On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act, which took effect January 1, 2020, is the most impactful retirement legislation of the past decade.
The act repeals the age restrictions to traditional retirement accounts, meaning the age for required minimum distributions from retirement accounts has increased from 70 ½ to 72 years of age.
The most significant provision for clients with retirement accounts is the elimination of the “stretch” option for non-spouse designated beneficiaries who inherit a retirement account. 
According to the SECURE Act, most non-spouse beneficiaries – with a few exceptions for beneficiaries who are not more than 10 years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals – are now required to withdraw the balance of the inherited retirement account within 10 years.
Without prompt and proper planning that takes the new law into account, this change could significantly increase the tax bill for non-spouse beneficiaries.
Previously, beneficiaries of inherited retirement accounts could take distributions over their life expectancy. Under the SECURE Act, the shorter 10-year timeframe for taking distributions will likely result in the income tax due being accelerated and possibly causing the beneficiaries to be bumped into a higher income tax bracket. That could result in the beneficiaries to receive less from the retirement account than originally anticipated.
Because of this monumental change in the way inherited retirement accounts are treated, it is crucial that we work together to ensure that we help our mutual clients to plan accordingly.
Keeping an eye on tax consequences and asset protection needs, there are several strategies that we can collaborate on to address this new paradigm.
Revocable Living Trust (RLT) or Standalone Retirement Trust (SRT)
Now that most beneficiaries are required to withdraw the entire balance of a retirement account within 10 years of the owner’s death, an RLT or SRT might be the best estate planning tool for these unique assets.
We should, however, reconsider the use of “conduit” trust provisions because they require any required minimum distributions (RMDs) to be distributed directly to the beneficiary through the trust.
Under the SECURE Act, the balance of the account would have to be distributed directly to the beneficiary at the end of year 10, which is an outcome our client might want to avoid.
Now, an “accumulation” trust provision may be more beneficial. This provision allows the trustee to receive the RMDs from the retirement account as often as required by law but allows the trustee to exercise discretion as to when and how much of the funds are distributed to or used for the benefit of the beneficiary. Although the trust will pay income tax on any of the distributions from a retirement account that are not distributed to the beneficiary, for many beneficiaries it is equally or more important to protect the money from the beneficiary’s creditors, divorces, or lawsuits.
If your client named their RLT or SRT as beneficiary of their retirement account, it is important that an attorney review their planning documents. If their trust contains “conduit” provisions, an amendment to their trust may be appropriate. We can help with this.
Charitable Remainder Trust (CRT)
For charitably inclined clients, a charitable remainder trust may be the right solution to plan for the disposition of their retirement accounts.
Such a trust would allow the client, as the grantor, to name beneficiaries to receive an income stream from the retirement account for a period of time, with the remainder going to a charity named in the trust agreement.
When the trust is created, the net present value of the remainder interest must be at least ten percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives.
Upon the plan participant’s or account owner’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust, and the distribution from the retirement account to the CRT is not taxed.
However, distributions from the CRT to the beneficiaries will be subject to income tax. Another benefit to this strategy is that the distributions to the beneficiaries will be smaller and therefore subject to less income tax liability.
It is important to note that this strategy is best for individuals who are already charitably inclined. This strategy may not result in the beneficiaries getting more than they would have utilizing other estate planning strategies, but if the client already wishes to provide for a charity, this may achieve the client’s goals in a more tax favorable way.
Irrevocable Life Insurance Trust (ILIT)
Due to the new 10-year mandatory withdrawal rule, there will be an acceleration of the beneficiaries’ income tax on inherited retirement accounts, potentially moving them into a higher income tax bracket.
The new rule may also result in the amount of cash available to beneficiaries being less than the client originally anticipated. In order to help offset this shortfall, your clients may want to consider using funds from their retirement accounts during their life to purchase additional life insurance and transfer ownership of the policy to an ILIT.
The ILIT will help protect the insurance funds from the beneficiary’s creditors and, if desired, can be designed so that the proceeds from the life insurance policy are not includible in the client’s estate. As their trusted financial advisor, you are uniquely positioned to assess the client’s circumstances and appropriate level of life insurance coverage.
Multi-Generational Spray Trust
Any number divided by a large number results in a smaller number. The same philosophy is true with distributions involving retirement accounts.
While the distributions must be made within 10 years, by distributing the retirement account to multiple beneficiaries at the same time over the 10-year period, the RMDs received by each beneficiary will be smaller, and the resulting tax liability per beneficiary will be reduced.
For asset protection purposes, it is always advisable that the distributions be made to a trust for the benefit of a beneficiary instead of directly to the beneficiary.
Inherited retirement accounts will not provide the same benefits post-SECURE Act. It might be important to review a client’s existing planning documents or explore new planning opportunities under the Act.
By working together, we can help our clients navigate the new rules. Proper estate planning can provide our clients with peace of mind while they are living, and ensure their retirement assets are passed on to their loved ones in the most efficient and protected manner.
Contact us today to learn more about how we can tackle the SECURE Act together.
 If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. § 1.401(a)(9)-3, Q&A (4)(a)(2) and 1.401(a)(9)-5, Q&A (5)(b).