The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted on December 20, 2019 and is now the law. While its primary goal was to encourage people to save more for retirement, it also attempts to cover the tax shortfall that will be caused by the Act’s taxpayer-friendly provisions, and that is where the problems arise. The SECURE Act actually increases the taxation of assets in a retirement savings account after the death of the original account owner (the “participant”). These provisions, which were designed to put more money back in government coffers, were primarily accomplished by changing the rules governing Required Minimum Distributions (“RMDs”). RMD rules are complex, but they are important to understand for purposes of estate planning. In fact, RMD rule changes made by the SECURE Act may require changing your estate planning documents to ensure that your estate plan continues to work as you intend.

The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” was enacted by Congress and signed into law on March 27, 2020. Because the CARES Act affects retirement plans as well, some professionals are referring to the CARES Act as SECURE Act No. 2. We have added Question 13 to summarize the relevant changes made by the CARES Act.

In order to help make these rules and their impact on your estate plan easier to understand, we are providing the following Q&A. Of course, we are here for you when you are ready to discuss your particular situation.

Table of Contents

Question 1: What are the RMD rules and, in a very general way, what did the SECURE Act do to them? 
Question 2: What are the major changes to the RMD rules? 
Question 3: Who qualifies as an EDB? 
Question 4: If the participant’s child is the direct beneficiary of the participant’s retirement plan account, is the child allowed to have the entire balance of the retirement plan account distributed to himself or herself once he or she reaches the age of majority (age 18 in Georgia)? 
Question 5: What is the age of majority, and what is its effect? 
Question 6: What if the named young beneficiary is not the participant’s legal child, but rather a grandchild, step-child, niece, or nephew? 
Question 7: Do you have to name your desired beneficiaries directly, or can you name a trust to benefit your desired beneficiaries? 
Question 8: Why would you want to name a trust as the retirement plan beneficiary rather than your loved one directly? 
Question 9: What are the three (3) types of trusts for purposes of the RMD rules? 
Question 10: If your current estate planning documents contemplate passing your retirement savings accounts to “conduit trusts,” should you keep it this way or do you need to make a change? 
Question 11: Based on all of the available beneficiary designation options, which one should you use? 
Question 12: Can you take any steps to reduce the negative tax effects from the changes in the RMD rules? 
Question 13: How did the CARES Act affect the RMD rules and other ways to benefit from a retirement plan? 
Final Question: What should you do now? 

Question 1: What are the RMD rules and, in a very general way, what did the SECURE Act do to them?

The SECURE Act changed the RMD rules, which mandate how fast IRA and Qualified Retirement Plan (“retirement plan”) assets must be distributed to the owner/participant (“participant”), or to the beneficiaries after the participant’s death. This is important because retirement plan assets are not taxed until they are distributed. If the participant or beneficiary fails to distribute the entire RMD for any given year, he or she will be subject to an annual 50% penalty tax on the shortfall until corrected.¹ The SECURE Act generally requires a faster payout of a participant’s retirement plan assets to the named beneficiaries after the participant’s death.

From a tax perspective, the shorter RMD period will likely cause income tax to be paid sooner and at likely higher rates. From a non-tax perspective, the RMD rule changes have a much bigger impact when a trust is the most appropriate beneficiary of a retirement plan account.

Question 2: What are the major changes to the RMD rules?

The SECURE Act changed the rules for distributions to designated beneficiaries (“DBs”). Under the old rules, payout of the retirement plan assets passing to a DB could be stretched out over a period of years equal to the beneficiary’s life expectancy (“LE”), beginning in the year after the participant’s death. This period of time was used to determine the annual RMDs that the DB must take. However, after the SECURE Act went into effect on January 1, 2020, full payout of all assets that remain in a retirement plan must be distributed completely to the DBs no later than December 31st of the calendar year that contains the 10th anniversary of the participant’s death (“10-year cliff rule”). However, a special category of eligible designated beneficiary (“EDB”) is generally allowed to use the old LE rule (i.e., receive RMDs that are based on the EDB’s own life expectancy).²

While the SECURE Act generally begins to apply on January 1, 2020, the SECURE Act has a delayed effective date of January 1, 2022 for certain types of retirement plans. The most important type of retirement plans with this delayed effective date are Governmental plans. While not totally clear, governmental plans likely refer to the types of plans used by Federal, state or local government authorities, including 403(b) and 457 Plans. However, and while not clear, the delayed effective date may be limited not only to the type of plan but rather to the sponsoring employer being a federal, state, or local governmental entity.

Where the participant died before the SECURE Act’s effective date, the DB continues to utilize RMDs based on the DB’s LE, but upon the DB’s death, the RMDs switch to the 10-year cliff rule. Where the participant died after the SECURE Act’s effective date and the beneficiary qualifies as an EDB to use RMDs based on their LE, then upon the EDB’s death (or when participant’s minor child attains age of majority), you switch to the 10-year cliff rule.

Question 3: Who qualifies as an EDB?

As discussed above, EDBs utilize their LE for purposes of the RMD rules. EDBs include: (i) the participant’s spouse; (ii) someone who is not more than 10 years younger than the participant; (iii) an individual who is qualified as disabled or chronically ill; and (iv) to a limited extent, the participant’s children. The RMD based on the child’s LE only applies to a child of the participant until the child attains the age of majority, after which the child is subject to the new 10-year cliff rule.

Following are some important points to understand regarding EDBs:

A. Someone not more than 10 years younger than the participant. Such an individual could be older than,³ about the same age as or up to 10 years younger than the participant. This status may apply, for example, to parents, non-married life partners, siblings, cousins and friends.

B. An individual who is qualified as disabled or chronically ill. This status may be difficult for a beneficiary to attain, unless the beneficiary is already qualified as disabled or chronically ill on the date of the participant’s death for other purposes, such as receiving social security disability benefits (“SSDI”), Medicaid, or, possibly, private disability or long-term care insurance benefits. We are hopeful that the IRS will liberalize these rules, but, as of now, fairly strict requirements must be met as of as of the participant’s date of death.

C. Participant’s child. First, this EDB status does not simply apply to any young beneficiary. Rather, this status is limited to the participant’s natural or adopted children, and does not to any other of the participant’s descendants, such as grandchildren. Further, step-children do not qualify as EDBs. Second, the definition of age of majority is unclear. At this point, we believe it means the state law age of majority, which in GA is age 18, but it can be extended up until age 26 based on educational status. However, until the IRS issues Regulations, it is unclear what is meant by necessary educational status to extend the age of majority for this purpose.

Question 4: If the participant’s child is the direct beneficiary of the participant’s retirement plan account, is the child allowed to have the entire balance of the retirement plan account distributed to himself or herself once he or she reaches the age of majority (age 18 in Georgia)?

Yes! First, no distributions from a retirement plan account can be made to anyone other than the participant during the participant’s lifetime. However, after the participant’s death, the RMD rules look to the beneficiary of the account to determine how fast the remaining account assets must be paid out. If the participant’s child is the successor beneficiary (either because the participant named the child as the beneficiary on the beneficiary designation form, or because the participant failed to name a beneficiary and the plan terms provide that the participant’s children are automatically the beneficiaries in the absence of a named beneficiary) then the child is either a normal DB (if he or she is over the age of majority at the time of the participant’s death), or an EDB (if he or she is under the age of majority at that time). If the child is under the age of majority, then the RMDs are based on the child’s LE, but only until the child attains the age of majority, at which point the RMDs change to being based on the new 10-year cliff rule. If the participant’s child has already attained the age of majority when the participant dies, then the RMDs are based on the new 10-year cliff rule.

The bigger issue, however, is who controls the distributions from the retirement account. The RMD rules do not prohibit larger distributions; they only mandate the minimum that needs to be distributed. State laws generally provide that a minor child does not have the legal right to control assets before the state law age of majority. For example, when the minor child receives a check as a birthday present, the check is deposited into a custodial account on the child’s behalf, so the custodian (normally the parent) can control the account funds until the child attains the age of majority. However, when the child attains the age of majority, the child has total control over his or her assets. As a result, the day the child attains the age of majority (age 18 in GA), the child can take a full distribution of the entire retirement plan account.

Question 5: What is the age of majority, and what is its effect?

There may be more than one age of majority, depending on the purpose. The law of the state where the child is domiciled (i.e. where the child permanently resides) determines the state law age of majority. In Georgia, a child reaches the state law age of majority and is considered an adult for legal purposes once the child reaches 18 years of age. However, a custodial account can be held by the custodian for the child’s benefit until the child reaches age 21. For purposes of the RMD rules, the age of majority would initially be determined by the applicable state law, but may then be extended up to age 26, depending on the child’s educational status. At this point, the law is unclear as to what educational status is necessary to extend the age of majority.

For example, if the participant dies when his or her child is under the age of majority, the child’s RMDs are required to be made annually based on the child’s LE until the child attains age 18, at which point the RMDs will switch to the new 10-year cliff rule, so that all retirement plan assets must be fully distributed by December 31st of the year the child attains age 28 (assuming state law age of majority of 18 and no educational status extension applies). Of course, the child will have access to the full retirement plan account balance at age 18 if the child is named directly as the beneficiary.

Question 6: What if the named young beneficiary is not the participant’s legal child, but rather a grandchild, step-child, niece, or nephew?

In this case, the young beneficiary is a normal DB who will need to comply with the new 10-year cliff rule. All of the assets in the retirement plan must be distributed to the DB within 10 years following the date of death of the plan participant, regardless of whether the DB was of minority age or majority age when the participant died. While the participant is a minor under the state law of the DB’s state of domicile, those distributions could be held in a custodial account and controlled by the custodian (usually a parent), but once the DB reaches majority age, he or she would have control over the assets in the custodial account.

For example, if the DB is only 4 years old when the participant dies, then all of the assets in the retirement account would still need to be distributed by December 31 of the calendar year that contains the 10th anniversary of the participant’s death, at which time the DB in this example will still be a minor.

Let’s look at another example, where the DB is 16 when the participant dies, and the applicable age of majority is 18. In this example, if there are still assets remaining in the retirement account when the DB turns 18 (remember, RMDs mandate minimum distributions, but not maximum distributions), then the DB could opt to take a full distribution of the remaining assets immediately. As long as all retirement plan assets are fully distributed before December 31st of the calendar year that contains the 10th anniversary of the participant’s death, the DB would not have any RMD related penalty tax.

Question 7: Do you have to name your desired beneficiaries directly, or can you name a trust to benefit your desired beneficiaries?

You can absolutely name a trust for your loved one’s benefit as the retirement plan beneficiary. The bottom line in dealing with the SECURE Act is to first determine if the retirement plan beneficiary should be your loved one directly or a trust that is held for your loved one’s benefit. If you decide to have a trust that is held for your loved one’s benefit be the beneficiary of the retirement plan, then you must decide which of three (3) possible trust types should be used (discussed in the answer to Question 9, below.)

Question 8: Why would you want to name a trust as the retirement plan beneficiary rather than your loved one directly?

The primary purposes of naming a trust as the beneficiary are the non-tax benefits of asset protection and control. As long as the retirement plan or its assets remain in trust, these assets remain protected from the loved one’s spouse in a divorce, from holders of his or her personal guarantees, from his or her judgement creditors, from bankruptcy proceedings, and from predators. In addition, the selected Trustee will control the trust’s assets as directed by the trust’s terms. So, for example, naming a trust that benefits your child as the retirement plan beneficiary, rather than naming your child directly, can ensure that the child does not get control over the retirement plan at a young age.

Question 9: What are the three (3) types of trusts for purposes of the RMD rules?

The three (3) types of trusts include: (i) conduit trusts; (ii) see-through accumulation trusts; and (iii) non-DB trusts.

The SECURE Act only changed the RMD period for designated beneficiaries (“DBs”) and a new special class of Eligible Designated Beneficiaries (“EDBs”). The SECURE Act did not change the actual definition of a DB. DBs include only individuals and two types of “see-through” trusts: conduit trusts and see-through accumulation trusts. Basically, the IRS rules look through a trust to its possible beneficiaries. For a trust to qualify as a DB, all of its present and future possible beneficiaries (other than those that are considered to be “mere potential successor” beneficiaries) must be individuals, and you need to be able to identify the individual in this group with the shortest LE at the participant’s death.⁴ Before the SECURE Act, the LE for RMD purposes was based on this shortest LE. However, after the SECURE Act, you just need to be able to satisfy these requirements.⁵

The conduit trust requires that all of the distributions made from the retirement plan to the trust must be immediately paid out to the selected conduit beneficiary. In this case, the conduit beneficiary is deemed to be the only beneficiary of the trust, and all other possible trust beneficiaries are ignored as “mere potential successor” beneficiaries. If the conduit beneficiary is also an EDB, the conduit beneficiary’s LE will be used for RMD purposes. If the conduit beneficiary is not also an EDB, then the 10-year cliff rule applies. As a result, if the 10-year cliff rule applies for RMD purposes, then the asset protection and control benefits of the trust will be lost with regard to the retirement plan assets within 10 years.

It is important when structuring a conduit trust to give the Trustee power to make distributions in addition to the RMD amount, consistent with the Trustee’s distribution discretion and/or to provide tax planning benefits. If this is not done, then no retirement plan distributions will be made under the 10-year cliff rule until the 10th year, at which point, all of the retirement plan balance must be distributed. This may end up being an unintended and very poor result.

The see-through accumulation trust is not required to immediately distribute all of the distributions made from the retirement plan to the trust. In other words, while the RMD rules determine how fast the assets in a retirement plan account must be distributed to the trust, it is the Trustee that decides on the timing of any trust distributions to the trust beneficiaries. Whereas the conduit trust is a safe harbor see-through trust option under the regulations, no such safe harbor rules apply to see-through accumulation trusts. Based on what little the IRS has provided in its regulations and in many Private Letter Rulings, we understand that the trust’s terms must be limited as discussed in the following paragraph. You should note that these rules are fairly nonsensical, but they exist, so these are the rules we live with until they are changed. In addition, because of these requirements, retirement assets are normally placed in separate trust shares to limit the effect on other non-retirement plan assets.

A see-through accumulation trust must limit its possible beneficiaries, both as described in the trust’s terms and as could be added with a power of appointment in the future.⁶ Specifically, it must prohibit the following from ever benefitting from the retirement plan assets: (i) any non-individual beneficiary (i.e., no charities and no general powers of appointment for flexibility and tax planning purposes); and (ii) any person who is older than the oldest living potential trust beneficiary on the date of the participant’s death (i.e., reduces flexibility of limited powers of appointment and it may turn out that one or more older heirs (via the contingent beneficiary provision) will be unable to benefit in the future if all of the descendants are deceased but assets remain.

The non-DB trust is a trust that does not qualify as either a conduit or a see-through accumulation trust. In other words, this type of trust does not jump through any IRS hoops to qualify as a DB. In this case, the RMD depends on the participant’s age when he or she died. If the participant died before the Required Beginning Date (“RBD”), the RMD is based on the 5-year cliff rule (i.e., all assets of the retirement plan must be distributed by December 31st of the calendar year that contains the 5th anniversary of the participant’s death). However, if the participant died on or after the RDB, the RMD is based on the participant’s ghost LE (i.e., the participant’s LE as if he or she were still living). The only change to non-DB trusts under the SECURE Act was to change how you calculate the RBD. The RBD has changed from April 1st of the year after the participant turns age 70 1/2 to April 1st of the year after the participant turns age 72.

Following are some important points to understand regarding non-DB trusts:

A. Ghost LE. It should be noted that the ghost LE (the deceased participant’s LE determined as if still living) based on the IRS’ applicable LE table is more than 10 years until about age 80, and it is about 5 years at age 91.

B. Roth IRAs. Since Roth IRAs do not have RMDs during the participant’s life, no RDB exists and therefore it may be that Roth IRAs can only use the 5-year cliff rule for RMD purposes.

C. Qualified Retirement Plan (“QP”) account rollover to an Inherited IRA account. QPs normally have more limited distribution options than IRAs. Whereas an employer who is sponsoring a QP will likely not want responsibility for dealing with a retirement plan account for a deceased employee’s family member, IRA custodians/trustees, such as Charles Schwab and Fidelity Investments, are in this business and normally provide all the legally possible distribution options. As a result, while the law may provide RMD rules based on annual minimum payments over a LE, a 10-year cliff rule or a 5-year cliff rule, a QP may limit distributions to as little as a full payout in one to three years. To deal with this issue, Federal law was changed to provide that after a participant’s death, a QP beneficiary can rollover the QP account to an Inherited IRA. The caveat is that this rollover option only applies to DBs. As a result, a participant with a significant QP account balance may not want to utilize a non-DB trust because of the risk of a total loss of otherwise available income tax deferral.

Question 10: If your current estate planning documents contemplate passing your retirement savings accounts to “conduit trusts,” should you keep it this way or do you need to make a change?

Needing to make a change or not will depend on the weighing of the pros and cons of the various options in your particular situation.

Before the SECURE Act, most trusts were structured as conduit trusts, as that type of trust normally had the best mix of pros and cons. All retirement plan distributions to the trust had to be immediately distributed to the conduit beneficiary, such as a child, but the amount would normally not be significant since the RMDs were based on the beneficiary’s LE. The younger the conduit beneficiary, the smaller the RMDs. The conduit trust’s asset protection and control benefits could also operate on a long-term basis.

However, after the SECURE Act, conduit trusts may no longer make a lot of sense if the asset protection and control benefits of trusts are desired on a long-term basis since all the retirement plan assets will generally need to be fully distributed to the conduit beneficiary within a 10-year period. Conduit trusts may still make sense for the following loved ones: (i) the participant’s spouse, but with the same caveats as before the SECURE Act, only if the participant is willing to both give up potentially significant income tax deferral and be willing to have retirement plan distributions forced out to the spouse over the spouse’s LE; (ii) someone who is not more than 10 years younger than the participant, if the participant is willing to force distributions out to this individual over the individual’s LE; and (iii) other individuals if determine the pros outweigh the con of forcing retirement plan distributions out to the beneficiary within a 10 year period. This con may not be so bad where the full inheritance is intended to pass outright to the children (or other loved ones) upon attaining ages of maturity, such as age 25 or 30, or if the amount of retirement plan assets is not significant in either amount or in relation to the overall inheritance and the individual does not have a significant need of protection for these assets from unwanted outsiders, including a spouse, personal guarantees, judgement creditors, bankruptcy or predators.

See Question 11 below for further information on how to choose the best option in a particular situation.

Question 11: Based on all of the available beneficiary designation options, which one should you use?

The available beneficiary options include: (i) designating an individual beneficiary directly; (ii) designating a charity directly; (iii) designating an estate directly; (iv) using a conduit trust; (v) using a see-through accumulation trust; (vi) using a non-DB trust; and (vii) using a charitable structure, including a charitable remainder trust (“CRT”), a charitable gift annuity (“CGA”) or a charitable pooled income fund (“PIF”). Below is a discussion of each of these options.

A. Designating individuals, a charity, or an estate. For those that want the most simplicity with the least administrative costs, and who do not care about the protection and control benefits of trusts, then naming the desired individual and charitable beneficiaries directly may be the best option. When the participant’s spouse is the desired beneficiary, naming the spouse directly is normally the best option; however, the participant could also choose to benefit the spouse in trust, as discussed below. Rarely is naming the participant’s estate as the direct beneficiary of a retirement plan the best option. However, the estate may be a viable option where the amount in the retirement plan is not significant, when there is no expectation that the estate will have significant debt, and when there are a relatively large number of individual beneficiaries. In any case, the plan participant should be sure to state percentage or fractional interests for each beneficiary on the beneficiary designation form. If the plan participant provides a specific dollar figure rather than a percentage or fractional interest, a distribution-timing requirement may be needed in order to avoid negative tax consequences.

B. Designating a trust. For those that want the asset protection and control benefits of trusts, which type of trust is better? It depends on the plan participant’s particular situation and the beneficiaries he or she wishes to benefit.

1. As for the participant’s spouse, the best option remains naming the spouse directly. The next best option is to go with a conduit trust as long as the participant does not mind having the retirement plan distributions immediately pushed out to the spouse. If neither of these options is acceptable, then it is better to treat the spouse like any other non-EDB individual.

2. As for an individual who is not more than 10 years younger than the participant, the best option is normally a conduit trust. However, if the individual has a relatively short LE, or its particularly problematic to have the retirement plan distributions be pushed out of the trust to the individual, then it is better to treat the individual like any other non-EDB individual.

3. As for the participant’s minor child, the decision will first depend on the desired type of trust to be used in the estate plan for the child, i.e., either (i) a short-term trust to eventually pay out all of its remaining assets in installment at maturity ages, such as 25, 30 or 35, or (ii) a long-term trust to protect the child’s inheritance from unwanted outsiders, such as a spouse in a divorce, personal guarantees, judgement creditors, bankruptcy and predators, throughout the child’s life. If a short-term trust is being used, then a conduit trust may work well, assuming that is acceptable to force all of retirement assets out to the child by as soon as age 28.⁷ On the other hand, if a long-term trust structure is being used, it is likely best in most cases to treat the child like any other non-EDB individual. However, in the case of very young children, and where the retirement savings account value is not too significant, a conduit trust may be a viable option. It is normally not a good idea for the participant to name his or her young child directly as the beneficiary of the retirement plan.

4. Where the intended beneficiary is a qualified disabled or chronically ill individual, the better option may be a specialized, see-through accumulation trust that allows RMDs from the retirement plan to be based on the beneficiary’s LE. In addition to all the normal see-through accumulation trust requirements and limitations as discussed above, this specialized see-through accumulation trust requires the qualified disabled or chronically ill individual to be the sole trust beneficiary during his or her life. While unclear at present, the trust may also need to prevent anyone with a shorter LE than the disabled or chronically ill individual from ever benefitting from the trust. A see-through accumulation trust will likely be the best trust structure for beneficiaries that are qualified as disabled or chronically ill, but the pros and cons of using this type trust to possibly obtain RMDs based on the beneficiary’s LE needs to be weighed against the pros and cons of the non-DB trust. This analysis also needs to consider that the RMDs may end up being based on the normal 10-year cliff rule if the beneficiary fails to qualify as disabled or chronically ill as of the participant’s date of death.

5. For non-EDB individual beneficiaries, the determination will depend on an analysis of the pros and cons in that particular case. For those that want their beneficiaries to benefit from the asset protection and control benefits of trusts for at least some period of time, here is the general listing of pros and cons for each type of trust:

(A) Conduit trusts.

1) On the pro side is: (i) access to the same RMD period that an individual would qualify for, including LE for EDBs and 10-year cliff for DBs; (ii) no limitations on trust beneficiaries; (iii) no limitations on the ability to utilize powers of appointment to provide future beneficiary flexibility and tax benefits and (iii) low administrative cost and hassle.

2) On the con side is only the requirement to immediately pay out to the conduit beneficiary all retirement plan distributions received by the trust, which reduces the asset protection and control benefits of the trust to 10 years for non-EDB individuals.

(B) See-through accumulation trusts.

1) On the pro side: (i) power to accumulate retirement plan distributions to take advantage of asset protection and control benefits of trusts on a long-term basis; and (ii) access the RMD period for non-EDB individuals, which is the 10-year cliff period, except for the special EDB LE rule for the disabled and chronically ill.

2) On the con side: (i) higher potential administrative costs and hassle because of likely need to have retirement benefits held by a separate trust for each beneficiary to prevent the cons from affecting the rest of the participant’s assets; (ii) limitations on future beneficiaries, including among others, no ability to benefit charity (because not an individual) or possibly, descendant’s spouses that are neither specifically named or existing on the participant’s date of death (because any such future spouses cannot be identified as of the participant’s date of death); and (iii) limitations on the ability to utilize powers of appointment to provide future beneficiary flexibility and tax benefits.

(C) Non-DB trusts.

1) On the pro side is: (i) power to accumulate retirement plan distributions to take advantage of asset protection and control benefits of trusts on a long-term basis; (ii) longer than 10 year RMD period if participant dies between the RBD to age 80; (iii) no limitations on trust beneficiaries; (iv) no limitations on the use of powers of appointment to provide future trust flexibility and tax benefits; and (v) low administrative cost and hassle.

2) On the con side is the possible loss of 5 years of RMD deferral period if the participant dies before RBD (which is April 1st in the year after the participant turns age 72), and some loss of possible deferral period, but less than 5 years, if the participant dies between ages 80 – 90. This will be a bigger issue for younger participants. As the participant moves past age 80, further consideration can be made as to changing the trust structure based on the laws at that time. In addition, two types of retirement plan accounts will likely suffer shorter tax deferral periods. First, Roth IRA account may be limited to a 5-year cliff RMD period. Second, QPs assets may be stuck with the distribution options set out in the QP (i.e., no ability to rollover to Inherited IRA account) which may be very limited, including possibly being limited to a one-year to three-year payout requirement. Therefore, non-DB trusts may not make sense for those with significant QP accounts until these assets are rolled over to an IRA account at retirement or otherwise.

6. If charity is strongly desired as a possible remainder beneficiary of retirement plan assets after the death of your individual loved ones, then the best trust structure is either a conduit trust (if long-term benefits of trusts are not needed), a non-DB trust (long-term trust benefits with more flexibility than see-through accumulation trust) or a CRT (specifically, a Charitable Remainder Unitrust, or “CRUT”) (less flexibility and requires a minimum 10% charitable remainder interest, but with more income tax deferral potential). Also, see Question 12, D below.

Question 12: Can you take any steps to reduce the negative tax effects from the changes in the RMD rules?

Yes, steps can be taken to improve your and your family’s tax situation with regard to your retirement plan accounts.

A. Conversion of regular IRA assets to Roth IRA assets. This strategy, when done properly, may be very advantageous. The goal is to end up better off from an income tax perspective in retirement years and to provide significant tax-free funds to your family after your passing. The key is to do conversions to the extent you will not need to live on the IRA funds for your current to mid-term support, that you will only recognize conversion-related taxable income to the extent you can take advantage of your lower tax brackets, and that you have other non-IRA plan assets available to pay the income tax generated by the conversion. By doing such a conversion, RMDs are avoided during the participant’s life, which may lead to more retirement plan assets available for the surviving beneficiaries, higher itemized income tax deductions (that are subject to an adjusted gross income floor), increased ability to utilize the 20% deduction on Qualified Business Income (“QBI”), lower taxation on Social Security benefits, lower 3.8% Net Investment Income tax (“NIIT”) on investment income, and lower Medicare premiums.

B. Qualified Charitable Distributions (“QCDs”). This is a trustee-to-trustee transfer from the IRA custodian to your desired public charity(ies). QCDs can be made up to $100,000 per year beginning at age 70 ½ (and these QCDs will offset RMDs on your retirement plans beginning at age 72). Assuming you are charitably inclined and do not need the funds for your current or future support, this strategy provides income tax benefits during retirement years similar to those of a Roth IRA conversion, including indirect income tax benefits and possible reductions in Medicare premiums. Care should be taken if you have made or intend to make deductible IRA contributions after attaining age 70 1/2, as these contributions may offset the ability to benefit from QCDs.

C. Postpone RMDs if you are still working. If you are not considered to own 5% or more of your employer (after considering ownership attribution rules), you are permitted to postpone your RMDs from QPs if you are still working past the RBD age of 72. If the QP permits, you may be able to move your existing IRA funds to the QP to postpone RMDs on your IRA accounts as well. This strategy provides the same type of income tax and Medicare premium reduction benefits as the Roth conversion and QCDs until you actually retire. This strategy may also provide you with more years to do Roth IRA conversions.

D. If you are charitably inclined. If you are charitably inclined, you may want to consider providing for some or all of the remaining retirement plan assets to pass to: (i) a charity directly;⁸ (ii) to a Charitable Remainder Trust (in this case, a Charitable Remainder Unitrust or CRUT), to effectively force a longer payout period for your individual beneficiaries; (iii) to a Charitable Gift Annuity (“CGA”) to get a similar benefit to a Charitable Remainder Annuity Trust or CRAT, but with a possibly better income tax result; or (iv) to a Charitable Pooled Income Trust, which is another option closer to a CRUT but with less flexibility and somewhat different results. While more sophisticated, you may also want to consider contributing other (non-retirement plan) assets a grantor charitable lead annuity trust (“grantor CLAT”) to create a large up-front charitable income tax deduction to offset taxable income from a Roth IRA conversion. Finally, for those that have a significant desire to use one of the above charitable strategies that may reduce the ultimate assets passing to family, purchasing life insurance in an irrevocable family gifting trust (or Irrevocable Life Insurance Trust) can be utilized to replace the wealth for the family.

Question 13: How did the CARES Act affect the RMD rules and other ways to benefit from a retirement plan?

The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” was enacted by Congress and signed into law on March 27, 2020. This huge, 880-page Act was Congress’ attempt to assist the economy and those who were likely to be hurt by the Corona Virus pandemic and its related social distancing and stay-at-home orders.

A. Suspension of RMDs during 2020.

This legislation eliminated RMD requirements during the year 2020 for most retirement plan types, but not for 457 plans that are sponsored by non-governmental tax-exempt entities or for pension plans. In effect, you will calculate the RMD for 2020 for those otherwise required to take it, but then not take it. In 2021, the normal RMD rules apply. The RMD term does not get extended.

The one exception to the general rule that the RMD term does not get extended is the extension of the 5-year RMD cliff rule to an effective 6-year RMD cliff rule for retirement plan owner’s that died sometime within 2015 – 2019. As discussed above, the 5-year RMD cliff rule applies (i) when the retirement plan account owner dies before the RBD (age 70 ½ before the SECURE Act and age 72 after the SECURE Act) and the beneficiary was a non-DB (meaning not an individual and neither a conduit trust nor a see-through accumulation trust) or (ii) the retirement plan account is a Roth IRA and the beneficiary was a non-DB. It is our understanding that Roth IRAs are limited to using the 5-year cliff rule where have a non-DB beneficiary (and cannot use the ghost LE because Roth IRAs do not require distributions during the owner’s life, and therefore do not have an RBD).

For those that had their RBD in 2019, they had the ability to take their first RMD by the end of 2019 or as late as April 1, 2020. If it was not yet taken by April, 1, 2020, then they do not need to take the RMDs for either 2019 or 2020.

If the retirement plan account owner (not a non-owner beneficiary) already took out the RMD during 2020, the owner may be able to roll it over within 60 days from the date of the distribution date back into the same or another retirement plan account. Care must be taken since the general rule is that you can only do one 60-day rollover within a 12-month period. If the 60-day period has already passed, then it is possible that the IRS may provide blanket relief through future guidance to permit such rollovers. Outside of this blanket relief, a hardship request could be made, but highly likely that such a request would not to be worth the effort because of the cost and hassle involved. [Update: IRS issues Notice 2020-23, which effectively gives those that took their retirement plan distribution beginning February 1, 2020 an extended 60-day rollover period until the later of 60 days or July 15, 2020. But, be careful, as you may only have one rollover in a 12-month period. So, only one distribution during this period may be rolled over.] It should also be noted that a qualified rollover must pass the same assets back into a retirement plan in the full amount to the extent you want to avoid income taxation. So, if cash came out, then cash needs to go back in. If stock came out then this stock needs to go back in and its value is irrelevant if it changes between the two dates. For taxation purposes, it is only the value on the date of retirement plan distribution that is relevant. If income taxes were withheld on the distribution, to fully avoid income taxation via the rollover within 60 days, the full amount needs to be rolled over, including the need to come up with additional funds to make up for the amount that was withheld for income taxes.

A Roth conversion may be somewhat easier in 2020 since you cannot do a Roth conversion until the RMD is fully distributed. Since there will be no RMD in 2020, every dollar distributed can be treated as a Roth conversion. Restrictions exist and care must be taken in this regard if a rollover has already been completed in the prior 12-month period.

Qualified Charitable Distributions (“QCDs”) can still be done during 2020, but they will likely not be as beneficial from an income tax perspective.

B. Other important retirement plan account-related changes.

First, the deadline for making IRA contributions for 2019 has been extended to July 15, 2020.

Second, the 10% Early Distribution Penalty for distributions before age 59 ½ is waived for distributions up to $100,000. In addition, the income tax incurred can be paid or the distributed amount can be recontributed within a following three (3) year period. In order to qualify for this relief, your hardship must be coronavirus related. Coronavirus related means (i) you, your spouse or dependent was diagnosed with coronavirus, (ii) you experienced adverse consequences as a result of being quarantined, furloughed or laid off or your work hours were reduced, (iii) you are unable to work because of a lack of childcare; (iv) you had to close or reduce hours of a business as a result of the virus; or (v) you were financially impacted by other factors as determined by the Treasury Secretary. While not completely clear, you may be able to achieve this benefit as to a full $100,000 distribution without having to have a $100,000 coronavirus hardship. As a result, having some coronavirus hardship may qualify the entire early distribution up to $100,000 for CARES Act relief. In addition and while likely not within the spirit of the law, you may be able to convert up to $100,000 of retirement plan account assets into a Roth IRA with the requirement to pay the resulting income tax (or recontribute other assets back to the retirement plan) within three (3) years as long as you qualify as having sufficient coronavirus hardship.

Third, the maximum loan amount from a Qualified Retirement Plan has been increased from $50,000 to $100,000.

Final Question: What should you do now?

The simple answer is that you need to revisit this aspect of your estate plan at your earliest convenience, since your plan may need to change. We are here to assist whenever you are ready.