Secure Act’s big impact on affluent clients

Advisers should expect numerous consequences for their affluent clients from the SECURE Act, including a handful of estate and tax issues.

The changes present opportunities for advisers to demonstrate their worth to clients, and they could also prompt conversations about further financial planning and intergenerational wealth transfer, one adviser said.

The law eliminated stretch IRA provisions for many of those who inherit individual retirement accounts, a detail that has already caused many wealthy clients to revisit their wills.

The expanded age limits for IRA contributions and required minimum distributions also affect high-net-worth clients. And the new law provides tax benefits for business owners as well as doctors, lawyers and other highly compensated professionals working at small practices.

“We know that a lot of high-net-worth individuals gain their wealth because they are business owners,” said Val Vest, vice president of fiduciary services at Cambridge Investment Research. “There are so many opportunities for financial professionals.”

The recently passed law, part of the government’s 2020 spending package, is the most significant legislative change to the retirement savings system in more than a decade.

Under new rules, the stretch IRA is all but gone. Previously, account holders could bequeath IRA assets to children and grandchildren, which allowed them to take distributions over their lifetimes.

Now beneficiaries who are not exempt must take payouts within 10 years, with no provision for annual distributions. For minors, the 10-year countdown does not begin until they reach 18. The change does not apply to spouses, people with certain disabilities, terminally ill beneficiaries or people who are within 10 years of the account owner’s age.

Account holders “are going to have to be much more careful,” said Dean Scoular, senior counsel at Retirement Law Group. “The elimination of both stretch IRA as well as stretch within a qualified plan … will really impact their estate plan.”

Without the use of a trust to institute regular payments, a child or grandchild could inherit IRA assets and have to take the full distribution of the assets within 10 years from the account holder’s death. The tax consequences of that situation should not be ignored, said Steven Novack, a financial adviser at Altfest Personal Wealth Management.

“We’re trying to get a list for everyone who has trust provisions” in their wills, Mr. Novack said. “If your child is really young … you can give certain powers that tell the trustee every year to take out [payments], so that all of a sudden it doesn’t come out in one piece.”

An alternative is naming a sibling or a cousin as a beneficiary, provided they are within 10 years of the account owner’s age, he said.

Another big change resulting from the SECURE Act is the new age limits for IRA contributions and required minimum distributions. That change allows older clients with wages to squirrel money away, tax deferred, if they don’t need the income, Mr. Novack said.

“Some of our clients in their 90s are still working,” he said.

As a result of the elimination of stretch distributions, some account holders could benefit from establishing multiple IRAs, such as one naming a spouse as a beneficiary and another for charity, Mr. Scoular said. They might take money out before 72 – the new age for required minimum distributions – and make qualified charitable contributions at 70.5, he said.

Additionally, some clients could take advantage of the new age limits by taking distributions from their qualified plan assets and using them to contribute to their Roth or traditional IRAs, given the elimination of the age cap, he said.

“It wouldn’t shock me to see a lot of the early 70-year-olds taking advantage of this,” Mr. Scoular said.

There are also opportunities under the new law for wealthy small-business owners.

For example, defined-benefit plans can be amended to allow for distributions at 59½ years, which means clients could move assets from pensions into defined-contribution plans and potentially do a Roth conversion, reaping the tax benefits when they take income, Mr. Scoular said.

Further, DB plans can now be established retroactively, whereas previously the deadline for doing so was by the end of the year. For small businesses that have a windfall year, starting a plan retroactively could help them save on taxes for that year, Mr. Scoular said.

The new deadline for having a signed plan document for the prior year is March 15, or Sept. 15 with an extension, he said.

“That could really shorten the sales cycle,” said Steve Niehoff, chief operating officer at the Pension Resource Institute. “That leaves [the opportunity for] advisers to close more cash balance plans.

“If [your small business] had a major year — your profit exceeded expectations — you’ve got this money,” he said. “You’re going to be taxed on it, or [you can] start a cash balance plan.”

Another facet of the SECURE Act was the expansion of 529 college savings programs, including the authorization to use plan assets to pay down student loans. While that might be a minor benefit to wealthy clients, “it’s more of a conversation starter for tax planning,” Ms. Vest said.

That can also lead help advisers “with the next generations” of clients, she said.

With a greater overall focus on a client’s complete financial picture, the team effort of advisers, financial planners and lawyers can help show value, she said.

Related Topics: Client Servicing, Retirement