The SECURE Act of 2019 made changes to the laws governing retirement benefits, including IRAs, 401(k)s and other qualified plans (collectively referred to as “Plans”).  The major changes for estate planning are: 1) increasing the participant’s Required Beginning Date (“RBD”) from 70 ½ to 72 years of age[1]; 2) allowing a participant to make contributions to an IRA after the age of  70 ½[2] ; and 3) substantially eliminating the ability of a non-spousal beneficiary to “stretch” required distributions from an inherited Plan over the beneficiary’s life expectancy. The changes to the non-spousal beneficiary distribution rules will have adverse consequences to many existing estate plans, requiring changes to documents and beneficiary designations.

Old vs New Distribution Rules When a Beneficiary Inherits a Retirement Benefit.

Under prior law, there were three categories of beneficiaries, “Surviving Spouse”[3], Designated Beneficiaries” and “Non-Designated Beneficiaries”[4].  Designated Beneficiaries had the ability to “stretch” the distributions over their life expectancy by taking a proportionate share of the Plan each year (Required Minimum Distributions “RMD”). This was extremely beneficial for a young beneficiary. For example, a 30-year-old beneficiary could stretch distributions over a period of 54 years. To qualify, a Designated Beneficiary (“DB”) had to be an individual or certain types of trusts that allowed the IRS to look through the trust and treat one of the beneficiaries as the DB. Examples of these “see through trusts” are conduit trusts (the RMD had to be withdrawn each year and distributed to the one current beneficiary) and accumulation trusts (RMD could be accumulated within the trust and the oldest of all potential beneficiaries is treated as the DB). Many estate plans include conduit trusts for minor children and other beneficiaries, as a conduit trust distributed the funds in a controlled manner and was straightforward to administer.

Now, under the SECURE Act, the ability to stretch out distributions is greatly reduced. Again, we have three categories of beneficiaries: Non-Designated Beneficiaries; Designated Beneficiaries; and Eligible Designated Beneficiaries. The rules for Non-Designated Beneficiaries have not changed. Designated Beneficiaries no longer use their life expectancy to determine the amount that must be withdrawn. Instead, the DB must withdraw the entire Plan balance by December 31^st of the year containing the 10^th anniversary of the participant’s death. Annual or proportionate distributions are not required.  If the Designated Beneficiary dies before the Plan is fully distributed, the Plan must be paid out to the subsequent beneficiary within the same original 10 years following the participant’s death.

The SECURE Act creates a new category, the Eligible Designated Beneficiaries (“EDB”). EDBs are: 1) the surviving spouse; 2) the participant’s minor child[5]; 3) a disabled individual, 4) a chronically ill individual and 4) an individual not described above who is not more than 10 years younger than the participant. These individuals and some trusts for these individuals qualify for modified life expectancy pay outs. At the death of an EDB or if the beneficiary no longer qualifies as an EDB (i.e. when the participant’s child “reaches majority” [6]) the 10 year payout rule applies.

Whose Estate Plans Will Be Affected?

The elimination of the ability to stretch Plan distributions and the implementation of new distributions rules are major game changers. However, not everyone will be affected in the same way.

For some, the changes in the law will have little or no impact on their planning and nothing further needs to be done, such as when,

1. Plan distributions will be needed to meet the beneficiary’s general living expenses.
2. The retirement benefits are left outright to a spouse or beneficiary who has “the age of majority”, or is ten years younger than the participant.
3. The retirement benefits are left to charities.

Individuals who created conduit trusts for young children and other beneficiaries will need to take immediate action.

1. Existing conduit trusts will no longer work the way the client anticipated.
2. Existing conduit trusts would now require the entire plan fund to be distributed to the beneficiary within ten years of the participants death. This would defeat the individual’s goals if the purpose is to be protect the beneficiary from squandering the plan funds or for creditor protection.
3. New conduit trusts can be created for young children that employ slower withdrawals from the account until the child reaches the age of majority and defer any further mandatory withdrawals for an additional ten years.
4. Accumulation trusts may be preferable to meet the participant’s goals (such as management and asset protection) allowing the trustee to distribute funds to a beneficiary over a longer period of time, even though it does not provide optimal income tax planning.

For some individuals, their plan may need minor tweaks.

1. A QTIP trust for a surviving spouse, that is not a conduit trust, may need to be adjusted to allow distributions to be spread out over the surviving spouse’s life expectancy.
2. Trusts for disabled or chronically ill persons may need to be adjusted to qualify for life expectancy treatment.
3. It might be prudent to provide broader distribution standards with the use of an independent trustee to provide flexibility to allow for greater income tax planning (undistributed trust income is be taxed at the highest marginal tax bracket).

I know that this sounds complicated. But, now more than ever, estate plans that include the managed distributions from retirement plans, must be tailored to a client’s specific situations and goals with today’s realities in mind. I am here to help you navigate through the new rules and am available to review your existing estate plan for changes brought on by the SECURE Act.

Stephanie Pahides Kalogredis concentrates her practice in estate planning and estate & trust administration and wealth transfer and succession planning at Lamb McErlane PC.  She assists her clients in finding personalized solutions to meet their estate planning goals through the use of wills, trusts, gifting and legal agreements.  skalogredis@lambmcerlane.com. 610.701.4433.

[1] It should be noted that while the RBD has been increased to 72, the participant may still take advantage of the $100,000 limit on qualified charitable deduction at age 70 1/2.

[2] Contributions will reduce the $100,000 limit on qualified charitable distribution from the Plan.

[3] A Surviving Spouse could delay or recalculate the beginning date for required distributions (“RBD”), and the new beneficiary would be able to take distributions over the beneficiary’s life expectancy.

[4] The Plan funds had to be fully distributed by December 31^st of the year containing the 5^th anniversary of the participant’s death (if death occurred before the Required Beginning Date “RBD”) or over the participant’s remaining life expectancy (death occurred after the participant’s RBD).

[5] This does not include grandchildren.  Many see-through trusts that were set up for grandchildren to utilize the grandchild’s longer life expectancy, will now be subject to the 10 year payout rule.

[6] The law defines “reaches majority” by reference to an unrelated provision which could extend the age of majority from a state defined 18 years of age to 26 years if the child has not “completed a specified course of education”.  We hope new Regulations will clarify this for us.