Trusts and Estates

Legislation Alert: The SECURE Act and the Stretch IRA

Anne Bruner Nash
Roisman Henel + Adams LLP

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted as part of a federal spending bill, makes substantial changes to the rules governing IRAs and other retirement plans, including replacement of the “stretch” inherited IRA with a ten-year payout rule for most non-spouse beneficiaries.

Signed into law on December 20, 2019; in effect January 1, 2020 for post-2020 deaths.

Short summary:  The most significant change in the SECURE Act that estate planners must address with clients is replacement of the ability to stretch out mandatory withdrawals of an inherited IRA over the life of the beneficiary with a ten-year mandatory withdrawal period for all but “eligible designated beneficiaries.”   Eligible designated beneficiaries consist of a surviving spouse, a minor child of the IRA owner until the minor reaches majority, a disabled or chronically ill beneficiary, and an individual who is not more than ten years younger than the IRA owner.


Section 401 in Title V—REVENUE PROVISIONS of DIVISION O (SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT) of the “Further Consolidated Appropriations Act, 2020” makes changes to §401(a)(9) of the Internal Revenue Code (the “Code”) by adding new subparagraph (H) and new definitions to §401(a)(9)(E).  It provides that with certain exceptions, the amendments apply to “employees” who die after December 31, 2019.  (The term “employee” in the Code refers to an employee of an employer who maintains a qualified retirement plan for its employees, and also refers to an IRA owner.  This alert will use the term “IRA owner.”)

The SECURE Act does not generally amend or replace the rules in effect before January 1, 2020 (which are set forth in the Code and in extensive Treasury regulations); it creates new rules that add to the old rules.  The definition of a designated beneficiary under Code §401(a)(9)(E) and the regulations remains the same: an individual or group of individuals or a trust if the trust meets the requirements for a see-through trust named as beneficiary by the IRA owner (or plan).  But new §401(a)(9)(H)(i)(I) provides that an IRA inherited by a designated beneficiary must be distributed within ten years after the death of the IRA owner, rather than over the life expectancy of the designated beneficiary, unless the designated beneficiary is an “eligible designated beneficiary.” 

The new definition for an “eligible designated beneficiary” under §401(a)(9)(E)(ii) is a designated beneficiary who is:

  • The surviving spouse of the IRA owner;
  • A child of the IRA owner who has not reached majority;
  • Disabled (as defined in Code §72(m)(7);
  • Chronically ill (as defined in Code §7702B(c)(2); or
  • An individual not described in any of the preceding groups who is not more than ten years younger than the IRA owner.

Under 401(a)(9)(B)(iii), the inherited IRA may be distributed over the life (or the life expectancy, whichever is less) of the eligible designated beneficiary, except that a minor child ceases to be an eligible designated beneficiary upon attaining majority, and then becomes subject to the ten-year rule.

In practical terms, what does this mean?

The old rules still apply to existing inherited IRAs, except that once the designated beneficiary dies, the ten-year rule will apply.  The old five-year rule still applies to IRAs that do not have a designated beneficiary (where there is no beneficiary designated, or the beneficiary is not an individual) and the IRA owner dies before the required beginning date.   If the IRA owner dies after the required beginning date (now 72, for individuals born on or before June 30, 1949), the IRA can be paid out over the remaining life expectancy of the owner.

For many designated beneficiaries, the new ten-year rule will apply.  The beneficiary will have to withdraw the entire IRA and pay the income tax within ten years of the IRA owner’s death, forgoing the long tax deferral that stretch-out offered.  For families of modest means, the SECURE Act may not have much effect—many inherited IRAs are withdrawn within a short period of time after the IRA owner’s death.  But these changes will have significant impact for clients who were planning on stretch-out to minimize the income taxes their beneficiaries will pay, especially those who were planning on using trusts to hold the inherited IRA.

Clients who included a conduit trust in their estate plan must determine whether the conduit trust will be satisfactory for any designated beneficiary who is not an eligible designated beneficiary, such as adult children or grandchildren of any age.  Under a conduit trust, all distributions made from the retirement plan to the trust during the lifetime of the beneficiary must be passed out to the beneficiary.  With the new rules, this means that the retirement plan must be distributed to the beneficiary (and the income tax paid) within ten years of the IRA owner’s death.  If the client was using a trust because the beneficiary was too young or otherwise not able to manage the funds responsibly, the conduit trust may not be satisfactory.  For minor children of the IRA owner (who are eligible designated beneficiaries), using a conduit trust will still allow the trustee to make small distributions during the years before the child’s majority, but the client will have to decide if having the balance of the IRA distributed outright to the child by age 28 is acceptable.

The other kind of trust commonly used to hold inherited IRAs is the accumulation trust.  An accumulation trust allows the trustee to accumulate the IRA withdrawals in trust, but all lifetime and remainder beneficiaries are counted as beneficiaries for the purpose of applying the minimum distribution rules.  (If an accumulation trust has a remainder beneficiary that is older than the sole lifetime beneficiary, it is the older beneficiary’s life expectancy that must be used to calculate the required minimum distributions.  If the trust has a charity as a remainder beneficiary, it does not count as a see-through trust, and the “no designated beneficiary” rules apply for calculating the required minimum distributions.)  Almost all accumulation trusts will be subject to the ten-year rule because at least one of the income or remainder beneficiaries will not be an eligible beneficiary, which means that the trust will have to pay the income taxes on the retirement plan distributions, at trust income tax rates, over ten years.

The exception will be an accumulation trust for a single disabled or chronically ill beneficiary.  If all remainder beneficiaries are the same age or younger than the lifetime beneficiary, the life expectancy of the disabled or ill beneficiary will be used to calculate the required minimum distributions.

Some of the options that we can offer to explore with clients to minimize the tax effects of the SECURE Act are:

  • If they are willing to leave a portion of the IRA to charity, designating a charitable remainder trust as the beneficiary of the IRA to mimic stretch-out for the noncharitable beneficiaries (although this strategy tends to work better for adult beneficiaries).
  • Convert the IRA to a Roth IRA.  The client has to pay income tax now but the assets in the Roth IRA would continue to grow tax-free and the distributions to the beneficiaries would not be subject to income tax.  This strategy requires an analysis of the client’s marginal income tax rate as compared to the beneficiaries’ anticipated income tax rates, but it may be a very good option for accumulation trusts. 
  • Use distributions from the IRA to invest in a life insurance policy which would pay the proceeds to the beneficiaries free of income tax.  This strategy requires careful analysis of life insurance products and a determination whether life insurance is an appropriate tool in the client’s overall estate plan.  In addition, the client must realize that any funds invested in a life insurance policy are no longer available for the client’s needs and expenses.  
  • For IRA owners who died later in 2019 and are leaving the plan to a surviving spouse, if the spouse doesn’t need the IRA funds, consider having the spouse disclaim so that the contingent beneficiaries can stretch out the payments under the pre-SECURE Act rules.

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