Drafting Estate Planning Documents in a Post-SECURE Act Environment

May 22, 2020 10:00:00 AM



One year ago this week, the House passed the SECURE Act with 417 yeas and 3 nays. Although this bill, Setting Every Community Up for Retirement Enhancement Act of 2019, H.R. 1994, 116th Cong. (2019), had overwhelming bipartisan support, it languished in the Senate. Estate planning attorneys, financial planners, and industry experts watched the bill for the rest of 2019 with particular interest, in large part because of a provision in Title IV of the bill that proposed modifying the required minimum distribution rules for qualified retirement accounts by eliminating the “stretch” for all beneficiaries except those qualifying as “eligible designated beneficiaries.” By December 2019, it seemed that the SECURE Act bill was going to die with the year. However, in a last-minute move, the SECURE Act was attached to the Further Consolidated Appropriations Act (FCAA) of 2020, H.R. 1865, 116th Cong. (2020), in a slightly modified form. This version of the SECURE Act, which Congress passed in mid-December, was signed into law on December 20, 2019, with an effective date of January 1, 2020, for most of its provisions. 

The SECURE Act is found in Division O of the FCAA. The provision that eliminates the stretch for inherited retirement accounts is found in Section 401 of Division O, which modifies Internal Revenue Code (Code) Section 401(a)(9). Five months after enactment, estate planners are still grappling with the changes made to Section 401(a)(9), which include the addition of a new class of beneficiaries called “eligible designated beneficiaries,” I.R.C. § 401(a)(9)(E)(ii) (West 2020), the substitution of the “10-year rule” for the “5-year rule” for designated beneficiaries, I.R.C. § 401(a)(9)(H)(i)(I) (West 2020), and a newly created “applicable multi-beneficiary trust,” I.R.C. § 401(a)(9)(H)(v) (West 2020). 

The previous rule allowing designated beneficiaries to stretch the payment of inherited retirement benefits over their lifetimes has been replaced with a new rule requiring distribution by the end of the tenth year following a participant’s death. An exception to the 10-year rule applies to the following five types of eligible designated beneficiaries: (1) the surviving spouse, (2) minor children of the participant, (3) disabled beneficiaries, (4) chronically ill beneficiaries, and (5) individuals not in the first four categories who are not more than ten years younger than the participant. Of these five types of beneficiaries, all but minor children are eligible to stretch distributions over their remaining lifetime. Minor children may stretch their distributions only while they are minors and must switch to the 10-year rule upon attaining majority. The rules on applicable multi-beneficiary trusts are aimed at trusts for disabled and chronically ill eligible beneficiaries and were not included in the version of the bill that originally passed the House in May 2019. Also new with the SECURE Act is the requirement that after the death of an eligible designated beneficiary, the distribution period for remaining retirement assets must switch to the 10-year rule. 

Other than specific provisions changed by the SECURE Act, existing Treasury Regulations have not changed. A key definition found in Code Section 401(a)(9)(E)(i) also has not changed—as was the case prior to passage of the SECURE Act, “designated beneficiary” still means “any individual designated as a beneficiary by the employee.” Further, Treas. Reg. Section 1.401(a)(9)-4, A-3 still applies, which states, “A person that is not an individual, such as the employee’s estate, may not be a designated beneficiary.” The treatment of non-designated beneficiaries has not changed under the SECURE Act, which means that they must still receive retirement benefits under the 5-year rule. 

Importantly for estate planners, Treas. Reg. Section 1.401(a)(9)-4 Q-4 and A-5(a) still apply, which provide that “[i]f a trust is named as a beneficiary of an employee, . . . the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).” For the beneficiaries of the trust to get this treatment, Treas. Reg. Section 1.401(a)(9)-4, A-4(b) requires that (1) the trust is valid under state law, (2) the trust is irrevocable or will become irrevocable upon the death of the employee, (3) the trust beneficiaries are identifiable individuals, and (4) the appropriate documentation is timely provided to the plan administrator. 

Following the passage of the SECURE Act, two types of trusts continue to meet the third requirement under Treas. Reg. Section 1.401(a)(9)-4, A-4(b) that the beneficiaries be identifiable individuals: conduit trusts and see-through accumulation trusts. The Internal Revenue Service (IRS) will “look through” or “see through” both types of trusts to identify the designated beneficiaries. To qualify as a conduit trust, a trust must mirror the example provided in Treas. Reg. Section 1.401(a)(9)-4, A-7(c), Example 2, in which the trust requires that all amounts distributed from the retirement account to the trustee be paid directly to the trust beneficiary upon receipt by the trustee. Conduit trusts are considered a safe harbor for treatment of qualifying trust beneficiaries as designated beneficiaries because there is no need to consider whether the trust’s remainder beneficiaries are designated beneficiaries. Any trust that does not contain conduit provisions is an accumulation trust, and the issue then becomes whether the accumulation trust qualifies to have the trust beneficiaries treated as designated beneficiaries with respect to the distribution of qualified retirement plan assets. If the accumulation trust qualifies for such treatment, it is sometimes called a see-through accumulation trust, a designated beneficiary trust, or simply, a qualifying trust. 

Updating estate planning software in light of SECURE Act

As was the case prior to the passage of the SECURE Act, WealthCounsel continues to offer the option to make all subtrusts created under a revocable living trust (RLT) subject to conduit trust provisions. In response to the SECURE Act, WealthCounsel has also added options in the RLT to have conduit provisions apply only to any subtrust for the benefit of a grantor’s child who is a minor as of the grantor’s date of death or to any subtrust for the benefit of a beneficiary who is not more than ten years younger than the grantor. In addition, Wealth Docx® users can opt to include see-through accumulation trust provisions in an RLT, which can be used either alone or in combination with either or both of the new conduit provision options. 


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Additionally, WealthCounsel continues to offer a stand-alone retirement trust (SRT), which is designed specifically for retirement assets. Unlike an RLT, which is almost certain to be funded with both retirement and nonretirement assets, an SRT can be funded with only retirement assets and offers the chance for more nuanced design. An SRT can be designed such that conduit provisions apply to each subtrust, accumulation provisions apply to each subtrust, or conduit provisions apply to some subtrusts and accumulation provisions apply to others. The SRT can also be designed with conduit provisions that can be “toggled” to accumulation provisions by a trust protector so long as the toggle is made within nine months of the grantor’s date of death or a later date allowed by the IRS. Because the requirements for conduit trusts and see-through accumulation trusts did not change with the passage of the SECURE Act, WealthCounsel made only very few changes to this type of trust. Some nuanced changes were made regarding the use of a measuring life for determining the applicable distribution period for required distributions. In addition, more options were added for including standby supplemental needs provisions, which can potentially be used to take advantage of the applicable multi-beneficiary trust rules if a beneficiary is disabled or chronically ill as of the grantor’s date of death. 

WealthCounsel members may access our webinars, thought papers, and content support for additional information and assistance in implementing WealthCounsel’s drafting options for retirement provisions. Click here to learn how WealthCounsel can elevate your practice today. 

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