The SECURE Act of 2019

The SECURE Act of 2019, or its more formal name of "Setting Ever Community Up for Retirement Enhancement Act" has changed how certain kinds of retirement plans work. This article will discuss briefly and in general the changes brought about by the SECURE Act. However, this article is not a substitute for personalized legal advice or financial-planning advise.

What kinds of accounts does the SECURE Act apply to?

The SECURE Act applies to “defined contribution plans,” 403(b) annuities, certain governmental and tax exempt employee plans, and pre-tax IRAs. Even ROTH IRAs have some changes to the distribution rules.

The Act became effective on January 1, 2020.

Main Changes

  • The "age component" of the Required Beginning Date ("RBD") is changed from 70.5 to 72;
  • Designated Beneficiaries are split into two types: Eligible Designated Beneficiaries and "Other" Designated Beneficiaries. Eligible Designated Beneficiaries are the following:
    • Participant's surviving spouse;
    • Participant's child who has not reached the age of majority;
    • A disabled beneficiary;
    • A chronically ill individual; and
    • A beneficiary not in any other category who is not more than 10 years younger than the Participant.
  • A new "10 year rule" applies to distributions from retirement plans payable to Other Designated Beneficiaries on the Participant’s death;
  • Only Eligible Designated Beneficiaries can obtain a life expectancy distribution from inherited retirement plans;
  • Entities and charities are not even a DB, let alone an ODB or EDB;
  • A new type of trust, called an "Applicable Multi-Beneficiary Trust," may be used for certain types of EDBs; and
  • The "10 year rule" is the new distribution period applicable to successor beneficiaries of Eligible Designated Beneficiaries.

How do these changes work?

The analysis starts with whether or not the Participant has a "Designated Beneficiary" ("DB") as of date of Participant's death. If the Participant does not have a DB, the distribution period changes whether the Participant died before or after the Participant's RBD (typically April 1 of the year following the year in which Participant turns 72). If the Participant does have a DB, the applicable distribution period after the Participant’s death depends on the type of DB. In other words, whether or not the DB is an Eligible Designated Beneficiary ("EDB") and what kind of EDB, or an Other Designated Beneficiary ("ODB").

Scenario Distribution Period Trust allowed? Notes
Participant Dies before RBD with no DB 5-year-rule Remainder of the year of Participant's death plus subsequent 5 years. Does not have to take distibutions in first 4 years.
Participant Dies on or after RBD with no DB Ghost Life Expectancy Use the Participant's remaining single-life expectancy, without recalculating, and must begin distributions in year following Participant's death year.
Participant Dies with an ODB 10-year-rule Accumulation Trust where all beneficiaries are DBs (i.e. no entities or charities) can work. Remainder of the year of Participant's death plus subsequent 10 years. Does not matter whether Participant died before or after RBD. Does not have to take out distributions in first 9 years.
Participant Dies with an EDB (Spouse) Can do spousal rollover; if no rollover then different rules Conduit trust with spouse as beneficiary allowed. Accumulation trust NOT allowed. If you do spousal rollover, spouse becomes new Participant as if it was spouse's original account. If no spousal rollover and if Participant dies before RBD, then distributions do not begin until December 31 of year that Participant would have reached 72. If no spousal rollover and Participant dies on or after RBD, spouse must begin taking distributions by December 31 of the year following Participant's death. When distributions commence, they are calculated from the surviving spouse's life expectancy per the single life table, but it is recalculated each year. Unclear as of time of writing whether or not we can still use the "ghost life expectancy". A successor beneficiary of a spouse under these rules subject to 10-year-rule.
Participant Dies with an EDB (Participant's Minor Child) Required minimum distributions before child reaches age 18; then 10-year-rule after reaching majority. Conduit trust for benefit of Participant's Minor child is allowed. Unclear whether a conduit "pot trust" would work. Accumulation trust unclear if allowed but likely NOT allowed. Unclear whether facility of payment terms in a conduit trust are allowed. Unclear whether conduit trust that flips to accumulation trust at majority would qualify. Distributions must start by December 31 of year following Participant's death. Distributions before majority calculated from child's single life table with the divisor changing each year until majority. After majority same 10-year rule as when Participant dies with an ODB above. "Majority" needs clarification by legislature / regulations for whether that is 18, or if that is 26 if the child has not completed a specified course of education, and whether or not the 10-year-rule is to the child's 10th birthday after reaching majroity or December 31 of of the year that contains the tenth anniversary of the date the minor child reaches majority.
Participant Dies with an EDB (Disabled / Chronically Ill) Distributions from plan to an "Applicable Multi-Beneficiary Trust" calculated on the disabled/chronically ill beneficiary's life expectancy, not recalculated. Unclear if distributions from said trust are calculated on disabled/chronically ill beneficiary's life expectancy. Conduit trust for benefit disabled/chronically ill beneficiary is allowed but likely not desirable. New form of trust created by statute called an "Applicable Multi-Beneficiary Trust". Disabled / Chronically ill definitions are slightly different than those for SSI/SSDI.
Participant Dies with an EDB (Not more than 10 years younger than Participant) Distributions calculated on the EDB's single life expectancy table, not recalculated. Conduit trust for benefit of the EDB allowed. Accumulation trust NOT allowed. Distributions must start by December 31 of year following Participant's death. Successor Beneficiary subject to 10-year-rule potentially even if the successor beneficiary is itself an EDB.
Participant Dies with a ROTH IRA Above distribution rules apply, even if no tax owed on such distributions

Minor child ideas

The following is an excerpt from Karen Gerstner's paper "Estate Planning for Retirement Plans in View of the SECURE Act" presented at Texas Tech University School of Law's 13th annual Estate Planning and Community Property Law Symposium on or about February 2021. It discusses a potential strategy if minor children are the primary EDBs of a plan:

The minor child EDB rule is not very favorable compared to the other EDB rules. In other words, the Participant’s minor child only gets the benefit of a life expectancy distribution until he or she reaches majority, after which, the balance of the inherited retirement plan must be distributed outright to the child pursuant to the 10 year rule. Whether the age of majority is 18, 21 or 26, if the retirement plan has a significant value, distributing 100% of the retirement plan outright to the child at age 28, 31 or 36 is likely not what the Participant wants. Instead of trying to qualify for the minor child EDB rule, a Participant who has a minor child and a retirement plan with a significant value might name as the beneficiary of his retirement plan an accumulation trust for the benefit of his minor child. Of course, in that case, the accumulation trust will probably not qualify as an EDB (subject to regulations that specifically allow that). However, assuming all of the trust’s beneficiaries are DBs, it will qualify as an ODB. Per the distribution rule applicable to ODBs after the Participant’s death, 100% of the inherited retirement plan that belongs to the accumulation trust must be distributed out of the plan pursuant to the 10 year rule (i.e., subject to confirming regulations, that means by December 31 of the year that contains the 10th anniversary of the Participant’s death). However, that does not mean (i) that all of those plan distributions have to be further distributed out of the trust to the child by that date or (ii) that the trust itself has to terminate on that date. Of course, the downside of retaining retirement plan distributions in the trust would be the high rate of income taxes payable by the trust on those distributions that are retained in the trust. In 2020, an accumulation trust will reach the top income tax bracket (37%) as soon as it has income of $12,950. On the other hand, if the Participant creates an accumulation pot trust for all of his children (some of whom might be adults or will soon become adults), that would increase the possibility of making distributions to multiple beneficiaries from the trust, carrying out that taxable income to the children who receive distributions. Some of those children might not be subject to the “Kiddie Tax.” Further, it is likely that at least some of those children would be in low income tax brackets. Participants with minor children have to weigh the income tax consequences of the trust paying income taxes at a high rate on retirement plan distributions against their desire for their children not to receive significant amounts, outright and free of trust, at an early age.

What does this all mean?

It means that many transactions are subject to the 10-year-rule if they don't fit into some of the more favorable EDB categories.

It means that for persons with beneficiaries that meet one of the more favorable EDB categories, we will see them leaving gifts outright to them. For those with disabled or chronically ill beneficiaries, we will see trusts used that satisfy the new Applicable Multi-Beneficiary Trust rules.

It means that anyone with an existing accumulation trust should be reviewed to potentially remove charities and entities as they are not considered a DB, let alone an ODB or EDB, in an attempt to preserve the 10-year-rule instead of getting stuck with the unfavorable 5-year-rule. Also to ensure that all beneficiaries of an existing accumulation trust are DBs, so that the trust itself will qualify as an ODB.

It means that for EDBs other than disabled/chronically ill EDBs, that a conduit trust is the only safe trust to use.

It means that for EDBs that are disabled/chronically ill, that the new Applicable Multi-Beneficiary Trust form will likely be used more often.

It means that charitable giving with retirement plans needs to be strictly analyzed in light of the SECURE Act.


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