Rebecca Rosenberger Smolen, left, andAmy Neifeld Shkedy, right, of Bala Law Group.

The new provisions of the SECURE Act, aka the Setting EveryCommunity Up for Retirement Enhancement Act, which were enacted onDec. 20, 2019, and became effective as of Jan. 1, 2020, change akey factor that goes into the retirement planning process.

Prior to the enactment of the SECURE Act, one of the valuablebenefits of careful estate planning with tax-deferred retirementaccounts was to preserve the tax deferral benefit of these assetsover the life expectancy of children, or even better, grandchildrenof the deceased funder of the account (the participant) if thebeneficiary designation form was properly completed.

The economic value of that life expectancy "stretch-out" couldbe very significant, so much so that at times it could be morevaluable than leaving assets without any built-in taxability to thesame beneficiaries.

Careful planning was essential to ensure that what istechnically known as a "designated beneficiary" was properly namedto achieve the most beneficial stretch-out. Not all namedbeneficiaries qualify as "designated beneficiaries." For example,if an estate (as opposed to a revocable trust) is named as, or isotherwise deemed to be, the beneficiary, the payout options (whichcould be a required five-year payout) were generally lessfavorable than the payout over the life expectancy of an individualdesignated beneficiary.

Those days of careful planning to obtain the maximum lifeexpectancy stretch-out are now over for the beneficiaries of aparticipant who dies on or after Jan. 1, 2020.

Now, in essence, the five-year payout rule that applieswhen there is no designated beneficiary for a tax-deferredretirement account has been unleashed in all cases. However, whenthere is a designated beneficiary properly named, instead of theduration of the payout period being five years, it is now10 years. This is compared to a payout period available under theprior regime of as long as 81.6 years for a 1-year-old beneficiary,or 43.6 years for a 40-year-old beneficiary.

We agree with several commentators who have noted that, underthis new paradigm, using a "conduit" trust as beneficiary for IRAswill no longer make sense in most instances, since it would meanthat the entire tax deferred retirement account will necessarily bedistributed to beneficiaries of the trust by the end of a 10-yearperiod.

That might be palatable for older beneficiaries, say, those over40 or 50. But, for younger beneficiaries, in many instances, such atruncated payout period might not be desirable to theparticipant.

Moreover, even for the older beneficiaries, it might not bedesirable to lose the creditor protection and estate tax "shelter"benefits of a trust, for what can be a significant portion of aninheritance, after the 10-year period. It's not just about thematurity of the beneficiary.

One important planning option that will now provide greaterutility than in the past for planning in this area is thecharitable remainder trust (CRT). By naming a CRT as beneficiary ofa tax-deferred retirement account, the beneficiaries will be ableto secure a stretch-out that will mimic what was available beforethe SECURE Act changes.

In simple terms, the way a CRT works, an annuity or unitrustamount is paid out for a term of years, or the life expectancy, ofnoncharitable beneficiaries and then what remains at the end of thepayout period is passed out to the charitable remainderbeneficiary.

The key is that the noncharitable beneficiaries are only subjectto income tax on the tax-deferred funds received by the CRT as theyreceive a portion of such funds in distributions to them (and thecomposition of distributions to beneficiaries aregenerally  characterized for tax purposes on a LIFObasis).

The charitable remainder beneficiary must receive at least 10%,on a present value basis, of the assets contributed to the CRT.This technique works best when the applicable federal interestrates for valuing the remainder interest are higher than they arecurrently.

It should be noted that the SECURE Act's replacement of theprior stretch-out opportunity with a required 10-year distributionpayout has a few exceptions. It does not apply to a participant'ssurviving spouse, a minor child of the participant (but only whilestill a minor as determined under applicable state law), a disabledor chronically ill beneficiary, or a beneficiary who is not morethan 10 years younger than the participant.

On a positive note, the SECURE Act delays the requiredcommencement of minimum required distributions for the participantfrom age 70.5 to age 72. Also, once that "required beginning date"is reached, unlike in the past, the participant may continue tomake contributions to an IRA (as long as the participant is stillreceiving earned income, of course).

As the years go by, we find that tax-deferred retirementaccounts provide a larger and larger component of the asset basefor many clients. So, this significant change in the law willreduce the tax benefits available for many of their heirs when theydie.

The good news for those heirs, though, is that, at least fornow, with a rise in the federal estate tax exemption from $600,000to more than $11 million over the last 20 or so years, along withthe introduction of the portability concept for the exemption, theyare very likely still coming out ahead.

Rebecca RosenbergerSmolen and Amy NeifeldShkedy are members and co-foundersof Bala Law Group. They focus their practices on tax andestate planning.