The SECURE Act Top Ten

By Mark R. Parthemer and Sasha Klein
New SECURE Act has over  2 dozen Changes to the law affecting retirement benefits

New SECURE Act has over 2 dozen Changes to the law affecting retirement benefits


Americans have over $30 trillion in retirement accounts as of September 2019. Investment Company Institute, http://www.ici.org. The Individual Retirement Account (IRA) was created on September 2, 1974. Forty-five years later, over 35 percent of American households have an IRA, with a total value of $10 trillion. Naturally, much more will shift into IRAs as participants retire and roll their other retirement assets to them. The size and proliferation of IRAs make an understanding of the applicable rules imperative for every planner.

Much has been written and discussed over planning in light of the passage of the SECURE Act. The vast sum of financial assets subject to it justifies the analysis. The new rules have a dramatic impact on optimal structuring. A review of beneficiary designations, and in many circumstances the entire estate plan, should be undertaken promptly. Over time, and with deeper understanding, there will be advances in planning. For now, we have compiled what you need to know in the following Top Ten list.

Number 10: The New Law

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law on December 20, 2019. Originally, it passed the House by an overwhelming 417-3 vote on May 23, 2019 but stalled in the Senate. To the surprise of many, the SECURE Act was included as Division O of the Further Consolidated Appropriations Act 2020 (Pub. L. No. 116-94)—ostensibly the act used to continue the funding of the federal government. The SECURE Act makes over two dozen changes to the law affecting retirement benefits.

Number 9: Fast Implementation

The SECURE Act became effective on January 1, 2020, only 11 days after it was signed into law. Within a few short weeks, the Act went from seemingly dormant, because of political maneuverings within the Senate, to passage, to effective. A very short span of time was afforded taxpayers to adjust, as the rules apply to those who die after December 31, 2019.

IRAs that have been inherited from a participant who died before January 1, 2020, should be grandfathered and thus free from the new SECURE Act requirements; however, Section 401(b) includes a provision that would apply the SECURE Act payout requirements to a successor designated beneficiary when a designated beneficiary dies before life expectancy. For example, Father died in 2018, and daughter (age 50) was the designated beneficiary. Daughter dies in 2021, with her son as successor designated beneficiary. Under the old law, because original designated beneficiary died before her life expectancy, the successor designated beneficiary could have continued the stretch-out using the life expectancy of the original designated beneficiary. However, the language of the SECURE Act suggests that the successor designated beneficiary would now be subject to the 10-Year Rule (defined below) and would not be able to continue the stretch-out even through the original account holder died prior to January 1, 2020.

Number 8: Some of the Changes to Retirement Plans Are Taxpayer- Friendly

Here are three:

  1. A relaxation of the qualification of a multi-employer plan to facilitate access to more Americans.
  2. Under the old rules, once an individual attained age 70 ½, or would do so by the end of the year, no additional contributions could be made. This has been repealed and contributions can continue to be made so long as the participant is employed (note, however, that the $100,000 qualified charitable contribution is reduced by the amount of contributions after 70 ½ to avoid it serving as a “pass-through” charitable contribution).
  3. The age at which required minimum distributions (RMDs) must begin has been extended from the year the taxpayer attains age 70 ½ to 72.

These changes are in recognition of the public policy goal to provide the opportunity for broader use of retirement plans, as well as the recognition that people are living longer. But the change to age 72 as the required beginning date (RBD), although a positive step forward, will have inconsistent impact on account owners. In essence, using a round number of 72 (versus 70 ½) will be easier for clients to comprehend (and remember), but the benefit for some owners will be twice what others receive. For example, compare the required beginning date of someone born in January 1950 versus someone born in July 1950, in the chart above.

Number 7: The Five-Year Rule Is Still in Effect after the SECURE Act

That is, the prior rule still applies. In short, an inherited IRA with no designated beneficiary is ineligible for stretch treatment (both lifetime and 10-Year Rule). Such an inherited IRA remains subject to an accelerated withdrawal period. The length of that period depends on whether the participant had died before or after the RBD:

  • If the death was before the RBD, then the entire account must be withdrawn before five years after the death (more precisely, by December 31 of the year that includes the fifth anniversary of the participant’s death).
  • If the death was after the participant’s RBD, then the account must be distributed in annual installments over what would have been the remaining life expectancy of the participant had he not died (some practitioners euphemistically refer to this as the ghost life).

As an example of the former case, if the participant were to die on July 1, 2020, and before her RBD, the entire account must be distributed by December 31, 2025; however, there would be no required distributions beforehand. Thus, the entire account could, but need not, be retained in the IRA for the duration. This is in contrast to the latter situation, when a participant dies after January 1, 2020, and after her RBD. In this case, distributions must continue to be made at least annually using the deceased participant’s remaining life expectancy.

Number 6: Elimination of the “Stretch” IRA

The ability to stretch certain inherited IRAs over a designated beneficiary’s life expectancy has been eliminated. An IRA now must be distributed by December 31st of the tenth year following the year in which the retirement account owner dies (herein referred to as the “10-Year Rule”). As a result, designated beneficiaries—the definition of which is unchanged—can no longer stretch an inherited IRA over their lifetime.

Number 5: A New Category of Beneficiaries with Special Rules

Though the definition of designated beneficiary has not changed, a new category of five beneficiaries has been created, each known as an eligible designated beneficiary (EDB). An EDB is an exception to the 10-Year Rule. The five EDBs 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.

Number 4: Effect of Ten-Year Rule

Under the old law, many clients converted a traditional IRA to a Roth form of IRA in order to structure a long-term stretch, perhaps allocating GST exemption to the account and naming a grandchild (or trust for a grandchild) as beneficiary. The following illustrates the effect of the new 10-Year Rule, assuming the participant died before his RBD (thus providing that the beneficiary must use his or her life expectancy).

Under the old law:

  • Joe, a 21-year-old designated beneficiary, has a life expectancy of 62.1 years. Joe inherits an IRA worth $2 million. Joe’s first RMD would be $32,206 ($2 million divided by the 62.1 years).
  • Jennifer, a 50-year-old designated beneficiary of an inherited IRA, has a life expectancy of 34.2 years. Jennifer inherits an IRA worth $2 million. Jennifer’s first RMD would be $58,480 ($2 million divided by the 34.2 years).

Under the SECURE Act, both Joe and Jennifer would be subject to the 10-Year Rule instead of the 62.1 years in Joe’s case and 34.2 years in Jennifer’s case.

Number 3: Roth Conversion Conundrum

Senator William Roth (R-Delaware) sponsored legislation in 1997 that resulted in the creation of an alternate form of IRA, known as a Roth (leaving us to refer to the 1974 version as a traditional IRA). However, only taxpayers with adjusted gross income of less than $100,000 could convert a traditional IRA to a Roth IRA. The 2010 tax law eliminated this income cap for conversions. This opened the floodgates for conversion, especially given the safety net of recharacterization (tax-free conversion back to a traditional IRA if done before the tax return due date for the year of the conversion). However, the 2017 Tax Act diminished the safety of conversion by eliminating the ability to recharacterize.

Conversion triggers current income taxation of the IRA, so the typical analysis was whether the participant or the beneficiary would be in a lower income tax bracket. With an accelerated payout under the 10-Year Rule, it now may be less likely that the beneficiary will be in a lower bracket. Rarely does it make sense to convert if withdrawals would need to be made to pay the income tax. Plus, as an offset, however, we know that if the participant were in a taxable estate, the dollars used to pay the income tax are in a sense discounted by the avoided estate tax. For example, a client has a taxable estate that includes a $1 million traditional IRA and $1.5 million in cash. If, for simplification, we assume her assets are subject to a 40 percent estate tax, her other assets pay the tax on them, and her cash is used to pay the estate tax on the IRA and the cash, her heirs will receive:

• If she does not convert, $1 million IRA (with an embedded income tax liability) and $500,000 of the cash. If the heir withdraws from the IRA and pays 37 percent income tax, the net value will be $1.13 million (($1,000,000 - 37%) + $500,000).

• If the IRA is converted before her death, triggering an income tax liability (we assume the highest 2019 marginal rate of 37 percent), or $370,000, her heirs will receive the $1 million Roth IRA (with no income tax liability) and $278,000 of cash ($1.5 million - $370,000 income tax - $852,000 estate tax). The net value would be $1.278 million ($1,000,000 + $278,000). This is an increase of $148,000, or slightly more than 13 percent.

• Although it appears that the conversion nets the heir a positive $148,000, it isn’t the entire calculation; one also must take into account (1) the estate tax exemption has become a moving target, so clients not currently in a taxable estate may become subject to estate tax by a change in legislation, (2) income tax rates—or at least the marginal rate to which the income is hypothetically exposed—can change, and (3) IRC section 691(c), which is a deduction a beneficiary can take to offset taxable IRA distributions to the extent of the allocable share of estate tax triggered by the IRA, was not eliminated by the 2017 Tax Act. The heir may be able to whittle down the tax burden on the IRA by virtue of this deduction, if she itemizes. That being said, one must make some assumptions and run the numbers to determine if a conversion makes sense.

Number 2: Trust under the SECURE Act

Under the SECURE Act, a trust may still be a beneficiary. The rules in this area have not changed, but the more limited stretch also applies to trusts. As a reminder, a trust beneficiary will fall into one of two categories.

A non-qualifying trust will not be treated as a designated beneficiary. As a result, it will be subject to the five-year rule (see Number 7).

A qualifying trust, commonly referred to as a “see-through” trust, will be able to use the entire stretch period, just as before. Of course, what is different is that the stretch period is the shorter 10-year deferral. The five qualifications to establish a see-through trust have not changed:

  1. the trust must be valid;
  2. the trust must be irrevocable or become irrevocable upon the death of the owner;
  3. the beneficiaries must be identifiable;
  4. the beneficiaries 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.

There are two types of see-through trusts: conduit and accumulation. Conduit trusts have been more popular over the years. With a conduit trust, all distributions including RMD received by the trust must be distributed to the trust beneficiary. In contrast, the second type, an accumulation trust, may retain receipts from IRAs. For many reasons, conduit trusts historically were favored by many planners for most clients. Under the SECURE Act, however, such trusts may be a less popular choice because all funds in the IRA will flow through the trust to its beneficiaries within 10 years, undermining the full benefits and protections a trust could provide. Accumulation trusts are notably harder to draft, but a trust that can protect assets from an IRA longer than 10 years now may be a better choice for many clients.

Number 1: Revisit the Estate Plan

The SECURE Act will be disruptive for many estate plans. For example, many clients have structured the use of GST exemption to long-term stretch trusts for grandchildren. But the acceleration of payout may be disquieting or worse. As for IRA beneficiary designations:

  • Given that the implications of the SECURE Act may dramatically affect a client’s estate plan, are they still optimal?
  • If a client wants the protection of a trust, determine whether the reduced additional deferral of a see-through trust makes sense (getting 10 years instead of five at the cost of a see-through trust versus a fully discretionary one).
  • If a see-through trust is desired, ensure the correct version (accumulation versus conduit) has been drafted.

Numerous alternative strategies are being explored, and we encourage the reader to study them. Two that are fairly easily explained to clients are:

Life Insurance Planning Opportunities. When planning for a child, consider life insurance on the parent to replace (a) lost retirement plan growth through the shorter stretch, (b) reduced value because of the taxes on conversion, or (c) income taxes on non-converted traditional IRAs because of the exposure to higher marginal rates as a result of the compressed payout period. When planning for a grandchild, consider insurance on the participant or on the participant’s child or parent of the grandchild. Use (now larger) IRA distributions resulting from the 10-Year Rule to fund life insurance premiums in order to replace assets.

Charitable Giving Planning Opportunities.

Direct Gift of Traditional IRA to Charity: With the elimination of the stretch, there is even more value now in shifting charitable gifts from other sources to traditional IRAs. This eliminates the estate and income taxation on the IRA, maximizing the value transferred to a favored charitable cause.

Charitable Remainder Trust (CRT) as IRA Beneficiary: Many clients saw value in the lifetime payout of the stretch plan. Given that an IRA can no longer be used by a beneficiary for such purposes, a CRT may be a valuable tool for those families who also have a charitable inclination. Because a CRT is exempt from income tax, it can receive a lump payout of the IRA without current tax. The annuity or unitrust to the CRT beneficiary will carry out taxable income, but the result has similarities to that of a pre-2020 IRA stretch. By using a CRT, taxable distributions can be made over a beneficiary’s lifetime (instead of the 10-Year Rule). Then, upon the beneficiary’s death, the balance of the IRA can be distributed in a lump sum to the charity income tax free. The CRT also provides asset protection. It is important to remember, however, that the assets ultimately must pass to a charity (though that can include a family foundation).

By Mark R. Parthemer and Sasha Klein

Mark R. Parthemer is senior fiduciary counsel at Bessemer Trust Company, and Sasha Klein is a partner at WardDamon, PL.