Effect of the SECURE Act

In the final weeks of 2019, Congress and the President enacted a federal appropriations bill that includes changes to the federal tax code that may affect your qualified retirement plan (such as a 401(k)) or IRA (sometimes called "retirement assets" in this article).  Those changes, referred to as the "SECURE Act," may affect you during your lifetime, but may also affect the way in which those retirement assets may be distributed to your beneficiaries after your death.  The SECURE Act may impact the timing and amount of tax paid by those beneficiaries on distributions of the retirement assets, as well as your ability to protect the retirement assets from the beneficiaries' creditors, and ultimately may affect the value of those retirement assets in the hands of the beneficiaries.  

Most notably, the SECURE Act does the following: 

• Allows many individuals to wait until age 72 to begin taking distributions from qualified plans or IRAs (if they have not already started taking distributions) 

• Eliminates the age restriction on contributions to a traditional (non-Roth) IRA 

• In many cases, eliminates the ability to stretch distribution of retirement assets over the life expectancy of a designated beneficiary after the employee's death, requiring distribution within 10 years instead 

• Creates a dilemma for blended families by making it difficult to stretch the distribution of retirement assets over the life of a surviving spouse while still controlling how the retirement assets pass after the surviving spouse's death    

As is often the case when dealing with new laws, the details of these changes are complex and cannot fully be explained in a few bullet points.  This article summarizes key aspects of the SECURE Act that may affect you or your estate plan.  We hope you find it helpful in understanding the major changes enacted by this legislation, and how they might affect you.  However, given the significance of these changes, We strongly urge you to contact our office to arrange a time for  one of our attorneys to discuss this new law as it applies to your estate plan, so that we may take action to revise your estate plan as needed. 

Changes Affecting You During Life 

One component of the SECURE Act that will affect many people during their lives is a change in the age at which a person must begin taking distributions from a qualified plan or IRA.  Under the law prior to the SECURE Act, most people (with the exception of some who are not yet retired) were required to begin taking distributions from their qualified plans or traditional (non-Roth) IRAs by April 1 of the year following the one in which they reached age 70 ½.  Under the SECURE Act, the age is increased to 72 for those who were not yet required to take distributions under the old law.  In addition, the SECURE Act removes the age cap for funding traditional (non-Roth) IRAs, meaning that individuals over age 70 ½ are now eligible to make contributions to a traditional IRA. 

These changes involve additional detail and nuance beyond the brief summary provided above and may present an opportunity for some to take further advantage of the tax-deferred savings offered by qualified plans and traditional IRAs.  In some instances, they may even present additional opportunities for funding a Roth IRA.  Your accountant or financial advisor is likely in the best position to advise you as to whether and how you might benefit from these changes in the law.   

After Your Death 

Perhaps the most significant changes brought about by the SECURE Act, at least in terms of estate planning, relate to how your qualified plan or IRA is distributed and taxed after your death to avoid penalties.  You may recall discussing the goal of "stretching out" your retirement assets after death.  Under the law prior to January 1 of this year, it was possible to stretch the distribution of inherited qualified plan or IRA assets over the life expectancy of a beneficiary, if that beneficiary met the requirements of a "designated beneficiary" under the law.  This lifetime stretch-out offered potential advantages in terms of income tax free  growth of the retirement assets during the beneficiary's life, the cumulative amount of income tax paid on distributions from the retirement account, and protection of the retirement assets from the beneficiary's creditors, or even from a beneficiary who might not have the ability to handle significant amounts of money at one time.  The law also permitted these advantages for retirement assets left in trust, as long as the trust was structured to meet certain requirements. 

The SECURE Act has changed these rules, so that most designated beneficiaries will be required to receive the full amount of an inherited qualified plan or IRA within 10 years of the death of the person who funded the plan or IRA.  Certain designated beneficiaries, including your surviving spouse, your minor children (but not grandchildren), and beneficiaries who are disabled or chronically ill, are still permitted to take distributions over their expected lifetimes (though children who are minors at the time of inheritance must now take the full distribution within 10 years after reaching the legal age of adulthood).  However, if the retirement assets are left to those beneficiaries in trust, they may not qualify for the lifetime distribution, depending on the terms of the trust. 

The good news is that the SECURE Act does not change the method of designating a beneficiary or beneficiaries to receive inherited retirement assets.  If you have existing beneficiary designations in place, those designations are still valid.  What the SECURE Act does, however, is introduce a host of new considerations that we must take into account in structuring your estate plan to maximize the benefit of the retirement assets and best protect your beneficiaries.   

Unfortunately, Congress gave us very little warning that these changes were on the horizon.  Accordingly, estate plans that, through the end of 2019, offered a sound approach to planning for retirement assets, may no longer provide a good solution.  For example, some of our clients may have current plans in place that, at death, leave their retirement assets to a trust known as a "conduit trust."  Any retirement assets paid to a conduit trust will pass immediately from the trustee to the beneficiary.  Under the old law, that may have been a good solution in some situations, because the distributions would be stretched over the expected lifetime of the trust beneficiary.  However, under the SECURE Act, that same conduit trust may now require distribution of the retirement assets to the beneficiary within 10 years of the death of the plan participant or plan owner or when the minor child reaches adulthood.  Depending on the circumstances, other planning techniques may better serve the goals those plans are meant to achieve, given the new rules. 

Take Action 

If you have assets in a qualified plan or IRA, we recommend  you review your estate plan as soon as possible to ensure it disposes of those assets in the best possible manner, taking into account the SECURE Act changes.  We welcome the opportunity to discuss these changes with you, answer any questions you may have, and make recommendations specifically for you.  Please contact  our office so that we can help you decide upon and implement the best planning solutions to meet your needs and those of your family. 

Note:  The contents of this Memo are for informational purposes only and are not intended to constitute legal advice or form an attorney-client relationship.  For information and advice particular to your situation, please contact our office at (405) 359-0701 and arrange a meeting with your attorney. 

Preparing for Incapacity

Imagine driving home from a holiday party this season and the unexpected occurs – Santa’s sleigh crashes into your vehicle! Leftover pumpkin pie and dressing splatter all over the reindeer. Jingle bells, toys, and cookies are strewn across the street in a 30-yard radius. Santa and his crew speed away without a scratch to finish deliveries to all the good boys and girls across the world. You, however, are incapacitated and require an emergency trip to the hospital, where you experience loss of consciousness (with visions of sugar plums) until Valentine’s Day.

Even without reckless reindeer on the road, about 750 car wreck-related injuries occur over the holiday season in Oklahoma, according to the most recent Fact Sheet published by the Highway Safety Office of the Oklahoma Department of Public Safety. Because car accidents occur so commonly, they provide a perfect illustration for imagining how easily any of us could become incapacitated. Any one of us could experience an accident or an illness and become unable to manage our day-to-day affairs, like paying our bills or driving to our doctor’s appointments.

What can we do to prepare for a season of life where we simply cannot take care of ourselves? Such a season could affect our physical abilities, mental abilities, or both. It could involve temporary impairment for only a season or permanent incapacity for the rest of life. Incapacity could occur slowly and over a long period of time, or it could occur suddenly and unexpectedly. The legal definition of “incapacity” incorporates a broad spectrum of circumstances, including the following:

• impairment due to mental illness or disability;

• impairment due to physical illness or disability;

• impairment due to drug or alcohol dependency;

• the inability to meet essential requirements for health and safety; and/or

• the inability to manage financial resources

Preparing for a season of your own incapacity could provide a huge blessing to your family and others who depend on you. Here are some ways you can prepare for the possibility of incapacity:

1. Appoint a person who can act for you in legal and financial matters. This person, your “agent,” is appointed in your Durable Power of Attorney. In case you ever need a court-appointed guardian, you can utilize your Durable Power of Attorney to nominate the person you would want to serve as your guardian.

2. Appoint a person who can act for you in making health care decisions. This person, your “Health Care Agent,” is appointed in your Health Care Power of Attorney. He or she can be authorized to communicate with your doctors and medical caregivers about your care and make decisions on your behalf if you are unable to do so. In case you ever need a court-appointed guardian, you can utilize your Health Care Power of Attorney to nominate the person you would want to serve as your guardian.

3. Appoint a person who can make decisions about end-of-life matters. You should have an Advance Directive in place, to document your decisions about the type of care you would want to receive if you become incapacitated and experience an end-of-life condition, such as becoming persistently unconscious or terminally ill. An Advance Directive also allows you to appoint a person, your “Health Care Proxy” to make sure your wishes, as expressed in your Advance Directive, are carried out by your health care providers.

4. If you already have these important documents in place, make sure your family members know where these documents are located and how to use them. Make sure these documents are accessible to those who might need them. Also, if you have appointed one of your children before another to serve an important role in your care, please consider explaining your decision to your children while you have the capacity to do so in order to avoid potential family strife after you are no longer able to communicate your wishes.

5. Talk to your family members and/or close friends about what information they will need to know if you become unable to take care of yourself and/or unable to continue taking care of them. This information includes the name and contact information for advisors you trust to assist you and your family during a period of incapacity.

Estate Planning FAQs

What is the difference among a Personal Representative, Trustee, Agent, Guardian and Proxy?

The Personal Representative, also known as an Executor, settles your estate if a court-supervised probate is required. You can appoint your Personal Representative in your Will. 

The Trustee is the person or entity who manages assets owned by your trust and distributes the trust fund to the named beneficiaries according to the dispositive provisions of the trust. A husband and wife who create a trust often appoint themselves as the initial trustees and their children as their successor trustees. Instead of appointing their children as successor trustees, some clients opt to appoint an entity as their successor trustee, such as a trust company.  

An Agent is the person you appoint in your Power of Attorney document to make decisions on your behalf if you are incapacitated or otherwise cannot conduct your business. Through the Health Care Power of Attorney, our clients appoint an Agent to make decisions regarding medical and other personal care matters. Through the Durable Power of Attorney, our clients appoint an Agent to make decisions regarding legal, property, and financial matters.  If a third party requires court authorization, the Guardian is the person you nominate, or suggest, the court to appoint.  Most often, a client selects the same individual to be his or her Agent and Guardian. 

A Proxy is the individual you nominate under your Advance Directive to ensure your end-of-life decisions are fulfilled.  

What do I need to do if my spouse becomes incapacitated? 

If your spouse’s mental or physical condition is rapidly declining such that he or she is unable to make financial and medical decisions for himself or herself, you need to take steps to protect your spouse.  You may need to obtain letters from your spouse’s physicians to document the incapacity.  These letters accompanied by an affidavit will allow you to notify third parties that your spouse is no longer able to serve in a fiduciary role as agent or trustee.  Also, if your spouse has a power of attorney triggered upon his or her incapacity, you will need to present the physicians’ letters and the power of attorney to third parties in order to act as your spouse’s agent. If your spouse does not have a power of attorney document, it may be necessary for you to seek a court-appointed guardianship to care for your spouse. 

Our married clients commonly have estate plans in which each spouse is authorized to act for the other (as agent, trustee, and health care proxy) without having to document their spouse's incapacity.  Many single clients have similar delegations of fiduciary authority to other adults (children, parents, siblings, or trusted friends).  Planning for your incapacity, or for your assistance to loved ones who become incapacitated, is important and can be done in many creative ways to ensure a person's needs are met in the best way possible. 

What do I need to do when my spouse dies?

Every person's affairs are different as their life comes to an end.  Although a long list of detailed tasks could be compiled in advance, much of it would be unnecessarily confusing or inapplicable when the time comes for its use.  The best advice is two-fold.  First, consult with your attorney, accountant, doctor, and financial advisor to have good estate planning in place and keep it up to date with annual plan reviews.  Then, when a death occurs or seems imminent, convene a meeting of those advisors to confirm the planning in place and the appropriate actions to take after considering the circumstances at the time.  Each person has their own unique circumstances with a need for a unique plan, unique in both implementation and in execution.  Plan your work, then work your plan. 

Can I transfer real property to my trust if it is subject to a mortgage?  What if I need to refinance my home?

Federal law permits individuals to transfer their homestead property to a revocable trust for estate planning purposes without triggering the due-on-sale clause in a mortgage agreement.  This law only applies to your homestead property – it does not apply to rental properties or vacation homes. If you need to refinance your home, most likely the mortgage company will require you transfer the home out of your trust to yourself individually.  After you have refinanced, it is imperative for you to deed your home back into your trust to avoid probate and ensure your home passes according to the terms of your trust. You can transfer other real property subject to a mortgage to your revocable trust, but you will need to coordinate with the mortgage company to avoid triggering the due-on-sale clause.

What do I need to transfer to my trust?

In general, all assets requiring interaction with a third party in order to transfer the asset should be owned by your trust if you want the terms of the trust to govern the disposition of the asset upon your death or incapacity. You should consider transferring the following assets to your trust: real estate, automobiles, savings accounts, checking accounts, certificates of deposit, money market accounts, stocks, bonds, interests in general or limited partnerships, interests in limited liability companies, accounts receivable, notes receivable, mineral interests, royalty interests, boats, and other recreational vehicles.  Some of these assets may pass by beneficiary designation or joint ownership if they are not transferred to your trust. You should review your beneficiary designations to determine if your trust should be listed as the primary or contingent beneficiary. 

What should not or might not be transferred to my trust?

Retirement accounts, such as IRAs and 401(k)s, must be owned by individuals. A trust cannot own these types of assets. However, trusts can be the designated beneficiaries of such assets. Take caution though, because your trust should not be the designated beneficiary of your retirement accounts unless your trust contains certain "qualifying" provisions. 

Retirement accounts are unique assets because they receive special tax deferral treatment. To take advantage of this special tax treatment, contact your financial institution and make sure you have primary and contingent beneficiary designations in place for all of your retirement accounts. 

Some clients are uncomfortable with the thought of relying on beneficiary designations to transfer their retirement accounts to their beneficiaries. This discomfort is understandable because retirement accounts often comprise the bulk of many clients’ estates. If you prefer your retirement accounts pass to your beneficiaries according to the distribution provisions of your trust instead of providing complete control to your named beneficiaries, please contact us before designating your trust as the primary or contingent beneficiary of your retirement account. We will review your trust to make sure it includes the provisions required to “qualify” the trust for tax deferral. 

I’m concerned about my child’s marriage, substance abuse, financial management, etc.  How can I protect my child’s inheritance?

This is a concern shared by many clients. If your estate plan provides your children their inheritance outright, there is not much you can do to protect them from themselves or their creditors once their inheritance is distributed. At your death, if your trust distributes outright, your trustee must distribute your assets to your beneficiaries as your trust directs. Unless your trust specifically provides otherwise, your trustee will not have discretion to withhold assets from your beneficiaries, even if a beneficiary is a drug addict, in prison, filing for bankruptcy, or going through a divorce.

If this possibility concerns you, the best way to protect your child's inheritance is to set up a trust for their share. Your child's trust can authorize the trustee to use his or her discretion in deciding whether or not to distribute trust funds to your child. Because the trust fund can only be used at the discretion of the trustee and because the child, as beneficiary, cannot force a distribution, creditors cannot reach the child’s trust fund and the child's spouse cannot claim an interest in the trust fund as marital property. 

Our address changed.  Do we need to update our documents?

Your estate planning documents are not invalid because your address and phone number have changed. However, accurate contact information may become important when you provide these documents to third parties. For example, your Health Care Power of Attorney provides the name, address, and telephone number of your Agent, the person you have selected to make health care decisions on your behalf if you are incapacitated and unable to do so. In an emergency situation, your medical care providers should have accurate contact information on file so they will be able to contact your Health Care Agent as quickly and easily as possible. 

What is my trust’s tax ID number?

For individual revocable trusts, the tax ID number for the trust is the social security number of the settlor, or creator, of the trust.  For joint revocable trusts, the trust's tax ID number is usually the social security number of the primary reporting spouse. However, if the initial trustees of your revocable trust are no longer trustees, new identification numbers should be used to report trust income. You can file an SS-4 with the IRS to request a trust identification number.