Mar 9

2019 Secure Act Takes Away the Security of Stretch Distribution Planning

US Capitol Building


The Secure Act, which became effective January 1, 2020, changed the options for inherited retirement account beneficiaries. In some cases, planners recommended that a retirement account be payable to the trustee of a trust, rather than directly to the beneficiaries. There could be good reasons to do so: the beneficiary is too young, has a disability, or just can’t manage money. To retain the advantage of “stretching” the distribution of the inherited account funds, attorneys put special language in trusts to preserve the stretch.


The Conduit Trust

One option was a “conduit trust” which required the trustee to collect the yearly distributions for a beneficiary and then distribute the funds in the same year for the intended beneficiary. Even though the funds ultimately passed to the beneficiary, the trustee could at least control the timing of the distributions. As a result, the trust was really just a “conduit” to receive and disburse funds. The trustee could make the election to take the beneficiaries over the beneficiary’s lifetime, which allowed for:

  • yearly distributions,
  • continued tax-free growth within the account, and
  • the avoidance of the higher income tax brackets for undistributed income within a trust.

Under the new law, the retirement account funds must be fully distributed by the trustee by the end of the 10th year. In some situations, this might be undesirable.


The Accumulation Trust

In cases where mandatory distributions from the trust each year were not desirable, the trust could provide that the trustee is permitted to accumulate income. That gave the trustee more control over the distributions, but potentially subjected the yearly distribution of retirement account funds to the trust to income tax at much higher rates than those paid by an individual.


Qualified Beneficiaries. Under the old rules, the beneficiary’s life expectancy could be used to calculate the yearly mandatory distribution of inherited retirement account funds. To qualify, the beneficiary would have to be an individual and have an identifiable interest in the trust. Only surviving spouses had the option of a true roll-over, allowing them to wait until age 70 to take distributions, and then calculate the yearly distributions based upon their life expectancy.


Eligible Qualified Beneficiaries

Under the new law, beneficiaries only have 10 years to withdraw the inherited retirement account funds unless they are “eligible qualified beneficiaries.” This limited group includes:

  • Surviving spouses;
  • Minor children of the account owner;
  • Beneficiaries with a chronic illness or disability; and
  • Beneficiaries who are not more than 10 years younger than the deceased account owner.

Minors loose their favorable status when they turn 18 and then have 10 years to withdraw the funds.


Steps to Consider

In light of the new plan, there are several options to consider.

  • Consider naming a charity or a Charitable Remainder Annuity Trust as the account beneficiary;
  • Convert to a Roth IRA;
  • Amend a trust to act as an accumulation trust instead of a conduit trust.

The available options should be discussed with your tax adviser and your legal adviser. There are many factors to consider, so the best approach for one estate plan may not be the best for another.