficiary designations regularly. This is especially true if the designated beneficiaries are trusts. Advisors should ensure that beneficiary designations align with the client's estate planning goals and the post-SECURE Act landscape.

Conclusion

In conclusion, advising clients on qualified accounts and the use of trusts following the SECURE Act involves carefully navigating the changes and revisiting existing estate plans. The 10-year rule has significantly altered the landscape, and traditional approaches may no longer serve the best interests of the clients. Advisors need to stay informed about the evolving legislative landscape, work closely with estate planning professionals, and most importantly, maintain clear, open, and ongoing dialogue with their clients to ensure the financial plans align with their current needs and future goals.