Andrew Rusniak, McNees Wallace& Nurick

The recently enacted Setting Every Community Up for RetirementEnhancement (SECURE) Act represents one of the most significantchanges to our retirement system in over a decade. The SECURE Actincludes many changes to retirement planning in general, such asthe increase in the age for required minimum distributions (RMDs)to 72 and the elimination of the maximum age for makingcontributions to a traditional IRA, provided the individual hasearned income. With respect to estate planning, however, perhapsthe most notable change comes in the form of the elimination of abeneficiary's ability to "stretch" an inherited IRA over thebeneficiary's lifetime for all but a limited class ofbeneficiaries.

The elimination of the lifetime stretch has caused practitionersto collectively rethink some of their long-held norms with respectto legacy planning and tax planning for retirement benefits,particularly with the use of trusts that will receive retirementplan benefits.

As a result of the SECURE Act, for decedents dying after Jan. 1,the beneficiary of a retirement plan will be required to withdrawthe retirement plan benefits within 10 years of the account owner'sdeath unless a beneficiary is an "eligible designated beneficiary"(a new term introduced by the SECURE Act).

This change eliminates the beneficiary's ability to stretchwithdrawals of an inherited retirement account over his or her lifeexpectancy. This lifetime stretch previously provided beneficiarieswith potentially decades of continued tax-deferred growth. Theclear (and stated) impact of the SECURE Act is to substantiallyaccelerate the required withdrawals out of the inherited retirementaccount, which forces the recipient to recognize income over a muchshorter period of time (as an important aside, the SECURE Act doesnot use the "required minimum distribution" terminology that hasbecome synonymous with IRA withdrawal requirements prior to 2020;instead, the SECURE Act models the 10-year payout requirement afterthe five-year payout rule for nondesignated beneficiaries).

By way of example, the IRS single life expectancy tables providethat a 50-year-old individual has a remaining life expectancy of34.2 years. Instead of enjoying withdrawals out of an inherited IRAusing a life expectancy factor in excess of 30 years, the SECUREAct requires the beneficiary, regardless of age, to withdrawal theaccount over a 10-year period.

Withdrawals from the account can be made pro rata, all in oneyear, or by any other distribution format provided the entireaccount balance is withdrawn no later than Dec, 31 of the yearcontaining the 10th anniversary of the participant's death. Theresult, therefore, is to cause the beneficiary to recognize incomeon the entire account balance much sooner than before and toeliminate the tax-deferred growth on the account in futureyears.

Notably, the lifetime stretch remains available, with certainmodifications, to a surviving spouse, a minor child of theparticipant (during minority), a disabled and chronically illbeneficiary or a beneficiary less than 10 years younger than theparticipant. These types of beneficiaries form a new category ofbeneficiary characterized by the SECURE Act as eligible designatedbeneficiaries or EDBs. Specifically, a surviving spouse can stillutilize the lifetime stretch; however, upon the death of thesurviving spouse, the 10-year payout will apply. With respect tominor children, the lifetime stretch rules continue to apply, butonly until the child reaches the age of majority.

Importantly, the SECURE Act did not amend or eliminate the needfor a "designated beneficiary" in order for beneficiaries to availthemselves of something more than the default five-year payout rulethat is imposed on nondesignated beneficiaries.

Therefore, the five-year payout rule remains forbeneficiaries such as estates, charitable organizations and truststhat do not qualify under the so-called "see through" rules. Onlyonce a beneficiary has survived the nondesignated beneficiaryhurdle can the beneficiary avail themselves of either the 10-yearrule or the lifetime stretch, provided the beneficiary qualifies asan EDB.

The loss of the lifetime stretch will be significant. The resultis particularly notable for trusts that have been designated asbeneficiaries of retirement accounts. Historically, estate planningattorneys often drafted trusts to qualify as "conduit trusts" forpurposes of the Section 401(a)(9) "see through" rules. The conduittrust rules were viewed as the one "safe harbor" for trusts thatpractitioners had available to them, and many lawyers draftedretirement account trusts to qualify as conduit trusts because ofthe certainty they provided.

Although the conduit trust rules require RMDs to be pushed outto the income beneficiary, the ability to disregard all otherremainder beneficiaries with certainty was attractive to ensure thestretch of the account over the life expectancy of the incomebeneficiary. The overall impact of pushing out the RMDs was minimalbecause the beneficiary's typically lengthy life expectancy couldbe used for purposes of calculating the RMDs. Practitioners weretherefore less concerned with the RMDs substantially increasing thebeneficiary's taxable income and did not need to worry as muchabout endowing a beneficiary with an overly substantial amount offunds in a short period of time.

With the enactment of the SECURE Act, it is important to rethinkthe use of the conduit trust as default planning for retirementaccount trusts. Some practitioners have always viewed the conduittrust as impractical due to the requirement to push out the RMDs tothe beneficiary. That argument is now substantially emboldened withthe 10-year payout requirement.

For example, assume an individual dies with an IRA valued at$1.5 million and designates a conduit trust for the benefit of his30-year-old son as the beneficiary. Further assume that the IRAearns a rate of return of 4% per year and that the trust makesapproximately equal withdrawals over a 10-year period. Both beforeand after the SECURE Act, the conduit trust will qualify as adesignated beneficiary. Prior to the SECURE Act,the year-one RMD payable to the conduit trust anddistributable to the son would have been $28,142.59. After theSECURE Act, the year-one withdrawal payable to the conduit trustand distributable to the son will be $150,000, a difference of$121,857.41.

By year five, the pre-SECURE Act RMD would have been $32,922.85,and the post-SECURE Act withdrawal will be $175,478.78. By year 10,the pre-SECURE Act RMD would have been $40,055.68, with a remainingaccount balance of $1,803,787.36. The year 10 post-SECURE Actwithdrawal will be $213,496.76, which will reduce the accountbalance to $0, as required under the new law.

Because the SECURE Act requires the account to be withdrawnwithin 10 years, a conduit trust is no longer appropriate for abeneficiary in a high-income tax bracket, a spendthrift or abeneficiary in need of creditor protection (assuming it was everappropriate for such a beneficiary). It also may no longer beappropriate for any type of beneficiary if the participant desiresthe benefits of a trust, as those protections will be available for10 years at best.

Instead, practitioners should consider the use of the"accumulation trust," which allows a trustee to accumulateretirement plan benefits within the trust, thereby preserving andprotecting the benefits for subsequent distribution in accordancewith the terms of the trust.

The trade-off is that the income tax brackets for trusts aremuch more compressed than for individuals. In 2020, a trust withtaxable income over $12,950 will be subject to the 37% rate.However, a trustee should be able to mitigate this taxexposure through the use of standard fiduciary income taxprincipals, such as distributable net income and the incomedistribution deduction. To the extent the trustee determines thatit is not advisable for the beneficiary to receive thedistribution, then the trustee will have the discretion to retainthe income within the trust and pay the income tax.

The difficulty with drafting accumulation trusts has always beenthe lack of clear guidance in the tax code and applicableregulations. The IRS has always allowed the use of accumulationtrusts, although extraordinary care must be taken to ensure thatnothing may be distributed or appointed from the trust to anyoneother than an individual or a trust that benefits individuals. Bestpractices typically dictate that an accumulation trust be housed ina separate benefits subtrust that will be sequestered from the maintrust and that will contain the necessary restrictions andlimitations.

Much could be written on the ways to address the loss of the10-year stretch. For example, Roth conversions during lifetimebecome more attractive, as does the use of life insurance as analternative to retirement account savings.

Charitable remainder trusts may partially mimic the formerlifetime stretch, although CRTs are only appropriate for anindividual with some level of charitable inclination. Regardless,the elimination of the lifetime stretch will have a continued andsubstantial effect on traditional planning for retirement benefits,and practitioners should carefully review and, when necessary,amend prior plans in order to account for the changes brought aboutby the SECURE Act.

Andrew S. Rusniak is a member at McNees Wallace& Nurick and practices in the firm's estate planning andcorporate and tax practice groups. He representsindividuals, families, business owners, executives andprofessionals in all aspects of tax and estate planning, businesssuccession planning, asset protection planning, charitableplanning, and estate and trust administration. Hepractices out of the firm's Lancaster and Harrisburg offices.