The SECURE Act and Your Retirement IRA

August 9th 2019

By Dean Ferraro

How the SECURE Act 2019 might change your Estate Planning.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed the House in a 417-3 vote and will now likely pass the Senate by unanimous consent, will probably change your estate planning.

Under the previous rules, we could ‘stretch’ IRA distributions to non-spouse beneficiaries, which allowed for a potentially significant income tax savings to the children of IRA owners.

For example, under the old rules, if Jane Doe is the owner of a $1 million IRA and leaves it to her 25-year-old granddaughter Jill, Jill could have stretched the distributions over her life expectancy of 57.2 years.

Coupled with the fact that inherited IRAs are subject to the claims of the beneficiary’s creditors, many IRA owners created ‘IRA Conduit Trusts’ or other mechanisms to make sure beneficiaries could take only the Required Minimum Distributions and assets in the IRA would be protected.

The SECURE Act changes that paradigm.

For most beneficiaries going forward, the ‘stretch’ rules are eliminated and the beneficiary must withdraw the entire IRA balance within 10 years of the death of the IRA’s owner.

There are exceptions to the 10-year rule, including:

  • A spouse may roll over the decedent’s IRA to their own and stretch distribution over their lifetime
  • Children under the age of majority. Upon attaining majority, they must then take distributions under the 10-year rule
  • A disabled beneficiary or chronically-ill beneficiary, or
  • A beneficiary within 10 years of age of the decedent

The ‘normal’ estate planning IRA strategy before SECURE was to name individual IRA beneficiaries and create an inherited IRA for each.

The beneficiary would then simply take distributions under the Required Minimum Distribution (RMD) rules based on their age.

Naming a Revocable Living Trust (RLT) as the beneficiary resulted in the RMD being based on the age of the oldest living beneficiary, which was often less-than-ideal.

An RLT needs to have a ‘look-through’ provision to allow the IRA to be distributed through the trust.

Failure to name individual beneficiaries formerly resulted in the imposition of a ‘5-year’ rule which forced all IRA balances to be distributed within 5 years of the death of the IRA owner (which is now 10 years).

If a qualified plan or IRA owner fails to name a beneficiary (or if the named beneficiary does not survive the owner), the IRA will go to the decedent’s estate, and be subject to probate and payout within 5-years.

More than IRAs.

The 10-year rule applies to all qualified plans with balances.

This would include all defined contribution plans including §:

  • 401(k),
  • 403(b),
  • 457(b),
  • 401(a),
  • Profit-sharing plans,
  • ESOP,
  • Cash Balance Plans and
  • lump-sum distributions from defined benefit plans.
IRAs are the typical rollover receptacle for all of the aforementioned plans.Upon their death, Spouses will typically roll over their deceased spouse’s plans, which build the IRA.This can generate a residual rollover IRA with a combination of all prior balances.So, if Jim has a $500,000 401(k) and rolls it into an IRA, and subsequently dies, his wife Mary could add it to her IRA, which could also contain Mary’s 401(k) rollover.If Mary then leaves that combined IRA to children over the age of majority, the 10-year rule will apply.

Trusts.

As indicated above, a Revocable Living Trust can be an IRA beneficiary if it meets the ‘look-through’ provisions.

To qualify as a ‘look-through,’ the trust must meet the following requirements:

  • The trust must be a valid trust under state law.
  • The trust must become irrevocable upon the death of the account owner or contain language to that end. A revocable trust will not be able to utilize look-through provisions.
  • Individual beneficiaries of the trust must be identifiable from the trust document.
  • Required trust documentation must have been provided to the IRA custodian no later than October 31 of the year following the IRA owner’s death. The trustee is responsible for providing trust documentation to the IRA custodian.

In addition to the above requirements, only natural persons (i.e., those with a life expectancy) may be considered “designated beneficiaries” by the IRS for purposes of taking advantage of the look-through IRA provisions.

A person who is not a natural person, such as an estate or a charity, may not be a designated beneficiary, and the option to manage payouts will be forfeited.


With the new rules, managing the distribution for the designated beneficiaries will become very important.

Under SECURE, distributions must be taken within the 10-year period. Determining the exact timing of the distributions within the 10-year period will be based on a variety of factors for taxable IRAs including:

  • Other income and expenses of the beneficiary
  • Business losses of a beneficiary in a pass-through entity. For example, one beneficiary has a start-up entity that is a Subchapter-S corporation. It generates a $250,000 loss. The beneficiary (or the trustee) could distribute $250,000 or more to offset the loss.
  • Charitable contributions by the beneficiary, including those through Donor Advised Funds, or charitable trusts. For example, if a beneficiary desired to make recurring charitable donations of $5,000 per year, they might make a $50,000 Donor Advised Fund (DAF) donation and offset that with a distribution of $50,000 from their inherited IRA.
  • Qualified Plan contributions. If an inherited IRA beneficiary worked at a company or owned a business where they had the opportunity to participate in a qualified plan, they could offset plan contributions with IRA distributions. So, for example, an inherited IRA beneficiary that was a sole proprietor might use a qualified plan to reduce taxable income by as much as $63,000 in a defined contribution plan and prospectively much more in a cash-balance or defined benefit plan. They might offset that contribution with an IRA distribution from the Inherited IRA.

On taxable inherited IRAs, it should be noted that the trust taking the distribution will result in possibly a much higher tax burden because of the higher trust income tax brackets.

Inherited Roth IRAs.

Roth IRAs are subject to the 10-year rule.

From an investment standpoint, the management of distributions is simpler, with the logical choice to defer distribution of a Roth IRA as long as possible.

Larger Roth IRAs might then likely dovetail into an irrevocable trust for the beneficiary, so the heirs would have a controllable stream of income coupled with asset protection.

In this scenario, the inherited Roth IRA might be in a trust that distributes the total Roth IRA balance in the 10th year to the trust and then proceeds to sprinkle distributions to the beneficiaries from the trust.


Allocation of Taxable and Roth IRAs.

Another strategy in adjusting estate planning under the SECURE Act will be to allocate taxable and Roth IRAs to appropriate beneficiaries.

The 10-year rule will exacerbate tax discrepancies on beneficiaries.

Logically, charitable bequests should be from taxable IRAs so that high-bracket beneficiaries can benefit from Roth legacies.

Measuring after-tax equalization may be of interest to some families to assure that heirs are equalized on an after-tax basis.

In one real-life example, we have a client with two adult children: one who is a teacher in a lower tax bracket and one who is an executive in the top tax bracket.

In this specific case, we constructed an after-tax allocation to ensure that each beneficiary was treated equally on a net or after-tax basis.

Retaining power to manage distributions in a look-though trust will likely cause a major shift in estate planning for IRAs.

The old rules to capture stretch provisions will need to be changed to manageable bracket provisions.

IRA Trusts.

A formerly popular technique was the IRA trust, which was a special form of Revocable Living Trust designed to hold a beneficiary’s inherited IRA.

The typical form of an IRA trust was a ‘Conduit Trust,’ which mandated the RMD.

With the RMD rules on inherited IRAs eliminated, the Conduit Trust become irrelevant.

Estate plans that incorporate IRA Trusts will need to be reviewed, and those provisions possibly abandoned or amended.

In special-needs cases, the use of an IRA Trust may still be the best option.

Charitable Remainder Trusts as an IRA beneficiary

For some IRA owners with a charitable inclination, it may still be wise to provide some form of a ‘stretch’ to a beneficiary.

In this case, the grantor may want to utilize a Charitable Reminder Unitrust (CRUT) or Charitable Reminder Annuity Trust (CRAT).

This might pay the beneficiary 5% of the IRA for 20 years and give the remainder to the donor’s favorite university or some other charitable organization.

In closing

There are more issues, including the use of life insurance.

Life insurance under the new rules is complex enough to warrant a separate discussion, so stay tuned.

If an IRA or a rollover from qualified plans are part of your legacy, you will probably want to dust off your estate planning binder and talk to an expert.

The SECURE Act--if it becomes law--would change things for all IRA owners in a significant way.

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