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SECURE Act & Your Retirement

Posted by James Burns | Feb 24, 2020

Under previous law, a non-spouse beneficiary could take distributions from an inherited IRA over the beneficiary's life expectancy, resulting in advantageous income tax deferral (we called it the “stretch”). Under the SECURE Act, the “stretch” for most non-spouse beneficiaries has been reduced to a 10-year term. Simply put, the SECURE Act requires that most retirement assets inherited in 2020 and beyond be distributed at the end of a 10-year period.

The 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 and is clumsy to read through all the density of other issues in a RLT.  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 may be subject to probate and payout within 5-years.

Traditionally, where retirement assets are directed to a trust, the trust beneficiaries could get the benefit of a stretch, provided the trust was properly drafted. For a trust to have qualified for the stretch, the trust must have been drafted as translucent or a “look-through” trust. There are two types of look-through trusts: “conduit” trusts and “accumulation” trusts. The greatest impact of the SECURE Act will be on conduit trusts.

Sometimes 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.

The better idea was the standalone trust like a Conduit trust which was designed to force out all IRA distributions (RMDs) to the trust beneficiaries. In other words, whenever a distribution is made from the IRA to the trust, the trustee must immediately distribute the IRA proceeds to the trust beneficiary. Under the SECURE Act, these trusts present a new problem: if an IRA has substantial value and 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 intended – specifically, the entire value of the IRA by the end of the 10-year period.

An accumulation trust (sometimes referred to as a discretionary trust) gives the trustee discretion on whether to pay out or retain RMDs within the trust. For that reason, an accumulation trust can solve the problem of the trust beneficiary receiving an unexpectedly large distribution, along with the risk of creditors accessing those assets. However, it could be less income tax efficient. This is because IRA distributions generate an income tax burden, and income accumulated within a trust often is taxed at the top income tax rate. An accumulation trust could be drafted to give the trustee discretion to either pay out nothing, a portion, or all of the IRA distributions to trust beneficiaries. But any IRA distribution amounts not paid (to trust beneficiaries) are considered accumulated (in the trust) and taxed at trust tax rates. Accordingly, the current thought is that most retirement plans payable to a trust should aim to qualify as an accumulation trust, giving trustee's discretion to make more tax-efficient distributions. Also, for income tax planning perhaps outside rapacious states such as California. An accumulation (as opposed to a conduit) trust does not have to pay out all IRA distributions to trust beneficiaries.

In sum, while a trust provides control, it doesn't provide any tax benefits. It could cause some heirs to pay more in tax. Beneficiaries who receive payouts straight from a trust will be taxed at their individual income rate.

If there is a delay in payouts—perhaps you don't want your child to start receiving money until they are 30 (a later age of your choosing) required minimum distributions and earnings on the RMDs that accumulate in the trust in the interim will be taxed annually at the rates that apply to trusts. Income tax brackets for trusts are much lower than for personal income, the highest tax rate of 37% kicks in on trust income exceeding $12,150. That means more income will be hit by taxes at higher rates.

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

  1. A spouse may do a custodian to custodian transfer from the deceased spouse's IRA to their own and stretch distribution over their lifetime.
  2. Children under the age of majority (18). Upon attaining majority, they must then take distributions under the 10-year rule.
  3. A disabled beneficiary or chronically-ill beneficiary[1], or
  4. A beneficiary within 10 years of age of the decedent.



  1. Convert Traditional IRAs to ROTH IRAs – By doing so, your client will pay the taxes up front so that beneficiaries aren't inundated with a significant tax bill at an inopportune time when they are compelled to withdraw at the end of the 10-year period. Right now, there is no income cap in place for an individual to convert their traditional IRA to a Roth.

Many people retire in their late 50s or early 60s, years before RMDs begin, which creates a window of time where tax planning opportunities abound. Research by firms like Vanguard, Morningstar, and Life Yield, shows actively engaging in tax planning can boost your after-tax income in retirement by a meaningful amount.

With lower rates now, you can engage in tax arbitrage.  For example, suppose between the ages of 60 and 70, you convert a portion of your IRA to a Roth IRA, and only pay taxes at the 10% and 12% marginal rates. Later in retirement, after reaching age 70-½, without this strategy, you would pay taxes on those withdrawals at the 22% or 24% rate, or, if tax rates revert in 2026, at the even higher marginal rates of 25% and 28%. By using the Roth conversion strategy, you pay taxes at 12 cents on the dollar today, instead of 24 cents or more per dollar later. That's an arbitrage opportunity you don't want to miss.

  1. Change conduit trusts to accumulating trusts – Before the SECURE Act, IRA trusts were often drafted as “conduit” trusts. In a conduit IRA trust, all IRA distributions (including RMDs) would pass to the primary beneficiary; however, the primary beneficiary may use their own life expectancy for purposes of RMDs, thus creating the “stretch.” This could create a problem under the SECURE Act where the only real RMD is at the 10-year mark. Alternatively, by drafting an IRA trust as accumulating, the trust retains the IRA assets after the 10-year period and distributions are discretionary/left to the trustee. An accumulation trust, unlike a conduit trust, allows distributions from the IRA to be retained by the trust.
  1. Convert to a charitable remainder trust (NIMCRUT = Net Income Makeup Charitable Remainder Unitrust) – Changing current IRA trusts to CRTs (Charitable Remainder Trust – several types) will allow a steady income stream to the beneficiary for those account holders who are more charitably minded. Also, a wealth preservation trust can be created and funded with life insurance to make up the difference on what goes to charity and what goes to beneficiaries all tax free.
  1. Buy life insurance at age 59 ½ (or thereafter) – At this age, there is no longer a 10% penalty for early withdraw on an IRA, although standard income taxes will be applicable. At that time, or thereafter, an account holder can withdraw all or part of their IRA and purchase a comparable whole life policy. This policy would create an income stream (and remember to select an irrevocable trust as its beneficiary). However, there are significant logistical issues regarding how much a policy of that size, at that age, would cost. This option would require a careful calculation of the cost benefit for each individual case.
  1. Asset based Long Term Care – take the IRA and move it to an annuity (1035 exchange). The annuity RMDs would fund a life insurance policy that builds cash values, has a death benefit (tax-free) and also carries extensive long term care coverage for a couple (either facility or home based care). This transfers a tax loaded instrument into a tax free tool (life insurance) and an ILIT (irrevocable life insurance trust) can be used as the vehicle for distributions. One must determine if they will need the lifetime income from the deferred plan. Where there is already more than enough in deferred plans re-characterizing the asset as tax free and creating an inevitable tax-free distribution that is regulated through an irrevocable trust is a powerful tool while also having nursing care coverage in the event of failed health.

CARES Act contributions to planning:

Some of the key highlights of the CARES Act relative to retirement plans are:

Required Minimum Distributions Waived for 2020. The CARES Act waives the RMD rules for 2020 with respect to RMDs made from IRAs and qualified employer retirement plans (other than cash balance and other defined benefit plans).

Coronavirus-Related Distributions. The 10% excise tax imposed on early distributions from a retirement plan is not imposed on coronavirus-related distributions of up to $100,000 in 2020. An individual must satisfy certain requirements in order to qualify for coronavirus-related distributions. A taxpayer may elect to pay income taxes on a coronavirus-related distribution over a three-year period, or taxpayers may avoid income recognition by repaying the distribution to the retirement plan within three years of receipt.

Retirement Plan Loans. A retirement plan participant who qualifies for a coronavirus-related distribution may borrow up to the lesser of $100,000 and 100% of his or her vested plan benefits (this is increased from the lesser of $50,000 and 50% of his or her vested plan benefits). For participant loans that were in effect as of March 27, 2020, where the participant qualifies for a coronavirus-related distribution, the loan repayment due date is delayed for one year.

Contribution Deadline Extended. The deadline for making contributions to an IRA is extended to July 15, 2020.

Many times clients need a combination of the above to make sure they have enough retirement income, avoid taxes, provide for critical care and protect minors/beneficiaries from mistakes, divorces and lawsuits.

[1] . Chronically ill is also defined as an illness that is indefinite duration. Under the SECURE Act, disability is defined as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for at least 90 days due to a loss of functional capacity. That means on the date of death, a chronically ill beneficiary will need a doctor's note stating that on the date of death they were chronically ill unable to engage in any substantial gainful activity. This may result in higher taxes on disabled or ill people who couldn't prove their disability or illness.

About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising: