The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was signed into law by President Trump on December 20, 2019 and went into effect on January 1, 2020. Amongst other things, the Act includes provisions aimed at increasing access to retirement accounts in the hope that it will keep Americans from outliving their assets. For example, the Act pushes back the age at which the retirement plan participant must take required minimum distributions (RMDs) from 70½ to 72 (for those who are not 70½ by the end of 2019).

For estate planners and their clients, the key change under the Act is the elimination of the “stretch out” rules for nonspousal beneficiaries inheriting individual retirement accounts, such as IRA and 401(k) plans.

Prior to the SECURE Act, nonspousal beneficiaries inheriting an IRA or 401(k) could elect to take only RMDs over their life expectancy. This was commonly referred to as an “inherited” or “stretch” IRA.

With the enactment of the SECURE Act, that tax-advantaged possibility has all but disappeared, apart from the few exceptions noted below. Under the new law, 10 years after the retirement plan holder’s death, any money that is left in the account must be distributed to the beneficiary (barring certain exemptions) and the account closed, regardless of the tax consequences. Now only the following categories of beneficiaries may elect the stretch provisions:

• Surviving spouse of the deceased account owner;
• Minor children of the deceased account owner (but only until they reach the age of majority; after that, they will have 10 years to withdraw the assets in an inherited account);
• The chronically ill and disabled (including a special needs trust for a disabled beneficiary);
• Beneficiaries who are not more than 10 years younger than the account owner.

Beneficiaries who do not fall under one of the exceptions above must cash out the IRA or 401(k) within 10 years. The Act does not impact beneficiaries who were already taking required minimum distributions from inherited accounts prior to January 1, 2020.

Under the prior rules, some clients elected to name a trust as their retirement plan beneficiary to protect the trust beneficiary from withdrawing too much and potentially wasting the money. These trusts often included “conduit” provisions, which required the trustee to distribute the RMDs outright to the trust beneficiary (as opposed to keeping the RMDs in the trust). Under the SECURE Act, these conduit trusts could present an issue. For example, if a retirement plan has substantial value but must pay out the entire account by the end of a 10-year period, then a beneficiary of a conduit trust will receive a distribution that is much greater than what was intended: the entire value of the IRA by the end of the 10-year period.

The alternative to a conduit trust is an “accumulation” trust. An accumulation trust gives the trustee discretion on whether to pay out RMDs directly to the trust beneficiary or to retain RMDs in the trust. For that reason, an accumulation trust may solve the problem of the trust beneficiary receiving an unexpectedly large distribution at the end of the 10-year period. However, depending on the particular drafting of the accumulation trust, it could be less income tax efficient.

The takeaway is that if your current living trust plan includes a conduit trust, you may wish to review the drafting of that trust with your estate planning attorney to understand the implications of the SECURE Act.

Additionally, if your estate plan includes a special needs trust or a disabled beneficiary, you may wish to revisit how your retirement plans can be used for that beneficiary in light of the SECURE Act.

If your estate plan includes leaving money to charities, you should confer with your tax advisor regarding naming charities as beneficiaries of your retirement plans. Because charities do not pay income taxes, the full amount of the retirement account would directly benefit the charity of your choice.

In short, now is an ideal time to revisit the beneficiary designations for your retirement plans to ensure they align with your wishes under current law.

In addition to reflecting on the above, you should also revisit your estate plan if, since your plan was last updated, you have had a change in your marital status, changes in your family (birth of a child/death of a beneficiary), changes in your inheritance wishes, or significant changes in your assets and liabilities.

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