Estate Planning and the SECURE Act of 2019

Effective Jan. 1, new Federal legislation signed into law by President Trump, the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes significant provisions designed at making it easier for small business owners to set up retirement plans and seeks to prevent individuals from outliving their assets by pushing back the age retirement plan participants are required to begin taking required minimum distributions (RMDs) from 70½ to 72.

The bad news for retirees is that the SECURE Act eliminates one of the most attractive benefits of retirement accounts – the “stretch” IRA. In the past, a non-spouse beneficiary of an IRA could stretch out RMDs over their own life expectancy and, in effect, delay or altogether avoid a sizable tax bill. Under the new rules, if a non-spouse beneficiary inherits an IRA they must withdraw all the assets within 10 years.

Exempted from this 10 year stretch period are surviving spouses, minor children, disabled or chronically ill individuals, and individuals within 10 years of age of the deceased IRA account owner.

Surviving Spouses
Under the SECURE Act, a surviving spouse who is named as a beneficiary of a retirement plan still has certain advantages. The surviving spouse can roll over an IRA into an inherited IRA account, which is treated as if the surviving spouse was the original owner. This allows the surviving spouse to calculate RMDs on the surviving spouse’s lifetime expectancy, which is re-calculated every year by the IRS and could allow for a longer payout period.

See-Through Trusts for Surviving Spouses
A see-through trust (also sometimes commonly referred to as a look-through trust or a conduit trust) is a special type of trust that may qualify for stretch treatment. Under the SECURE Act, to qualify for stretch treatment, a see-through trust must meet the following requirements:

  1. The trust must be a valid trust under state law.
  2. The trust must be irrevocable at the death of the plan owner.
  3. The surviving spouse of the deceased plan owner must be the only lifetime beneficiary of the trust.
  4. The trustee of the trust must be required to distribute to the surviving spouse any distribution the trustee receives from the retirement plan during the surviving spouse’s lifetime.
  5. The retirement plan administrator must receive certain required documents no later than October 31 of the year following the account holder’s death. The plan administrator must also accept the trust as a see-through trust before the trust will qualify for see-through status.

When designating as beneficiary of a retirement account a trust that benefits a surviving spouse, it is crucial to be specific about which trust is the beneficiary. To avoid issues with the plan administrator, name the specific trust under agreement or will rather than the parent trust (e.g. The Jane Doe Revocable Living Trust Separate IRA Share F/B/O John Doe). Being specific in designating the trust avoids having unintended non-spouse beneficiaries cause the trust to be ineligible to qualify as a see-through trust.

Trusts for Non-Spouse Beneficiaries
Under the SECURE Act, trusts that include one or more non-spouse individuals as beneficiaries will no longer be eligible to qualify as see-through trusts and the trustee will not be able to stretch the RMDs over the oldest beneficiary’s life expectancy. The trustee of such a trust must now withdraw all of the inherited IRA assets within 10 years. Whether it now makes sense to name such a trust as beneficiary of an IRA depends on a variety of factors including, but not limited to, the purpose of the trust and the maturity, experience, capability, and predicament of the non-spouse beneficiaries of the trust.

Charitable Giving with Retirement Plans
Pre-tax retirement plans are often preferred vehicles for charitable giving. A retirement account plan owner may continue to maximize his or her charitable giving by bequeathing untaxed retirement dollars to qualified charitable institutions. Such contributions are tax free, so money given from a pre-tax retirement account will flow to the qualified charity without being subject to any tax at distribution.

Summary of How Qualified Retirement Accounts are Distributed Under the SECURE Act
One of the more complex and confusing areas under the SECURE Act is determining when and how qualified retirement plan distributions pay out to beneficiaries. The timing of these distributions ultimately determines when taxable income is realized by the beneficiary.

The terminology for retirement plan distributions can be confusing. Certain key terms include:

  • Required Minimum Distribution (RMD) – After the required beginning date, the amount that must be distributed annually to the plan owner during life or the beneficiary after the plan owner’s death from a retirement plan.
  • Applicable Distribution Period (ADP) – The payout period in years over which required minimum distributions are paid to a particular plan owner or beneficiary.
  • Required Beginning Date (RBD) – The date that the plan owner must begin to receive required minimum distributions, as follows:
    • Traditional IRA – April 1st following the year in which the plan owner turns 72
    • Roth IRA – No required minimum distribution date since no distributions are required during the plan owner’s lifetime
    • 401(k)/403(b) – Later of (1) April 1st following the year in which the plan owner turns 72 or (2) April 1st following the year the plan owner retires
  • Designated Beneficiary – The individual on whose life expectancy the ADP is based.
  • 10 Year Rule – For distribution schemes with no designated beneficiary, all plan assets must be distributed out to the plan beneficiary by December 31st of year containing the 10th anniversary of the plan owner’s death.

How plan assets are distributed to the plan beneficiaries is determined by (1) the type of beneficiary and (2) whether the owner of the plan has died before the RBD or after the RBD. The chart below summarizes the distribution rules pertaining to each scenario.

BeneficiaryDistributions During LifeADP if Owner Dies BEFORE RBD (1)ADP if Owner Dies AFTER RBD
Plan OwnerRMD distributed as a fractional share of IRA assets based upon RBD, ADP, and IRS distribution tablesNo RMD during year of deathYear of death RMD paid to beneficiaries, not plan owner's estate
SpouseN/ASpouse's life expectancyLonger of spouse's OR deceased plan owner's life expectancy
See-Through Trust for Spouse OnlyN/ASpouse's life expectancyLonger of spouse's OR deceased plan owner's life expectancy
Non-Spouse Individual/Estate/Non-See-Through Trust/Non-IndividualN/A10 year ruleDeceased plan owner's life expectancy

(1) Includes Roth IRAs

It is important to remember that everyone’s situation is unique. If you have questions or concerns about your current planning, please contact your attorney or another professional advisor.

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