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Planning for Retirement Benefits After the SECURE Act

Jan 21, 2020

Presented by Natalie B. Choate, Nutter McClennen & Fish

The Setting Every Community Up for Retirement Enhancement Act (“SECURE”) was signed into law on December 20, 2019 and has radically changed the estate planning landscape for individuals’ retirement benefits. In this special session of the Heckerling Institute, Ms. Choate explains the impact of SECURE on estate plans.

SECURE eliminates the life expectancy payout and replaces it with a maximum ten-year post-death payout period for most retirement benefits. The new law does not apply for five types of eligible designated beneficiaries (“EDBs”):

  • The surviving spouse of the participant
  • Minor child of the plan owner (payout allowed until majority)
  • Disabled beneficiary
  • Chronically ill individual
  • An individual not more than ten years younger than the participant

For over 30 years, the go-to estate plan for owners of tax-favored retirement plans has been the “stretch” IRA. Under the stretch IRA, the IRA or other retirement plan is payable to a “designated beneficiary,” who can leave the plan in its tax-deferred status for years after the individual’s death. The beneficiary is able to withdraw the benefits gradually by taking annual distributions over her life expectancy. These rules also apply for see-through trusts.

SECURE has eliminated the stretch IRA for most individuals. SECURE changes the payout period for most beneficiaries to the ten-year payout. Even pre-2020 deaths are not spared by SECURE. They receive only a partial exemption from the ten-year payout rule.

Ms. Choate described some planning ideas to consider in light of SECURE:

  • Consider one of the five EDBs. Current estate plans that have one of these EBDs should still work, but may require some tweaks to accommodate SECURE. One such adjustment may be to eliminate other discretionary beneficiaries from benefitting from the plan. Some specifics on a couple of EDBs are as follows:
    • When the EBD is a minor child of the participant, it might not be desirous to accelerate the taxation of the benefits or accelerate the child’s control of the assets. Use of a conduit trust may be helpful as it is entitled to the same treatment as the minor child. This is because the minor child is the sole designated beneficiary of the trust. However, the provision only applies until the child reaches majority. At that time, the ten-year rule applies. Determining a child’s majority may actually be tricky given that majority is often based on the education status of the child.
    • When the EBD is either a disabled or chronically ill beneficiary, two special breaks apply if an “applicable multi-beneficiary trust” is established. This is a trust that has:
      • More than one beneficiary
      • All the beneficiaries are treated as designated beneficiaries
      • At least one beneficiary is an EDB

The two “breaks” are as follows:

  • If the trust is required by the terms of the trust instrument to be divided immediately upon the death of the employee into separate trusts for each beneficiary, the payout rules shall be applied separately with respect to the portion of the employee’s interest that is payable to any disabled or chronically ill EDB.
  • If under the terms of the trust, no individual other than an EDB who is disabled or chronically ill has any right to the employee’s interest in the plan until the death of all such EDBs, then the life expectancy exception shall apply to the distribution of the employee’s interest and any beneficiary who is not such an EDB shall be treated as a beneficiary of the EDB upon the death of the EDB.
  • Leave traditional retirement benefits to a charitable remainder trust (“CRT”). In this plan, the income tax on the IRA itself is basically eliminated, and provides an annual payout to individuals, replacing the lost “life expectancy payout.” At the end of the CRT’s term, the remainder of the CRT goes to charity. Obviously, the participant should have a philanthropic intent.
  • If the IRA owner is in a lower income tax bracket than her expected beneficiaries, the IRA owner may consider doing a ROTH conversion during her lifetime. This should result in lower income taxes on an overall basis.
  • If the current estate plan leaves retirement benefits for a “conduit trust,” this might still work fine under SECURE if the conduit trust is for a less-than-ten-years younger beneficiary. However, many conduit trust provisions force the trustee to distribute the entire retirement plan to the conduit beneficiary within ten years after the participant’s death. This may not be a desirable result.
  • Accumulation trusts will still work under SECURE. However, the trustee will be faced with a substantial income tax bill on an accelerated basis since all benefits must be distributed from the plan to the trust within ten years. This action triggers the tax.

As mentioned previously, SECURE’s rules for pre-2020 deaths provide for a partial exemption. Ms. Choate noted that the attempt to impose the rules on pre-2020 deaths cannot be realistically implemented except in the simplest of situations. Regulations and/or other guidance is needed in this area.

In any case, all estate plans need to be reviewed to determine what changes, if any, are necessary to effectuate a viable estate plan that is in congruence with the IRA owner’s objectives and desires.

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Marie Arrigo

Marie Arrigo is an Advisor and led the Family Office Tax Services Practice within the firm’s Private Client Services Group.

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