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UPDATE OF THE SECURE ACT
By:   Alan B. Cohn
Greenspoon Marder LLP

Congress passed the SECURE Act of 2019 on December 20, 2019, when President Trump signed it into law.  SECURE stands for Setting Every Community Up For Retirement Enhancement Act.  The focus of this short article is on changes to the post-death minimum distribution rules for retirement benefits for any clients who passes away this year (2020) or thereafter.   As a preface to this, it is important to remember that the values of any retirement accounts, such as IRA’s that you have, are not really worth that to your beneficiaries because of taxes.  Each of us will need to explain to our clients that the traditional “stretch IRA” planning, where you leave it to adult children over their lifetimes, is no longer an option since most beneficiaries must receive the money and pay the taxes within ten (10) years after the death of the family member.  This could be a major advantage for charities since it is one of the few ways around the accelerated income recognition rules.   There are a few exceptions for certain beneficiaries.

Prior to the SECURE Act, if a client (participant) died before he or she was required to start taking their minimum distributions, then the entire account had to be distributed within five (5) years from death unless the benefits were left to a designated beneficiary, in which case the designated beneficiary could take the benefits over their life expectancy.   If the participant died after they started taking their required minimum distributions, then the benefits had to be paid out after his or her death at least as rapidly as under the pay-out method being used to compute his or her required minimum distributions.   This resulted in benefits left to a designated beneficiary being distributed over the longer of the designated beneficiary’s life expectancy or the participant/client’s remaining life expectancy.   There are also rules as to how any trust created for a beneficiary could use the beneficiary’s life expectancy, by using the oldest beneficiary of the trust’s life expectancy.

All this was changed by the SECURE Act by inserting the ten (10) year rule.  The ten (10) year rule applies only for designated beneficiaries, whether death was before or after the required minimum distribution date. There are exceptions to this general rule for “eligible” designated beneficiaries. However, eventually upon the death of an eligible designated beneficiary, the ten (10) year rule kicks in and applies.  Please note the SECURE Act does not change the rules applicable where there is no designated beneficiary, and it does not change the definition of a designated beneficiary.  Certain exceptions were made for disabled or chronically ill beneficiaries.   No changes were made to the definitions for conduit trusts.  

An example of how the new ten (10) year rule works is as follows:

If the client should die on November 1, 2020, leaving the IRA to their adult child who is non-disabled, the IRA must be distributed in full to that non-disabled beneficiary by December 31, 2030.   The beneficiary can take distributions of any amount at any time (even taking no distributions) based on what is left starting in the year 2020 through 2029.  However, by the year 2030, the account must be liquidated.  If the beneficiary dies prior to December 31, 2030, his successor beneficiary (if he has named one) or his estate (if he did not name a beneficiary) succeeds to the obligation and must take the distribution of the entire balance by December 31, 2030.   If he fails to take the distribution by December 31, 2030, then this triggers a 50% penalty excise tax on the amount not distributed.  The 50% excise tax will continue each year the account is not 100% withdrawn, starting with the tenth year.

If a person currently has a conduit trust in their estate planning documents, then the conduit trust will still be considered the sole beneficiary of the retirement account.  If the person has a see-through accumulation trust, it still will qualify as such.  None of these have to be changed.   The problem is the benefit has changed since the account must be distributed within ten (10) years.

A surviving spouse can still receive a life expectancy pay-out.  It is one of the few exceptions.   However, when the surviving spouse dies, then the IRA is subject to the ten (10) year rule.   The same RMD rules apply to the spouse, even though the RMD age has now been changed to age 72.  The same rule applies if the trust for the spouse is a conduit trust since it is treated the same as the surviving spouse.  However, a marital trust (QTIP trust) does not receive the same surviving spouse treatment because the spouse is not considered the sole beneficiary of that trust.  Some planners may disagree on this point.  However, it appears there is a difference between a conduit trust for the surviving spouse and an accumulation trust for the surviving spouse.  A conservative way of handling this is to make sure that the trusts are all conduit trusts for the surviving spouse.  Even though you are limited to the ten (10) year rule, the accumulation trust still might be used if the spouse is not the first spouse, i.e., second marriage.   The change for a QTIP trust is a major difference under the SECURE Act.  

The life expectancy rule also still applies if the beneficiary is a minor child.   When the minor child attains the age of majority, then the ten (10) year rule kicks in, so it is life expectancy until majority, and then ten (10) years.  Attaining majority can be extended until age 26 if they are still in school or if the minor is disabled, in which case the life expectancy will continue as long as the disability lasts.   However, this rule only applies to minor children of the client/participant, not for grandchildren, nieces or nephews, or step-children.  As is the case for spouses, a conduit trust will qualify for the life expectancy payout for the minor child.   If there is an annual required minimum distribution requirement, then it must be paid out to the child or applied for their benefit.   After the child attains majority, over the next ten (10) year period, any benefits in the conduit trust must be paid for the benefit of the child (formerly the minor child).   If you combine minor children in one trust, then the life expectancy of the oldest child would be used for purposes of when the ten (10) year rule starts.  There may be other devices to make sure that the child doesn’t take control of the money too soon.   Please contact your estate planner to discuss these possibilities.  Those issues exceed the introductory level of this article.

As stated above, there are exceptions for disabled or chronically ill beneficiaries.  It would be placed in an accumulation trust and obtain a life expectancy payout.  To qualify any trust for a disabled or chronically ill person, it cannot contain possible distributions to other family members during the lifetime of the disabled or chronically ill person. 

The final exception is designated beneficiaries who are not more than ten (10) years younger than the deceased client/participant.  Under these rules the old life expectancy rule applies with a ten year payout starting on the death of the designated beneficiary if they die before the end of their life expectancy. The only ways to really beat the new SECURE Act is charitable planning, i.e., a charitable remainder trust, a Roth conversion, or converting to an annuity.  Please contact your estate planner for more information on the SECURE Act, or reach out to me at alan.cohn@gmlaw.com or (954) 491-1120.