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SECURE Act's impact on retirement trusts could upend your estate plan

by Michael Flannery | Contributor
February 8, 2020

Despite its many benefits and much-needed provisions addressing retirement plan accessibility, the SECURE Act's oppressive restriction on the duration of distributions for designated beneficiaries has made the use of retirement trusts as an estate planning vehicle for the benefit of future generations a thing of the past. But there are alternative options for accomplishing your estate plan objectives.

For many people, retirement savings are not necessarily needed for retirement. Retirement savings may serve a better purpose after the employee participant's death, such as securing the future education of a child, providing for the special needs of a family member or accomplishing any other post-death estate planning objective. Traditionally, the IRS has allowed for the use of inherited IRAs and qualified retirement trusts to accomplish these objectives. However, the ability to use a lifetime of retirement savings to benefit loved ones after your death and provide security for their lifetime has come to a halt with the enactment of the SECURE Act, which took effect on Jan. 1, 2020.

Retirement benefits as a traditional estate planning vehicle

If you have an individual retirement account (IRA) or participate in an employer-sponsored retirement plan, you may have designated someone other than your spouse as the beneficiary — perhaps a child, grandchild or other individual. The advantage to this designation is that, instead of receiving a lump sum payout of benefits, which could create a significant and immediate income tax burden on the beneficiary, the beneficiary may choose to "stretch" the payout of the plan benefits over the course of his or her life expectancy, which is based on the beneficiary's age in the calendar year following the calendar year of your death, as referenced to a life expectancy designated in the IRS Single Life Table.

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Traditionally, there were significant benefits to be gained by a plan participant making such a designation and creating an inherited IRA for retirement benefits to be paid to another individual after the participant's death. These included:

  • Tax-deferred benefit payouts
  • Long-term, tax-free asset growth
  • Lower tax bracket designation
  • "Stretching" tax deferment

The possible tax advantages from a well-managed inherited IRA for a disciplined designated beneficiary were significant and were available, potentially, for a lifetime. The younger the designated beneficiary, the longer the life expectancy and the lower the annual required minimum distribution (RMD) and, in turn, the greater the tax advantage. Indeed, the ability to "stretch" tax deferment for inherited retirement distributions has been a valuable estate planning option for both the plan participant and the designated beneficiary.

Retirement trusts offer greater asset protection and control

Unfortunately, not every retirement plan participant can count on a disciplined or fully insulated designated beneficiary who will be able to take advantage of the considerable tax benefits of the "stretch." Retirees planning to use their retirement savings for the financial future of a loved one may be confronted with a designated beneficiary who may want, need or risk access to the bulk or entirety of the plan benefits and, thereby, forego the available tax advantages. Such a predicament may arise when the designated beneficiary:

  • Anticipates a divorce
  • Is subject to financial liability through litigation
  • Owes significant debt
  • Is fiscally irresponsible
  • Suffers an unexpected disability
  • Is immature
  • Requires incentive
  • Is a spendthrift
  • Incurs unanticipated health care costs
  • Faces long-term care expenses

To provide future retirement benefits to a designated beneficiary for whom circumstances present some risk of access by third-party creditors, it is not uncommon for participants to create a standalone trust that is designated as the beneficiary of the retirement benefits. The advantage of naming a trust as the beneficiary of retirement benefits, which are then paid out to the individual designated as the beneficiary of the trust, are:

  • Greater asset protection
  • Greater control of distributions
  • Preservation of the "stretch"
  • Possible long-term tax benefits

However, there also are certain drawbacks to using a trust as a conduit for distributing benefits to designated beneficiaries. These include:

  • Strict qualification requirements for trusts. To be valid, the trust must satisfy the requirements of a "see-through" trust.
  • Narrower parameters for countable life expectancy. If qualified as a valid see-through trust, the RMD from the trust is not calculated using the life expectancy of the designated beneficiary (the trust) because it is not a human individual. Instead, the IRS uses the life expectancy of the oldest beneficiary of the trust at the time of the death of the owner (which often provides a shorter payout duration and, consequently, higher RMDs and less tax savings).
  • Higher tax rate for trusts. When an individual is named as the direct beneficiary, the income derived from RMDs is taxed at the individual income tax rate. But when benefits are paid to the trust, and not paid to an individual beneficiary in the same year, the income is taxed at the higher rate attributed to trusts.

Therefore, using a retirement trust as the beneficiary of plan benefits is a calculated trade-off of tax benefits for asset protection.

Conduit or accumulated (discretionary) "see-through" trusts

There are several requirements that the trust must satisfy to be eligible for designated beneficiary treatment to retain the tax deferment "stretch."

  • The trust must be valid under state law
  • The trust must be irrevocable or, by its terms, become irrevocable upon the death of the original IRA owner
  • The underlying beneficiaries of the trust must be identifiable individuals qualified as designated beneficiaries (thus, we "see through" the trust to identify a beneficiary with a life expectancy)
  • Documentation of the trust must be provided to the custodian of the subject IRA by Oct. 31 of the year following the year of the owner's death

In addition, the see-through trust must be named as either a "conduit" trust or an "accumulated" trust. The difference between the two types of trusts can be significant.

  1. Conduit trusts
  2. Conduit trusts function as their title suggests — they serve as a simple conduit for delivering benefits from the retirement plan to the designated beneficiary of the trust. Thus, with a conduit trust, the trust does not retain any RMDs but, rather, the trustee immediately distributes the payouts to the beneficiary and the beneficiary pays income tax on conduit payouts based on the lower individual income tax rate. In addition, when identifying the oldest beneficiary of the trust for purposes of determining life expectancy, any remainder beneficiaries are not counted.

  3. Accumulated trusts
  4. An accumulated trust functions in just the opposite way by retaining RMDs in the trust and allowing the trustee to exercise discretion as to when and how the benefits are distributed. Thus, accumulated trusts are often referred to as "discretionary" trusts. With a discretionary trust, because the payouts are retained in the trust, the income is taxed using the higher income tax rate for trusts (although the added control in determining payouts allows the trustee to better manage the income tax consequences over time). Additionally, when identifying the oldest beneficiary for purposes of determining life expectancy, remainder beneficiaries may be counted.

By naming the see-through trust as "conduit" or "accumulated," the owner may provide retirement benefits to a designated beneficiary for the expectancy of their life and opt for greater tax benefits or greater asset protection.

The effect of the SECURE Act on retirement trusts

On Jan. 1, 2020, the SECURE Act took effect. "SECURE" stands for Setting Every Community Up for Retirement Enhancement. One of the purposes of SECURE is to provide greater access to retirement savings for employees not otherwise eligible for employer-sponsored plans. However, when Congress set out to facilitate greater access and use of retirement savings, it meant those savings to be used for retirement — not as an estate planning vehicle for the long-term future benefit of non-retirees.

Although SECURE may accomplish its goal of greater access to retirement savings, which is sorely needed, it essentially removes the usefulness of retirement trusts by restricting the maximum duration of retirement plan payouts to 10 years. Thus, for all retirement plan participants who die after Dec. 31, 2019, any tax deferment and asset protection obtained by using conduit and accumulated trusts will be limited to 10 years after the year of the original owner's death, by which time the retirement plan must be entirely paid out. All funds distributed will be taxed within that 10-year window (except for tax-free Roth IRA funds). Those taxes are estimated to provide a $16 million benefit to the U.S. Treasury.

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For the beneficiaries, however, upon the 10-year required distribution, no taxes are deferred and the funds distributed to the designated beneficiary become accessible to third-party creditors. For many inherited IRA beneficiaries, SECURE may even be a disincentive to wait for 10 years for final distribution. But even for those who wait, a bulk distribution of remaining benefits at 10 years may create a significant and burdensome income tax payment. The bottom line is that SECURE makes inherited IRA trusts a much less valuable, if not counter-productive, estate planning vehicle.

Are there any exceptions from the 10-year rule?

SECURE does provide five categories of eligible designated beneficiaries (EDBs) who are exceptions from the 10-year rule and may continue to withdraw inherited IRA benefits over the course of their life expectancy. These include:

  • Surviving spouse
  • Disabled beneficiary
  • Chronically ill beneficiary
  • Minor children
  • Beneficiary not more than 10 years younger than the plan owner

However, qualification for these exempted categories can be detailed and complex, and there may be hidden disadvantages. You should consult your estate planning attorney to determine whether your intended designated beneficiary qualifies for one of these excepted categories.

What are the estate planning options after SECURE?

  1. Inherited IRA trust
  2. Although SECURE has placed a significant restriction on the duration of retirement trust benefits and the usefulness of retirement trusts, they remain viable options for those who name an EDB who qualifies as an exception from the restrictive 10-year rule. If the beneficiary does not qualify as an exception, the conduit or accumulated trust is only useful for 10 years after the death of the original owner and will present several disadvantages:

    • Termination of RMDs
    • Elimination of asset protection
    • Higher taxes for accumulated trusts
    • Potentially significant tax consequences upon the required 10-year distribution

  3. Roth IRAs
  4. Using a Roth IRA in an accumulated trust offers the benefits of discretionary control and tax-free distributions for 10 years. However, you should consult with your estate planning attorney about the limitations and other tax consequences of using Roth IRAs.

  5. Life insurance
  6. Investing the balance of accessible tax plan benefits in life insurance and naming the intended beneficiary of the life insurance plan assimilates a stretch IRA, with distribution of benefits to a named beneficiary upon the death of the insured. As an estate planning vehicle, life insurance can be just as effective for accomplishing long-term post-death objectives and may avoid the complicated rules and tax requirements of SECURE.

  7. Designated retirement plan beneficiary
  8. Compared to the now-restricted conduit or accumulated trust, simply naming a designated beneficiary of your retirement plan at least allows you to choose an intended beneficiary with a longer life expectancy and thereby benefit from lower immediate RMD tax consequences and a greater accrual of asset growth. However, the long-term discretionary control and asset protection that made the retirement trust so inviting as an estate planning tool is sacrificed.

  9. Re-evaluate existing asset distributions in your estate plan
  10. Using retirement trusts to preserve inherited IRA benefits for the life expectancy of a loved one offered significant advantages before SECURE was enacted. There is no question that SECURE has significantly limited the viability of retirement trusts as an estate planning tool. But accomplishing your long-term estate planning objectives — even those that are important to you after your death — are not limited simply to your ability to "stretch" the duration of the tax deferment of retirement plan distributions. There are countless other distribution methods that you can incorporate into your existing estate plan to accomplish your objectives.

However, assessing the effect of SECURE on your existing retirement plan and evaluating potential alternative distribution methods requires careful and comprehensive consideration by an experienced estate planning attorney who understands the relevant tax laws (like SECURE) and the appropriate balancing of advantages and disadvantages for each possible approach. And no attorney can determine the appropriate approach for you without your input.

If you own or benefit from an existing inherited IRA or retirement trust, confer with your estate planning attorney now to determine what effect SECURE may have on your long-term interests. The impact of SECURE may impose significant limitations on your retirement plan objectives, but accomplishing your overall estate plan is only limited by your hesitancy to respond.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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