Retzner & Nichols: Estate planning with retirement assets and the SECURE Act

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By Rodney Retzner and Micah Nichols

The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) was enacted on December 20, 2019. The SECURE Act dramatically changes how an individual should structure his or her estate plan if there are qualified retirement accounts involved.

The most significant change for estate planning is the change involving how and when beneficiaries of such accounts withdraw the funds (and, thereby, when they pay the income tax on the assets held in those accounts. Prior to the SECURE Act, designated beneficiaries of an inherited retirement account were generally permitted to take required minimum distributions (“RMDs”) from the retirement account over their life expectancies. By allowing a designated beneficiary to “stretch” RMDs over his or her lifetime, the designated beneficiary could continue the benefit of allowing the retirement accounts to grow on a tax-deferred basis and avoid paying income tax on the assets up front, spreading the income tax over the withdrawal period. The SECURE Act eliminates, in most cases, the ability to “stretch” RMDs from an inherited retirement account over a designated beneficiary’s lifetime. Now, an inherited retirement account must be distributed in full within 10 years after a plan participant’s death (“10 year rule”). This accelerated withdrawal will cause most beneficiaries to pay income tax on the assets on an accelerated basis and at higher income tax rates.


While the 10 year rule applies to most designated beneficiaries, there are five classes of designated beneficiaries who will not be affected by the SECURE Act and who will still be able to stretch RMDs over their life expectancies (also called “eligible designated beneficiaries” or “EDBs” under the SECURE Act): (1) the plan participant’s spouse, (2) minor children of the plan participant, (3) disabled individuals, (4) chronically ill individuals, and (5) individuals less than 10 years younger than the plan participant. All other designated beneficiaries outside these five classes, including any trust named as a designated beneficiary (except in certain circumstances), are subject to the 10 year rule.

Many estate plans utilize continuing trusts for descendants. These trusts, to be considered as “qualified beneficiaries,” must be specifically drafted as “see-through” trusts to allow the trust beneficiary to be treated as a designated beneficiary of a retirement account even though the assets are in trust for that beneficiary. These types of trusts are the same before and after the SECURE Act, however, the implications of the type of beneficiary under the SECURE Act dramatically change the effect of such trusts as assets are paid out of the retirement accounts. The payout requirements will depend on whether the beneficiary is a beneficiary subject to the 10 year rule or EDB.

There are generally two types of see-through trusts: conduit trusts and accumulation trusts. Conduit trusts provide that any distributions made from a retirement account to the trust are immediately paid to the trust beneficiary. The trust is simply a “conduit” for paying out the account. Conduit trusts have often been used in conjunction with the lifetime stretch rules for distributing retirement accounts to beneficiaries. The RMD, and the income associated therewith, simply flows out to the beneficiary while the bulk of the retirement account remains in trust. Accumulation trusts provide that distributions made from a retirement account may be accumulated within the trust (i.e. they do not have to be distributed to the beneficiary immediately, or at any specific time).

After the SECURE Act, use of conduit trusts now cause individual beneficiaries or trusts for a client’s descendants to realize a significant amount of income over a shorter period of time (rather than a lifetime) because all retirement accounts must be distributed outright within 10 years. Although the conduit trust would likely result in lower overall income tax because a descendant is normally not in the highest income tax bracket, the protection of having the trust holding assets beyond the 10-year point is lost. Because a conduit trust is required to distribute all mandatory distributions from the retirement account, there would be a large, outright distribution of the entire account at that 10-year point. An accumulation trust provides a way to avoid distributing the retirement account to descendants outright and in full within 10 years. With an accumulation trust, the RMDs would accumulate inside the accumulation trust, with a trustee maintaining discretion regarding distributions to descendants. Because the retirement account would still need to be distributed to the accumulation trust, in full, within 10 years, however, this will likely result in a larger overall income tax as trusts have compressed tax rates and hit the highest tax bracket after only about $12,000 in income. Nevertheless, this is likely a far better result for a client, especially if the client wishes to hold the retirement account in trust for the benefit of his or her descendants and not distribute a sizable lump-sum retirement account to those descendants within 10 years.

When reviewing a client’s estate plan and considering the SECURE Act, lawyers should consider the following planning techniques for their client:

• A client’s estate plan might not change at all if his or her retirement accounts will pass to EDBs. If other beneficiaries are involved who are not EDBs, the client’s estate plan should be revisited and possibly amended.

• If the plan participant is in a lower tax bracket than his or her expected designated beneficiaries (which will especially be the case if the designated beneficiary is going to be an accumulation trust), the plan participant might consider converting his or her traditional retirement accounts to Roth retirement accounts during his or her lifetime, because the plan participant can absorb the tax at a lower rate than will apply to his or her future beneficiaries.

• Leaving traditional retirement accounts to charity or charitable trust could also be used to reduce or eliminate the income tax on the retirement account.

These are just a few items to consider when revisiting estate plans in light of the SECURE Act.•

Rodney Retzner is a partner and Micah Nichols is an associate at Krieg DeVault. Opinions expressed are those of the authors.

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