The SECURE Act – Geri McHam Feb 2020

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By Family Defined Benefits / February 4, 2020

After a long wait, Congress has approved The Setting Every Community Up For Retirement Enhancement (SECURE) Act, which was signed into law on December 20, 2019. It went into effect January 1, 2020 and there are several major changes that affect individual retirement accounts (IRAs), defined benefit plans (pensions), and defined contributions plans, such as 401(k)s and 457 plans.

On the positive side, this Act will increase access to workplace retirement plans, allow for automatic enrollment into workplace plans, and expand retirement savings by allowing open multiple employer plans (MEPs), thereby opening access for employees that don’t currently have the ability to participate in a workplace savings plan. It will also defer the starting age for required minimum distributions (RMDs) from age 70½ to 72, and eliminates the age limit for contributing to an IRA, which allows individuals to save more, thus providing greater opportunities to increase one’s retirement account balances.

Those that are focused on accumulating wealth within their retirement accounts will likely view the SECURE Act as a positive game changer in that it provides greater access to retirement plans, greater investment choices, extends contribution limits, and defers RMDs until 72.

However, those that have already accumulated a sizeable amount of wealth inside their retirement plans, such as retirees and those nearing retirement, may view the SECURE Act in a negative light as it has the potential to create some significant tax and estate planning challenges. The most significant of these changes is the elimination of the stretch IRA, which was replaced by the “10 year rule.”

By eliminating the ability to “stretch out” the IRA distributions over a beneficiary’s lifetime, the funds held inside the qualified retirement account must be distributed within a maximum of 10 years. This creates a future tax burden on these accounts and significantly decreases the amount of wealth transfer due to the taxes. Everyone with a substantial amount of wealth in a qualified plan such as an IRA, 401K or 457 should review their beneficiary designations and trust provisions in order to eliminate the possibility of an avoidable tax disaster.

There are some exceptions to the 10 year payout rule. The SECURE Act creates new categories of beneficiaries, and limits the opportunity to take distributions over one’s life expectancy to only certain beneficiaries, the “eligible designated beneficiary” (“EDB”). Persons in this category named as outright beneficiaries 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 remain the same.
  2. A minor child of the plan participant based on the definition of “minor” in the person’s state of domicile, but when the child reaches adulthood, the 10-year rule applies. 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 shall be considered to be disabled if unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. Proof of disability is required.
  4. A chronically ill individual. Certification of illness that is expected to be lengthy or indefinite is required.
  5. An individual who is not more than 10 years younger than the deceased participant or IRA owner. (A sibling, for example).

All other designated beneficiaries must take complete distribution of the benefits by the end of the 10th calendar year following the participant’s death.

Conduit Trusts

A conduit trust requires the trustee to distribute immediately to the beneficiary any plan distributions the trust receives. 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 or other liability.

Though trusts are taxed at a high rate, you have to consider the Marginal vs. the Effective tax rate. Bear in mind why the trust may have been created in the first place; to be protective of a beneficiary who may not be an appropriate inheritor to receive outright distributions.

Accumulation Trusts

An accumulation trust provides that plan distributions received by the trust are not required to be distributed, but rather may be held in the trust for future distribution to a beneficiary. The funds can remain in the trust indefinitely after they have been distributed from the retirement plan, but you will still have to have the distributions into the trust on a 10 year payout.


The SECURE Act retains the definition of designated beneficiary, so current plans naming beneficiaries remain effective. The Act does not affect the definition of see-through conduit trusts and accumulation trusts. These are still fine.

The game-changing problem is that except for the specified categories of EDBs, for deaths in 2020 or later, the existing estate plan will not work as it was intended. Plan benefits must now be distributed in 10 years rather than over the life expectancy of the designated beneficiary (or oldest trust 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 potential substantial payout will be required to be made to a beneficiary within 10 years – possibly more than the participant would prefer the beneficiary receive, and possibly to a beneficiary in a very high income tax bracket, perhaps in peak earning years, forced to report a substantial amount of ordinary income.

It is anticipated that many clients will 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 with a Trust Protector or through other means, so it’s important that the client meet with his or her advisors to review the current plan.


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

Some clients 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.

This is why it’s imperative that you either work with your financial advisor, or your clients, as the case may be, to create a plan that is beneficial.