[Note to reader: We published our original News Alert on the Secure Act on January 15, 2020. However, we soon came to an important realization that pre-Secure Act Treasury Regulations still technically apply, even if their likely historical purpose is no longer relevant. Being wrong as to the application of these rules can result in an annual 50% penalty, so being wrong is a very big deal! As a result, our planning recommendations have changed rather significantly, at least until the IRS may one day provide us with favorable legal guidance. This January 2020 Secure Act Q&A is updated to account for our changes in planning recommendations. We apologize for any inconvenience.]

The 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.

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

Question 3: Who qualifies as an EDB?

EDBs include: (i) the participant’s spouse; (ii) someone less 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 LE rules only apply 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 less than 10 years younger than the participant. This status may potentially apply to 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 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. This EDB status only applies to the participant’s natural or adopted children, and not to any other descendants, such as grandchildren. Step-children do not qualify as EDBs.

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 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 old LE rules, 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 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, 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 age of majority. In Georgia, a child reaches the 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 either 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) 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.[2] 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.[3]

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.

The accumulation trust is not required to immediately distribute all of the distributions made from the retirement plan to the trust. 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, two possible methods exist in structuring this type of trust. First, the trust can limit its possible beneficiaries. Specifically, it must prohibit any non-individual beneficiary, it must prohibit any beneficiary who cannot be identified as of the participant’s date of death, and the trust must limit the ability to modify who can benefit from the trust via powers of appointment. This normally means that the trust will include only individual beneficiaries and that the only individual beneficiaries who can benefit from the retirement plan funds must not have a shorter LE (not be older) than a stated trust beneficiary, as well as limiting any possible powers of appointment that could possibly change this outcome. Second, the trust can require the full, immediate and outright distribution of retirement benefits after the death of an earlier beneficiary.[4] 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 as “mere potential successor” beneficiaries.

The non-DB trust is a trust that does not qualify as either a conduit or a see-through accumulation trust. In this case, the RMD depends on the participant’s age when he or she died. If the participant died before age 72 (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 age 72, 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 age 70 1/2 to age 72.

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 a10-year period. Conduit trusts may still make sense for the following loved ones: (i) the participant’s spouse, but only if the participant is willing to both give up 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 less 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 as to how to think through this analysis after the Secure Act.

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

The available beneficiary options include: (i) designating the 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 remainder trust (“CRT”). 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. The plan participant should be sure to provide percentage or fractional interests for each beneficiary on the plan participant’s 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, 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 individual’s LE. This type of see-through accumulation trust requires the qualified disabled or chronically ill individual to be the sole trust beneficiary during his or her life. However, if the disabled or chronically ill person has a relatively short LE, or if the see-through accumulation trust’s required limitations on future beneficiaries and powers of appointment is particularly undesirable, then a non-DB trust may be the better option. In many cases, these trusts will also be structured to be supplemental or special needs trusts, to ensure that the trust assets to do not affect the individual’s ability to benefit from means-tested government benefits. As discussed above, to qualify as a see-through accumulation trust, the trust must only benefit individuals (e.g., no charities) and you must be able to identify the individual beneficiary with the shortest LE, which results in limitations on both future beneficiaries and the flexibility that could otherwise be provided by powers of appointment. While unclear at present, the trust may need to prevent anyone with a shorter LE than the disabled or chronically ill individual from ever benefitting from the trust.

5. For non-EDB individual beneficiaries, the determination will depend on an analysis if the pros and cons in that particular case. Where the asset protection and control benefits of trusts are needed or desired at least for 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 as long as meet the conduit distribution requirements; 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 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 cost and hassle because of likely need to have retirement benefits held by a separate trust share for each beneficiary to prevent the cons from affecting the rest of the participant’s assets; (ii) significant potential limitations on future beneficiaries, including among others, no ability to benefit charity (because not an individual) or 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) significant potential limitations on the ability to utilize powers of appointment to provide future beneficiary flexibility and tax benefits. If the trust is structured to cause an immediate and direct payout of all remaining retirement plan assets to a successor beneficiary, regardless of the successor beneficiary’s age, in order to qualify as a see-through accumulation trust and limit some of the other cons of these type trusts, then the con is providing trust payment terms that may be imprudent under the circumstances in order to achieve some additional tax deferral benefit.

(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 ages 72 – 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 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 participant moves past age 80, further consideration can be made as to changing the trust structure based on the laws at that time.

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 trust are not needed), a non-DB trust (long-term trust benefits with more flexibility than see-through accumulation trust) or a CRT (or, specifically, a Charitable Remainder Unitrust, or “CRUT”) (less flexibility and requires a minimum 10% charitable remainder interest, but with more income tax deferral potential).

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 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 beginning at age 72). Assuming you are charitably inclined and do not need the funds for your current or future support, this strategy provides benefits 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% of your employer (after considering ownership attribution rules), you are permitted to postpone your RMDs from employer qualified plans (“QPs”) if you are still working past the RBD of age 72. If the QP permits, you may be able to move your 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 give you more years to do Roth IRA conversions.

D. If you are charitably inclined. If you are charitably inclined, you may want to consider either providing for some or all of the remaining retirement plan assets to pass (i) to a charity directly,[5] or (ii) to a CRUT, to effectively force a longer payout period for your individual beneficiaries. While more sophisticated, you may also want to consider 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.

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.


[1] A request can be made to the Internal Revenue Service (“IRS”) to abatement this penalty tax based on reasonable cause, but no guarantee exists that the IRS will approve any such request.

[2] Additional time is given to fix beneficiary issues until the Beneficiary Finalization Date (“BFD”), which is September 30th of the year after the participant’s death.

[3] An exception may exist in the case of the special EDB accumulation trust for a qualified disabled or chronically ill individual. In this case, it may be required that the disabled or chronically ill individual is the oldest trust beneficiary.

[4] This second option is the riskiest since is based almost exclusively on IRS Private Letter Rulings, which are not legal authority that can be cited in court. However, so many such rulings have been issued in the past, that this option has become fairly excepted as being safe.

[5] It is often preferable to name a Donor Advised Fund (“DAF”) as the beneficiary of your retirement plan account and then name your desired ultimate charities on the DAF paperwork. This DAF paperwork can also be changed easily over time as desires change. When charitable organizations are named directly at death, the financial institution holding the IRA account will often require the charity to have their own inherited IRA account at their institution. While setting up an inherited IRA account for an individual is fairly simple, this is the often not the case with charitable organizations.

Print Friendly, PDF & Email