The Setting Every Community Up for Retirement Enhancement Act of 2019, commonly known as the SECURE act,  became effective on January 1, 2020. The SECURE Act makes substantial  changes to the law affecting retirement plans. The law also makes dramatic changes with regard to the role of a trust as a beneficiary of a retirement account.

The Secure Act Eliminates the “Stretch” IRA

Under the SECURE Act, the beneficiaries of an IRA are no longer able to stretch certain inherited IRAs over their life expectancy. Instead, the SECURE Act imposes a new 10 year rule. Meaning, an IRA now must be distributed to the beneficiary by the tenth year following the year in which the retirement account owner dies.

Exceptions to the New 10 Year Rule

While the SECURE Act eliminates stretching an IRA beyond 10 years for many beneficiaries, it does contain some exceptions. The law contains five categories of beneficiaries known as an “eligible designated beneficiary” for whom the new 10 year rule does not apply. The five types of eligible designated beneficiaries are:

  1. A surviving spouse
  2. The child of the decedent who is a minor (note that this exception is narrowly drawn; for example, it does not apply to grandchildren even if the child predeceased the participant—so, no “predeceased child step-up” rule as exists for GST)
  3. A disabled person
  4. A chronically ill person or
  5. An individual who is not more than 10 years younger than the decedent.

Trusts under the SECURE Act

A trust may still be a beneficiary under the secure Act; however, the new ten year rule also applies to trusts. This means a “qualifying trust” or “see through trust” can still be used to stretch the distribution period for a beneficiary. The obvious difference is that the stretch period is limited to ten years. To qualify as a see through trust, your trust must meet the following criteria:

  1. the trust must be valid
  2. the trust must be irrevocable or become irrevocable upon the death of the owner
  3. the beneficiaries of the trust must be identifiable
  4. the beneficiaries of the trust themselves must be designated beneficiaries and
  5. a copy of the trust must be provided to the trust administrator no later than October 31 of the year following the year of the participant’s death.

See through trusts can be further divided into two subsets: (1) conduit trusts and (2) accumulation trusts. When using a conduit trust, all distributions from the IRA, including required minimum distributions, paid to the trust are to be distributed to the trust beneficiary. Conversely, as the name suggests, an accumulation trust, may retain distributions from IRAs. Of the two, conduit trusts have generally been more popular. However, this may change as the SECURE Act forces distributions from an IRA through a trust to be made within 10 years. Accumulation trusts have been less popular over the years and do come with their own disadvantages, but with the passage of the SECURE Act, accumulation trusts may see an increase in popularity for those who wish to protect assets from an IRA longer than 10 years.

Review your Trust and Estate Plan

If you have named a trust as the beneficiary of your IRA, Roth IRA, 401k, or other retirement plan, then the SECURE Act may have a dramatic effect on your estate plan. You are strongly encouraged to review your estate plan with a qualified estate planning attorney. Not addressing the issue could cause dramatic unintended tax consequences.

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About the Author: Aaron R. Shahan is an attorney at Atlas Law, PLC. Aaron dedicates his practice to virtually all aspects of estate planning, elder law and probate.

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