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The Secure Act: A Retirement Plan Distribution Game-Changer
The SECURE Act (Setting Every Community Up for Retirement Enhancement) became law on December 20, 2019 and is effective for deaths in 2020 and beyond.

Before the SECURE Act, upon the death of a participant in an Individual Retirement Account (IRA) or similar plan, beneficiaries could take distributions over their life expectancy. This permitted the desirable “stretch out” planning for beneficiaries, especially children and grandchildren.

One category is called an “eligible designated beneficiary” (“EDB”). Persons in this category named as outright beneficiaries or as the sole beneficiaries of trusts for their benefit may continue to take distributions over his or her life expectancy. This category includes:

  1. A surviving spouse. The rules for leaving benefits to a surviving spouse are unchanged under the SECURE Act. A surviving spouse named as an outright beneficiary may roll over the inherited benefits to his or her own IRA or treat it as his or her own IRA. A conduit trust for the surviving spouse will be entitled to all the minimum distribution benefits of the surviving spouse under the IRS’s rule that the conduit beneficiary is considered the sole beneficiary of the plan. Accordingly, the trust need not take required minimum distributions until the end of the year in which the deceased participant would have reached age 72. A qualified terminable interest property (QTIP) trust – by which the spouse receives the greater of the required minimum distribution or the annual income each year – will continue to work just as before. The spouse’s life expectancy, recalculated annually, will be the distribution period.

  2. A minor child of the plan participant based on the definition of “minor” in the person’s state of domicile (a student who has not completed a specified course of education and is under age 26 is considered a minor child).

  3. A disabled individual. An individual is disabled if he or she cannot engage in any substantial gainful activity because of any medically determinable physical or mental impairment that will likely result in death or long-continued and indefinite duration. Proof of disability is required.

  4. A chronically ill individual. Certification of illness is required

  5. An individual not over 10 years younger than the deceased participant or IRA owner (a sibling, for example).

The SECURE Act then generally requires all other designated or successor beneficiaries (a second category) to take complete distribution of the benefits by the end of the tenth calendar year following the participant’s death. This rule applies whether the plan participant died before his or her required beginning date. All amounts must be distributed by December 31 of the year that contains the 10th anniversary of death; and meanwhile, no annual distributions are required, as long as funds are out of the plan by that deadline.

When an EDB dies, the remaining balance must be distributed within 10 years. A minor child ceases to be an EDB upon reaching majority. Any remaining balance must be distributed within 10 years from the time the minor reaches majority (under the state law). The exception for a minor child does not include a minor grandchild or any other minor beneficiary. Thus, the favorable planning technique of naming grandchildren as beneficiaries with the opportunity for a lengthy stretch out has been eliminated.

Special needs trusts for one or more disabled or chronically ill EDBs will qualify for the exception to the 10-year rule.

The SECURE Act will have a significant impact on trusts for designated beneficiaries. Before the Act, planning suggested using a conduit trust or an accumulation trust.

Conduit Trusts

A conduit trust requires the trustee to distribute immediately to the beneficiary any plan distributions the trust receives. Before the SECURE Act, designating a young beneficiary would achieve a long stretch out for that person’s lifetime, keeping the annual conduit payout of the required minimum distribution relatively small. With the SECURE Act, conduit trusts for designated beneficiaries will force the entire IRA to be paid to the beneficiary in as few as 10 years. The payment need not be made in annual installments. The Act requires payment within 10 years, allowing deferral to the end of the 10-year period, but a significant taxable payment will result if deferral is chosen. As a result of the Act, conduit trusts will rarely be a good option to protect a spendthrift beneficiary or protect the beneficiary from creditors.

The income tax laws will create a dilemma – since trusts reach the top income tax bracket at around $13,000 in taxable income, distributing the IRA may save significant income taxes, but remember why the trust may have been created in the first place, i.e. to be protective of a beneficiary who may not be an appropriate inheritor to receive distributions.

Accumulation Trusts

With an accumulation trust, distributions received by the trust need not be distributed to the trust’s beneficiaries but may be kept in the trust for future distribution to a beneficiary. This trust is typically used to delay distributions until a designated age of a beneficiary is obtained, or to provide protection from creditors. An accumulation trust will still be available after the SECURE Act, if desired, but there will be the required distribution to the trust at the end of 10 years (or sooner if desired) at the cost of higher income taxes being owed on amounts distributed from the plan due to the severely compressed trust income tax rates. The funds can remain in the trust indefinitely after they have been distributed from the retirement plan.


The SECURE Act retains the definition of designated beneficiary, so current plans naming beneficiaries remain effective. The Act does not affect the definition of conduit or accumulation trusts. These are still fine. They are defined in the same way under the SECURE Act as they were under prior law.

The game-changing problem is that except for the specified categories of EDBs, for deaths in 2020 or later, the existing estate plan may not work as it was intended. Plan benefits must now be distributed in 10 years rather than over the life expectancy of the oldest trust beneficiary. When the EDB dies, plan benefits must be distributed over 10 years. For deaths that occurred before 2020, where benefits are being paid out over the life expectancy of the designated beneficiary, the 10-year rule will start upon the death of the designated beneficiary. The 10-year rule has crushed the planned-for stretched out life expectancy payout for many beneficiaries.

Clients are now faced with the choice of continuing a conduit trust plan, with the realization that a possibly very substantial payout must be made to a beneficiary within 10 years – possibly more (or much more) that the participant would prefer the beneficiary receive, and possibly to a beneficiary in a high income tax bracket, perhaps in peak earning years, forced to report substantial ordinary income. Consider the accumulation trust for the beneficiary, which will allow more control over the timing of distributions and withholding distributions from a spendthrift or creditor-concerned beneficiary – but the “cost” of receiving the plan benefits in a trust without distribution to beneficiaries is ordinary income taxation at the severely compressed trust income tax rates.

Many clients will likely consider changing a trust from a conduit trust to an accumulation trust to avoid a rapid forced payout of the plan funds. If the client dies with a conduit trust, it may be possible to modify or reform the trust to make it an accumulation trust. Judicial modification of a trust based on changed circumstances or to accomplish the trust grantor’s objectives is permitted in states that have adopted the Uniform Trust Code, like Utah. Some state laws may permit a modification of the trust by consent of the interested parties, while persons in other states may have to ask a court to intervene.


If the plan participant is in a lower income tax bracket than the intended beneficiaries, consider converting the plan to a Roth IRA. The participant will then pay income tax on the conversion, but the beneficiaries can withdraw the money (still subject to the 10 year rule) without income tax consequences.

Some may prefer to be more receptive to investing in a life insurance policy to be held in an irrevocable trust. Assuming the policy will be excluded from the decedent’s estate, the trust will receive the policy proceeds without estate or income tax, and the trust provisions can provide for a lifetime stretch out of the trust income and principal which the SECURE Act now denies.

Another alternative plan to consider is the creation of a charitable remainder trust. Such a trust may be created for the lifetime of a non-charitable beneficiary, or for a duration of up to 20 years. While a lifetime trust may be preferred, it does not “work” for young beneficiaries, since the minimum annual payout to the beneficiary must be 5%, and the actuarial value of the remainder interest to the charity must be at least 10% of the value of the trust at its inception. In the era of low interest rates, the 10% requirement is not easily met for a beneficiary with a long actuarial life expectancy. However, a charitable remainder trust with a duration of 20 years (or less if desired) is a viable option. Retirement plan benefits can be paid tax-free into the charitable remainder trust, which then pays a stream of fixed dollar payments (if a charitable remainder annuity trust) or annually determined payments based on a fixed percentage of the annually determined fair market value of the trust assets (if a charitable remainder unitrust). These payments are taxable to the individual beneficiary, but a 20-year trust term with controlled annual payments may be a preferred alternative to required distributions over a 10-year term, especially if the plan participant is charitably inclined.

I hope this short summary of the SECURE Act helps you understand better the role the new law will play in your estate planning.
–Robert A. Youngberg

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