The SECURE Act and Changes to the Stretch IRA

By Attorney Christine S. Anderson

January 2020

In December, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Although there are several components to the legislation, this article will discuss the elimination of the stretch provisions for individuals who inherit IRAs.

Most non-spouse beneficiaries who inherit a traditional IRA from an account owner who dies after 2019 will no longer be able to benefit from the so-called “Stretch Provisions.” Previously, a beneficiary of an inherited IRA could stretch the payment of the inherited IRA over his or her life expectancy and continue the income tax deferral on the amounts not withdrawn. After the passage of the SECURE Act, with a few exceptions, non-spouse beneficiaries will have to withdraw 100% of the funds in the inherited IRA within 10 years of the account owner’s death. For minor children inheriting an IRA from their parent, the 10 year period will not start until they reach age 18.

The IRA stretch rules remain the same for surviving spouses and certain other beneficiaries (disabled, chronically ill and those who are 10 or fewer years younger than the IRA owner.)

Many of our clients designate adult children, other individuals or charities directly as the beneficiaries of their IRAs. For other clients, however, it is appropriate for the IRA to be payable to the client’s revocable trust either because the individual beneficiaries are too young to receive outright distribution or because the client prefers that the distributions are held and managed for the beneficiaries. For clients who name their revocable trust as beneficiary of an IRA, we have typically included “conduit” provisions that direct the required minimum distributions based on the individual beneficiary’s life expectancy be paid from the IRA to the trust and then out to the beneficiary in the same year. Including this language historically meant that the IRS would consider the age of the beneficiary when determining the number of years over which the distributions would need to be made. This type of language qualified the trust as a “see-through” or “look-through” trust.

Specifically, our form language provides that “the Trustee shall withdraw from such Retirement Benefit the Minimum Required Distribution for such Retirement Benefit for such year.” Now that the required minimum distributions are no longer based on a beneficiary’s life expectancy, it would seem the only “required distribution” is the distribution of the entire account balance in year ten. Many advisors and attorneys fear that the application of this form language in the context of the SECURE Act would be disastrous. Professionals are concerned that this type of form language does not allow payments out of the IRA in years one through nine and requires the entire balance to be paid out in year ten, likely resulting in a higher marginal income tax rate and a large lump sum payment to the beneficiary, often the very thing a client was trying to avoid.

When we considered this issue in the context of our standard form language, we are happy to report that in addition to the language that directs the trustee to withdraw the required minimum distributions, our standard form language also provides that the Trustee shall withdraw “such additional amount or amounts, if any, as the Trustee deems advisable in its sole discretion.” This language means that the trustee will have the discretion to spread the IRA withdrawals over 10 years, in any combination that makes sense given the beneficiary’s particular situation.

The majority of our clients with trusts designed to be designated as the beneficiary of retirement accounts have our standard conduit language in their trusts, and therefore do not need to rush in and have the documents updated. However, some of our clients with particularly large retirement accounts payable to their trusts may want to consider having us review their plans, particularly if their goal is to avoid large sums being distributed to their beneficiaries in a given year. If you are uncertain whether you fall into this category, we are happy to go over your estate plan with you.

Although the language in our trusts is already more flexible than the language in many other attorneys’ documents, we are always working to improve our so-called boilerplate. We are currently modifying the provisions in our trusts that concern retirement account distributions to address the changes brought by the SECURE Act.

If you would like to meet with Alyssa or Christine to discuss the impact of the SECURE Act on your estate plan, please call the office and schedule an appointment. We would be happy to meet with you