As you are likely aware, Congress enacted legislation on December 20, 2019, commonly referred to as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, that significantly changed the income taxation of retirement plan accounts, including Individual Retirement Accounts (“IRAs”) and Qualified Retirement Plans (“QPs”), after the death of the account owner/participant (“participant”). At its most basic, the SECURE Act simply changed certain aspects of the Required Minimum Distribution (“RMD”) rules. Since retirement plan account assets are not taxed until they are distributed, the RMD rules essentially force these assets to be distributed, and thereby taxed, at least to the extent of a minimum amount each year beginning at age 72 for the participant and beginning the year after the participant’s death for account beneficiaries. Failure to comply with the RMD rules results in a massive 50% penalty, which is applied annually until the under-distributed amount is corrected.

After the shock of seeing these new rules enacted on December 20, 2019 and becoming effective for most types of retirement plan accounts days later on January 1, 2020, we realized that these rules do not always play nicely with our clients’ existing estate planning documents. For the most part, the rules work in a similar manner as before the SECURE Act for the participant and the participant’s spouse. For non-spouse beneficiaries after the participant’s death, the rules can be very different. As a result, pretty much all of our clients need to consider if they need to change their estate plans to properly deal with SECURE Act changes.

As you can likely imagine, this puts estate planners in a very difficult position. Estate planners are generally very nice people who strive to help others the best they can. Our knee jerk reaction is to help all of our clients with this SECURE Act review at no charge. However, this would mean that our practices would likely go bankrupt since this would take all of our time, but we would not be earning any revenue to pay our significant operating expenses. The obvious option is to simply charge all of our clients for this time, and this makes sense since these changes were not within our control. However, this option would likely result in many of our clients ignoring the problem to their family’s detriment. Having our clients’ families be hurt by this likely inaction disturbs us, because remember, we are nice people who want the best for our clients. So, we thought some more.

We now believe we have come up with a reasonable solution to the estate planner’s dilemma. We created this SECURE Act Self-Assessment Tool to enable our clients to first consider on their own if they are ok as is or if they need further assistance. If the client needs further assistance, we can assist them based on our normal legal fees. Of course, we are always here if you need us, even if you would rather not go through the self-assessment, but we will need to charge for our services. We are hopeful that our clients see this as a true win-win.

We are happy for advisors to use this self-assessment tool to assist their clients as they deem appropriate, as long as it is not changed without our permission. Of course, this tool is being provided solely to provide education and should not be relied upon without your own individualized legal assistance.

Finally, please send us your comments if you have suggestions on how to improve this Self-Assessment Tool.

Table Of Contents

Self-Assessment Step 1: Determine how old your current estate plan is and if it still reflects your estate planning desires.

Self-Assessment Step 2: If your desire is to simply pass your assets to your loved ones outright in all cases, then your SECURE Act analysis ends here.

Self-Assessment Step 3: If your desire is to pass your assets to your loved ones in trust, then you need to determine which of three (3) trust options is best in your case. So, let’s review the three (3) trust options.

Self-Assessment Step 4: Determine the type of trusts you are using for RMD purposes in your current estate planning documents.

Self-Assessment Step 5: How to decide which type of trust is best in your particular situation for RMD purposes.

SECURE Act Self-Assessment Tool

Self-Assessment Step 1: Determine how old your current estate plan is and if it still reflects your estate planning desires.

The first step is to decide if you already need assistance to review your overall estate plan (“EP”) even if the SECURE Act was not an issue. If you are ready for an EP review, then we can review your SECURE Act issues when you come in to review the overall EP.

A. 3-Year Review.

If you have not updated your financial Power of Attorney (“POA”) and Advance Directive for Health Care (“ADHC”) within the past 3 years, then you are due for a review, if for no other reason, just to update these two important documents. While these documents do not become legally invalid after 3 years, the risk increases that they will be harder to get others to accept them when you may need to use them. Coming in to update these two documents is the perfect time to review your overall estate plan, which would include reviewing the SECURE Act issue in your situation.

B. Review Substance of Your Estate Plan.

You should review your overall EP to determine how your assets pass to your loved ones and/or selected charitable organizations at your passing and who you selected to be your fiduciaries to be sure your plans are carried out properly. If your EP still reflects your desires, then you do not need to come in for this reason. However, this information is still needed to determine how best to deal with the SECURE Act changes as discussed below.

The following information should help you consider if your plan still reflects your desires. First, consider your existing fiduciaries, including your POA agent(s), ADHC agent(s), Executor(s) under your Will(s), Trustee(s) of any trusts, and Guardian(s) for any minor children. Second, consider how you are currently passing your assets to your loved ones and/or charitable organizations. Five (5) ways exist to pass assets to your desired beneficiaries at your death, including (i) outright, (ii) short-term trusts, (iii) long-term trusts, (iv) pure dynasty trusts, or (v) supplemental needs trusts for special needs beneficiaries. You can determine the choices you made in your current estate planning documents by reviewing the explanatory letter and/or copies of your signed EP documents.

i. Outright.

Assets pass outright (directly) to your desired beneficiaries via a beneficiary designation, owning assets as joint tenants with rights of survivorship, or through a will or trust. These assets will pass in a simple manner, but they will not benefit from the asset protection and control benefits of trusts.

This option is most often chosen when transferring assets to a spouse and/or non-descendant loved ones and friends. This option is also used to transfer assets to mature adult children/descendants where the amount of assets is not significant enough to justify the use of long-term trusts.

ii. Short-term trusts.

Assets pass in trust for the benefit of the desired individual beneficiaries (e.g., children), but only until the beneficiaries (e.g., children) attain certain maturity age(s), such as ages 30 and 35. These assets will not benefit from the asset protection and control benefits of trusts after the beneficiaries attain the selected maturity age(s).

This option is most often chosen when passing assets to young children/descendants or other young loved ones and the amount of assets is not significant enough to justify the use of long-term trusts.

iii. Long-term trusts.

Assets pass in trust for the benefit of the desired individual beneficiaries (e.g., children) for their lifetimes. As a result, the trust structure acts throughout the beneficiary’s (e.g., child’s) lifetime to legally protect the trust assets from the beneficiary’s unwanted outsiders, including a spouse in a divorce, personal guarantees, judgement creditors, bankruptcy and predators. The beneficiary (e.g., child) is normally given the power (via a limited power of appointment or “limited POA”) to modify how any remaining trust assets pass at their death, which can include extending the trust(s) for the benefit of their descendants.1 To the extent the beneficiary does not exercise this limited POA, the assets split up into shares for their children, and these trusts act similar to short-term trusts with ultimate payouts at selected maturity age(s), such as ages 30 and 35.

These trusts can be set up with the primary beneficiary, either immediately or upon attaining a selected age, being a co-trustee, the sole trustee, or never having the ability to be a trustee. Where the beneficiary is their own sole trustee, the beneficiary will feel like the trust is practically invisible but it remains legally effective to protect the trust’s assets from their unwanted outsiders. If the beneficiary is not permitted to serve as their own trustee, the trust assets will always be controlled by another trustee on their behalf, which can give you the confidence that the beneficiary will always be taken care of to a reasonable extent, have a life-long safety net, and a second set of eyeballs watching out for them after you are gone.

This option is most often chosen to benefit children/descendants where sufficient assets exist to make it worthwhile. Our rule of thumb as to when these trusts become worthwhile is based on the amount of assets that will eventually be passed on a per primary beneficiary (child) basis. If the amount per primary beneficiary is $300,000 or so, then it is likely not worthwhile unless special circumstances exist, such as a child involved in a failing marriage or business or has special needs. If the amount per primary beneficiary is at least $500,000, then it is worthwhile but it is not necessarily the absolute way to go. However, where the amount per primary beneficiary is at least $1,000,000, then this structure becomes the absolute way to go unless the pure dynasty trust structure is desired for larger amounts of wealth.

iv. Pure dynasty trusts.

Pure dynasty trusts is our name for long-term trusts that are structured to continue on until the later of the trusts running out of assets or the end of the applicable RAP (up to 360 years in GA for trusts created on or after July 1, 2018).2 This multi-generational type of trust could not have been created by a resident of GA prior to July 1, 2018 unless it had been set up in another state that had already extended its RAP or eliminated it altogether. The biggest practical difference between the long-term trust structure and the pure dynasty trust structure is what actions a beneficiary may need to take to extend the trust. With the long-term trust structure, the beneficiary will need to get the assistance of their own estate planning attorney sometime in the future to extend the trust for the benefit of their descendants, whereas the pure dynasty trust structure does not need any such actions for the trusts to continue.

This option is most often chosen to benefit children/descendants where the amount of wealth is significant, and likely at least several million per child.

v. Supplemental needs trusts for special needs beneficiaries.

Supplement needs trusts3 are long-term trusts structured to ensure that the trust assets will not count in determining the beneficiary’s qualification for means-tested government benefits, such as Medicaid.

This option is most often chosen to benefit children/descendants who are disabled or otherwise considered special needs and are either already receiving means tested government benefits or may one day qualify to receive them.

Self-Assessment Step 2: If your desire is to simply pass your assets to your loved ones outright in all cases, then your SECURE Act analysis ends here.

The RMD rules will tend to work automatically when the beneficiary receives their inheritance outright, rather than in trust. The beneficiary will still need to follow the RMD rules, but they will be fairly simple in this case.

As discussed above, passing an inheritance outright is most often chosen when transferring assets to a spouse and/or non-descendant loved ones and friends. This option is also used to transfer assets to mature adult children/descendants where the amount of assets is not significant enough to justify the use of long-term trusts.

Self-Assessment Step 3: If your desire is to pass your assets to your loved ones in trust, then you need to determine which of three (3) trust options is best in your case. So, let’s review the three (3) trust options.

A. Conduit Trusts.

Conduit trusts require 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 Eligible Designated Beneficiary (EDB), the conduit beneficiary’s LE will be used for RMD purposes.4 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.

B. See-through accumulation trusts.

See-through accumulation trusts are 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 (in accordance with the terms of the trust) 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 (which will increase administrative costs and hassles to some extent) to limit the effect of the nonsensical rules on the 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 (“POA”) in the future.5 In general, all trust beneficiaries must be individuals and you must be able to identify the potential trust beneficiary with the shortest LE on the participant’s (owner’s) date of death. The effect of these conditions is that the trust terms must prohibit the following from ever benefitting from the retirement plan assets: (i) any non-individual beneficiary (i.e., no charities, no ability to use these funds to pay any estate expenses, debts or taxes, no testamentary general POAs for flexibility and tax planning purposes, and restricted ability to use inter-vivos general POAs for flexibility and tax planning purposes); and (ii) any individual who has a shorter LE than the living potential trust beneficiary with the shortest LE on the date of the participant’s death [i.e., reduces flexibility of limited POAs, may prevent a beneficiary’s future spouse from being a future beneficiary, 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].6

C. Non-Designated Beneficiary (“non-DB”) Trusts.

Non-DB trusts do not qualify as either a conduit trust 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 or (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 RBD, 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 the RBD 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.

In analyzing the tax effects of a non-DB trust, it is important to understand: (i) the ghost LE exceeds 10 years from RBD to about age 80, reduces slowly and is about 5 years at age 91;7 (ii) RMDs for Roth IRAs are likely limited to the 5-year cliff rule no matter the participant’s age on their date of death;8 and (iii) beneficiaries of Qualified Retirement Plan (“QP”) accounts may not be able to rollover the account at the participant’s death to an Inherited IRA account, which means that the QP’s more restrictive distribution options will effectively overrule the normal RMD provisions; and as a result, the QP assets may be forced to be distributed and therefore taxed within a potentially short one (1) to three (3) period.9

Self-Assessment Step 4: Determine the type of trusts you are using for RMD purposes in your current estate planning documents.

This step may not be as simple as it could be. Most attorneys, us included, did this type analysis in house to try to keep the complexity down for our clients. Basically, if your primary EP document, be it a Will or Revocable Trust, provides that all retirement plan distributions must be immediately distributed to a particular beneficiary (e.g., child), then the sub-trusts in the Will or Revocable Trust are structured as conduit trusts. If immediate distributions are not required, then the sub-trusts in the Will or Revocable are either structured as see-through accumulation trusts or non-DB trusts.

However, for our clients, this analysis is likely fairly simple. Our clients’ trusts were almost always structured as conduit trusts, unless the beneficiary (e.g., child) had special needs, dependency issues or otherwise, where it was not prudent to force any funds out to the beneficiary. In these exceptional cases, their trusts were either structured as see-through accumulation trusts or non-DB trusts, depending on their particular situation. While it is our understanding that most other law firms also took this position, others took the position that see-through accumulation trusts should be used for the majority of their clients.

The question for our clients, without special beneficiary situations, and for many clients of other attorneys, is if conduit trusts still make sense in their situation when the RMD period for most DBs has been reduced from the beneficiary’s LE to 10 years? This is important since conduit trusts require all retirement plan distributions to a trust to be immediately distributed outright to the trust’s conduit beneficiary. As a result, the asset protection and control benefits of the trusts for DBs have been reduced to only lasting a maximum of 10 years.

Self-Assessment Step 5: How to decide which type of trust is best in your particular situation for RMD purposes.

Following is a discussion to help you choose the right type of trust structure for your estate plan for RMD purposes. If after this discussion you remain unsure of the type of trust structure you need or if the one you want is different than the one you currently have, then you will need to contact us to help determine the proper trust structure to use in your particular situation and/or to possibly update your estate plan. When we do this analysis for our clients, we often find that an obvious choice is discovered, but in a minority of cases, the best option is unclear and will depend on how a client feels about one or more particular factors.

A. Conduit trusts.

As discussed above, the downside to the conduit trust structure is that the RMDs and any other amounts distributed from the retirement plan account to the trust are then immediately forced to be distributed outright to the conduit beneficiary (e.g., child). After the SECURE Act, conduit trusts will normally only make sense in the following situations:

1. Where using short-term trusts.

If short-term trusts are being used, then forcing the distributions out to the conduit beneficiary may not be a serious problem.

i. Participant’s minor or young adult child.

Where the participant’s minor child is the conduit beneficiary, the RMDs are based on the child’s LE until the age of majority, which will be age 18 (and possibly up to age 26, depending on educational status), at which point the 10-year cliff rule applies. As a result, the trustee will not be required to fully distribute the retirement plan assets until age 28 (but possibly as late as age 36), which may be acceptable. Of course, if the participant lives to a normal life expectancy, then the child will be well beyond the short-term trust installment ages and the 10-year cliff rule should not be a problem. However, if the conduit beneficiary is under age 18 and the risk that all the retirement plan assets must be distributed to the child by age 28 is unacceptable, then the conduit trust structure should not be used. Of course, the trust structure can be revisited, and possibly changed, in the future as the child ages and more facts are known.

ii. Minor who is not the participant’s child.

If the conduit beneficiary is the participant’s step-child, grandchild, niece or nephew or other young individual, then the 10-year cliff rule applies. Depending on the ages of the individual beneficiaries, the conduit trust structure may prove undesirable since the beneficiary will receive outright distributions of all of the retirement plan account assets within 10 years after the participant’s death.

iii. Older child or other individual beneficiaries.

Where short-term trusts are desired and the risk of the child or other individual beneficiary receiving all of the retirement plan assets within 10 years of the participant’s death is not a significant concern, then the conduit trust structure is likely the correct trust structure for RMD purposes.

2. Participant’s spouse.

If the spouse is the desired beneficiary, the best way to pass the retirement plan assets is to pass them outright to the spouse. This option provides by far the best income tax results. However, if non-tax reasons require these assets to pass to the spouse in trust (e.g., blended family situation), then the conduit trust structure is normally the best way to do it. In this situation, you will also likely want the trust to satisfy the QTIP marital trust requirements to qualify the trust for the estate tax marital deduction as well. However, if no distributions should be forced to the spouse because of incapacity, dependency or other reasons, then the conduit structure is not a viable option. The only potentially viable choices to consider in this case will be either a see-through accumulation trust or a non-DB trust.

3. Individual not more than 10 years younger than the participant.

If the beneficiary is not more than 10 years younger than the participant, the beneficiary qualifies as an EDB, and the beneficiary is thereby able to use their own LE for RMD purposes. However, except as discussed below as to a beneficiary qualified as disabled or chronically ill on the participant’s date of death, the RMD rules do not look to the individual beneficiary’s particular identity unless the individual is named directly or is the conduit beneficiary of a conduit trust. Where using short-term trusts, conduit trust planning is better than naming the beneficiary directly. However, it is highly unlikely that a short-term trust would be used in this situation except in a rare situation, since someone no more than 10 years younger than the retirement plan account owner is likely well beyond the age where a short-term trust would be utilized. As a result, if you wish to take advantage of the EDB’s LE for RMD purposes, the conduit trust is likely only better than naming the individual outright if the benefits of a long-term trust are desired.

However, if a significant risk exists that the individual is or may become disabled or chronically ill, then naming the beneficiary directly or as the conduit beneficiary of a conduit trust are both poor options. The better options will be to go with either: (i) a see-through accumulation trust (with RMDs based on either 10-year cliff rule or the beneficiary’s LE, if the beneficiary is qualified as disabled or chronically ill on the participant’s date of death and the trust is properly structured or modified) or (ii) a non-DB trust (5-year cliff rule or ghost LE, depending primarily on the age that participant died).

Finally, if you simply cannot or should not force any assets out to the individual beneficiary, then you should not use the conduit trust option, and you will need to go with see-through accumulation trusts or non-DB trusts.

4. Relatively little in amount or as a percentage of wealth is in retirement plan accounts.

Conduit trusts are useful where retirement plan accounts are not significant in amount on a per individual beneficiary basis or in relation to the total wealth being passed at death. In such a case, the extra expense and hassles of maintaining a see-through accumulation trust or a non-DB trust for retirement plan account assets may not be worth the trouble. However, the extra cost and hassle of a conduit trust is fairly minimal.

5. Better than outright.

Utilizing conduit trusts planning for short-term or long-term trusts is significantly better than passing the retirement plan accounts to the desired individuals outright, because you still get at least 10 years of potential asset protection and control benefits from the trusts.

6. Significant assets in Roth IRAs and/or Qualified Plans.

Both Roth IRAs and QPs need special consideration under the RMD rules. For Roth IRAs, you are likely stuck with the 5-year cliff rule if you go with non-DB trusts. For QPs, the situation is even worse. While you get the same RMD rules for QPs as with IRA accounts, the one big difference is that you may not be able to rollover the QP account to an inherited IRA account at the participant’s death if the beneficiary is a non-DB. If a rollover cannot happen, then the beneficiary is stuck with the potentially much more restrictive distribution options set out under the terms of that particular QP, which could cause a full payout within a 1-year to 3-year period. As a result, if significant assets are in a QP, you may want to seriously consider avoiding non-DB trusts, which leaves beneficiary options as individuals directly, conduit trusts and see-through accumulation trusts. While a similar push away from non-DB trusts exists for those that have significant assets in Roth IRAs, the concern is not as significant since distributions from the Roth IRA are tax free, so you would only be giving up some ability to postpone taxation on post-distribution earnings.

B. See-through accumulation trusts.

See-through accumulation trusts and non-DB trusts are the two options when you have done the analysis and determined that naming the beneficiary directly or using a conduit trust structure are not favorable options. See-through accumulation trusts will be the better option in the following situations:

1. Want or need ability to accumulate retirement plan distributions and can live with the IRS limitations.

If you want or need the ability to accumulate retirement plan distributions and you would like the normal RMD rules for a DB, then you will need to use a see-through accumulation trust. The normal RMD rules with this type trust will be the standard 10-year cliff rule, with the one EDB exception being the beneficiary’s LE if the beneficiary qualifies as disabled or chronically on the participant’s date of death and the trust is properly structured.

The downsides to this type trust are the IRS limitations. In general, this means that the trust terms will need to be more restrictive than you may otherwise desire. Specifically, the effect of these IRS limitations is that the trust terms must prohibit the following from ever benefitting from the retirement plan assets: (i) any non-individual beneficiary (i.e., no charities, no ability to use these funds to pay any estate debts or taxes, no testamentary general powers of appointment for flexibility and tax planning purposes, and restricted ability to use inter-vivos general powers of appointment for flexibility and tax planning purposes); and (ii) any individual who has a shorter LE than the living potential trust beneficiary with the shortest LE on the date of the participant’s death [i.e., reduces flexibility of limited powers of appointment, may prevent a beneficiary’s future spouse from being a future beneficiary, 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].

What do these IRS limitations mean in practical terms?

i. Benefitting charity.

If you wish to benefit one or more charities, you will not be able to do it as part of a contingent beneficiary provision (where all intended beneficiaries are deceased but assets remain in trust). Instead, you will need to provide for charity another way, which could include, for example, providing for charity via a beneficiary designation (at least some of the retirement plan funds will not go to charity rather than to the trust) or via a specific bequest (where non-retirement plan funds are distributed to charity).

ii. Contingent Beneficiaries.

The contingent beneficiary provision will need to name individuals and be done in a manner that can adjust based on who is living at that time. Essentially, this requires that you name your heirs, your spouse’s heirs, or a combination of the two, with some ability to exclude certain individuals if desired. Heirs are the closest living relatives at that time as determined under applicable state law.

iii. Benefitting a descendant’s spouse.

If you wish to enable a descendant’s spouse to benefit in the future or to enable this to happen in the future via the exercise of a limited POA, the definition of a spouse who could benefit will need to be carefully limited.

iv. Need to limit beneficiary’s limited POA.

Normally, you would want to provide your beneficiary with a limited POA in a long-term trust to provide them with flexibility to change how any assets remaining in their trust share will pass at their death to a defined group, which could be as limited as your or their descendants or as broad as anyone or any charity as long it is not so broad as to be classified as a general POA for tax purposes. When using a see-through accumulation trust, these limited POAs generally need to be limited to your or their descendants, and with some limited ability to benefit spouses.

v. Prohibition on using testamentary general POAs and limited ability to use inter-vivos general POAs.

General POAs are used to provide flexibility and various tax planning benefits. A general POA is a POA that can benefit at least one of yourself, your estate, your creditors or the creditors of your estate. When using a see-through accumulation trust, you are prohibited from providing any of these powers, except for the ability to benefit yourself. As a result, you are prohibited from using a testamentary (exercisable at death) general POA. This prevents a significant tax planning opportunity to achieve a step-up in income tax basis at a beneficiary’s death by giving them a testamentary general POA to cause inclusion in their taxable estate for estate tax purposes. One tax planning opportunity still exists by using a specific type of inter-vivos (exercisable during life) general POA. This opportunity enables the parties to effectively tax the trust’s taxable income at a particular beneficiary’s lower marginal income tax rates, with the ability to utilize this planning option like a switch on an annual basis.

vi. Need separate trust(s) to own the retirement plan account(s).

In order to prevent the IRS limitations from limiting the flexibility and tax planning as to the other trust assets, you will normally want to own the retirement plan account(s) in a separate trust share, which increases costs and hassle.

2. Beneficiary is or may be disabled or chronically ill on the participant’s date of death.

The see-through accumulation trust will normally be the best trust structure where the beneficiary already is or a significant risk exists that the beneficiary may become disabled or chronically ill as of the participant’s date of death. In this case, the RMDs will be based on the beneficiary’s LE if the beneficiary is the sole trust beneficiary during the beneficiary’s lifetime. This is one of the EDB exceptions and was likely created to benefit those who may need to utilize special or supplemental needs trusts to avoid disqualification for government means-tested benefits, such as SSI or Medicaid.

The situations where a non-DB trust may be the better option even where this special EDB status is lost include: (i) the added RMD benefits are not worth the IRS limitations on see-through accumulation trusts as discussed above or (ii) the amount of retirement plan assets are not significant enough to justify the extra cost and hassle where need a separate trust to hold the retirement plan assets to prevent IRS limitations from affecting the other trust assets.

C. Non-DB trusts.

As discussed, above, you use non-DB trusts when conduit trusts and see-through accumulation trusts are not viable options because of their requirements in your situation or the pros and cons of the non-DB trust simply outweigh those of the other two options in your situation.

1. The pro for using a non-DB trust: The ability to use whatever trust terms are desired, and not be limited by IRS rules. Basically, the non-DB trust does not need to require distributions like the conduit trust and its terms do not need to be limited as required for a see-through accumulation trust.

2. The cons for using a non-DB trust:

i. Applicable RMD period, in general.

You do not get to use the normal RMD rules when using a non-DB trust. Instead, you utilize the RMD fallback rules which will normally depend on the participant’s age on their date of death. If the participant died before the RBD (after the SECURE Act, April 1st of the year after the participant turns age 72), then the RMDs are based on a short 5-year cliff rule. If the participant died after the RBD, then the RMDs are based on the ghost LE (the participant’s remaining LE as if still living).

ii. Applicable RMD period for Roth IRAs.

Since Roth IRAs do not have RMDs during the participant’s lifetime, Roth IRAs do not have an RBD. As a result, Roth IRAs are stuck with the 5-year cliff rule when using a non-DB trust.

iii. Serious issue with QPs.

Because of a technical glitch in the law, the ability for a beneficiary of a QP to rollover the account to an inherited IRA account does not exist unless the beneficiary is a DB. As a result, using a non-DB trust means no ability to rollover the QP account to an inherited IRA account. While the RMD payout rules provide the maximum deferral period, the terms of the QP or IRA can provide shorter payout rules which override the RMD payout rules. It is often the case with QPs that the distribution options are very limited for those who are neither the participant nor the participant’s spouse, and are often limited to a short 1-year to 3-year full distribution requirement. As a result, for those with significant amounts in QP accounts, a non-DB trust may not be a viable option. However, this option may become viable in the future after the participant retires and rolls over their QP account to an IRA account.

1The beneficiary will normally have power to extend the trust for as long as the appliable state law Rule Against Perpetuities (“RAP”), which in GA is 360 years based on legislation which became effective on July 1, 2018. The previous GA RAP was 90 years. If desired, the beneficiary may also be given the power to benefit other individuals and charitable organizations.
2It is possible that some revocable trusts created before this date that did not become irrevocable until on or after July 1, 2018 can utilize the new GA RAP of 360 years if the trust contained language to account for the later change in GA law.
3These trusts are also known as “special needs trusts.”
4In order to benefit from EDB status, the beneficiary must be the individual EDB directly or the individual EDB must be the conduit beneficiary of a conduit trust. The one EDB exception is for an individual qualified as disabled or chronically ill on the date of the participant’s death. In this exception case, the disabled or chronically ill individual must be the sole beneficiary during his or her life of a see-through accumulation trust, and while not clear at this point, you may also need to prohibit anyone older than the disabled or chronically ill person from ever benefitting from the retirement plan assets. The purpose of this exception is likely to enable the use of the beneficiary’s LE when using supplemental (special) needs trusts.
5A second option may exist in qualifying a trust as a see-through accumulation trust. However, relying solely on this second option comes with more risk since it is based almost exclusively on IRS Private Letter Rulings, which are not legal authority and cannot be cited in court. However, so many such rulings have been issued in the past, that this option may now be somewhat safe. Under this second option, the trust must require the full, immediate and outright distribution of retirement benefits after the death of an earlier beneficiary. For example, the trust can benefit a child, and upon the child’s death, any retirement benefits remaining must be immediately distributed outright to the child’s children, no matter their age or other condition. Assuming the grandchild, in this example, is living on the participant’s date of death, any beneficiaries after the grandchild would be ignored for purposes of satisfying the above described tests as “mere potential successor” beneficiaries.
6See footnote 4 above as to special EDB status of beneficiaries qualified as disabled and chronically ill on the participant’s date of death, and the effect of this special EDB status on see-through accumulation trusts.
7This means that a non-DB trust could have an equivalent or somewhat better tax deferral result than a DB depending on the participant’s age at his or her date of death. From a planning perspective, non-DB trusts will make more sense for older participants.
8Since RMDs are not required for Roth IRAs during the participant’s lifetime, no RBD exists for Roth IRAs. As a result, you may not be able to use the ghost LE for Roth IRAs, which means you will likely be stuck with the 5-year cliff rule for Roth IRAs. This means that you may lose 5 years of income tax deferral vs using a DB. However, since distributions from Roth IRAs are not taxable, this loss is not nearly as bad as losing 5 years of possible income tax deferral for other retirement plan accounts.
9This means that the non-DB trust option may not be viable for those with significant amounts in QP accounts, such as 401(k) accounts. However, as participant’s age, they will likely retire and rollover their QP account balances to an IRA account. After this happens, the non-DB trust becomes a viable option that may be worth considering further.>/div>
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