SNAP: the stretch just broke – time to revisit IRA and qualified plan beneficiary designations

28 January 2020 | Applicable law: US

Despite the fanfare, the Secure Act will not change how most people transfer their Qualified Plans and IRAs upon death. Generally, distributions from retirement accounts will be made over shorter periods and taxes on such distributions will be higher, but there is largely no way to avoid this result.

The Secure Act has maintained the ability to "stretch" payments over a beneficiary's lifetime if such beneficiary can qualify as an "Eligible Designated Beneficiary."1 For those beneficiaries who do not so qualify, payments will generally have to empty a retirement account in 10 years. It makes good sense to review your existing beneficiary designation forms and make sure they reflect your wishes and your loved ones' needs. Ultimately, if those existing beneficiary designations have named a trust as beneficiary of a retirement account, it's time to contact your Withers Bergman attorney to review that planning.

Setting every community up for Retirement Enhancement Act (the "Secure Act")

The Secure Act was enacted on December 20, 2019 as part of the Further Consolidated Appropriations Act 2020, a $1.4 trillion spending bill which avoided a government shutdown. Among its positive changes, the Secure Act raises the age to start required minimum distributions for Qualified Plans and IRAs (collectively, "Retirement Accounts") from age 70 ½ to age 72 after January 1, 2020; allows deductible IRA contributions for individuals who qualify after age 70 ½ ; and makes many small modifications to the Qualified Plan rules to increase retirement security and incentivize employers to adopt Qualified Plans. The projected cost of the Secure Act is about $16.3 billion, with $15.7 billion expected to be funded by changes that largely eliminate the "stretch" IRA.

The Secure Act eliminates payouts based on life expectancy for most non-spousal beneficiaries, significantly accelerating the income taxes on inherited Retirement Accounts. The Secure Act changes are effective for Qualified Plan participants and IRA account owners (collectively referred to as "Participants") who die on or after January 1, 2020. Participants who have died prior to January 1, 2020 are subject to pre-Secure Act rules and their Designated Beneficiaries will qualify for life expectancy payments. Participants in collectively bargained or government plans may rely on the pre-Secure Act rules until January 1, 2022.

Under the pre-Secure Act rules, "Designated Beneficiaries," who could be either individuals or certain qualifying "see-through" trusts, could inherit a Retirement Account and "stretch" payouts over the Designated Beneficiary's life expectancy.

  • Example 1: David dies in 2017. His Designated Beneficiary is his daughter, Amy, who is 50 years of age. Under the pre-Secure Act rules, Amy could take distributions from the Retirement Account over 34 years, based on her life expectancy. Now, under the Secure Act rules, Designated Beneficiaries can no longer stretch the payout over their lifetimes. Instead, Designated Beneficiaries must take the entire balance of the account by December 31 of the year containing the 10th anniversary of the Participant's date of death (such convention, the "10-Year Rule"), unless such beneficiaries qualify as "Eligible Designated Beneficiaries" (described below).

  • Example 2: Paul dies in 2020. His Designated Beneficiary is his son, Sam, who is 50 years old with a 34-year life expectancy. Under the Secure Act, Sam will need to withdraw all of Paul's Retirement Account by December 31, 2030.

The only difference in the two examples is the Participant's date of death. Prior to the Secure Act, the 50-year old beneficiary would have 34 years of tax-deferred growth and income tax would be spread over the same 34-year period. Under the 10-Year Rule instituted by the Secure Act, there are only 11 years of tax-deferred growth and income tax is paid at most over 11 years. Additionally, these payouts under the Secure Act do not have to occur annually, as they do under the old rules where a minimum annual distribution is required. Under the Secure Act, the entire account can grow tax deferred until December 31st of the 10th Anniversary of the Participant's date of death and then be distributed as a lump sum.

The Secure Act also impacts Roth IRAs. The hope for multiple decades of tax-free growth for Designated Beneficiaries is now eliminated, except for a minority of individuals who qualify as Eligible Designated Beneficiaries (described below). Now under the Secure Act, most Designated Beneficiaries will have to take distributions of the Roth IRA under the 10-Year Rule, but the Roth distributions remain tax-free. Ultimately, inherited Roth IRAs are still tax-free to beneficiaries, but the time they can continue to grow has been significantly reduced for most individuals.

One area the Secure Act has not impacted is the 5-year rule for Non-Designated Beneficiaries. If a non-qualified trust, estate or charity is named as a beneficiary of a Retirement Account, complete distribution generally must be made within 5 years of the Participant's death (unless required minimum distributions for the Participant have already begun, which would then allow the beneficiary to use the deceased Participant's life expectancy for purposes of calculating payments). While some commentary has suggested that status as a Non-Designated Beneficiary might be favorable, based on other Secure Act changes, further guidance will be necessary.

Who is still eligible for stretch payments?

Annual distributions from a Retirement Account calculated based on a beneficiary's life expectancy ("life expectancy payments") are still available for five classes of Designated Beneficiaries, who go by the new Secure Act definition "Eligible Designated Beneficiaries." Eligible Designated Beneficiaries – those that are not subject to the 10-Year Rule and are still permitted to receive life expectancy payments – are the following individuals:

  1. The surviving spouse of the Participant;

  2. Children of the Participant under the age of majority. However, such children must receive the entire remaining Retirement Account within 10 years of reaching the age of majority—which, interpreted plainly, is age 18 under most state laws (apart from Alabama (19), Nebraska (19) and Mississippi (21)) or up to age 26, if the child is enrolled in certain educational programs;

  3. Disabled individuals. Defined as individuals who are unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment expected to result in death or be of long-continued and indefinite duration, with proof of such condition required;

  4. Chronically ill individuals. Defined as individuals who cannot independently complete two or more "activities of daily living" (eating, toileting, transferring, bathing, dressing and/or continence), with proof of such condition required; and

  5. An individual not more than 10 years younger than the Participant.

The qualification of a beneficiary as an Eligible Designated Beneficiary is determined upon the death of the Participant. Additionally, Retirement Accounts may only be stretched over the lifetime of an Eligible Designated Beneficiary once; after the Retirement Account has been stretched over one Eligible Designated Beneficiary's lifetime, the remaining balance must then be paid out over 10 years after such beneficiary's death, regardless of whether the successor beneficiary would also qualify as an Eligible Designated Beneficiary. This 10-year limitation for successor beneficiaries will also apply to pre-Secure Designated Beneficiaries receiving life expectancy payments who die before the payment term has expired.

Let's examine each class of Eligible Designated Beneficiary.


Planning for spousal beneficiaries has not changed. Trusts for spouses that worked under the pre-Secure Act rules (typically, QTIPs or conduit trusts) continue to operate the same—distributions from the Retirement Account to a spouse outright or to a marital trust can be life expectancy payments. Also, life expectancies for surviving spouses can continue to be recalculated annually, unlike any other Eligible Designated Beneficiary.

Generally, to maximize flexibility, the surviving spouse should elect a rollover of the retirement account to his or her own IRA. There are mainly two situations where this rollover election should not be automatic. First, when the surviving spouse is under 59½ and needs immediate access to the IRA, treating the decedent's IRA as "inherited" allows distributions without triggering a 10% excise tax. Second, when the surviving spouse is significantly older than the deceased spouse, treating the account as an "inherited IRA" allows the surviving "older" spouse to defer distributions at least until the "younger" (deceased) spouse would have attained age 72.

  • Example 3: George dies leaving his spouse Alice as the Designated Beneficiary of a substantial IRA. Alice and George are the same age, and Alice does not need the money. Alice can elect to roll the account over into her own existing or newly created IRA, and Alice can begin required minimum distributions when she attains age 72.

  • Example 4: Joe dies in 2020, leaving his spouse, Karen, age 50, as the Designated Beneficiary of a substantial IRA. Karen will need to access the IRA funds prior to attaining age 59½. Karen should not rollover the IRA to her own IRA, but instead could treat Joe's IRA as an inherited IRA, allowing her to access the funds prior to age 59½ without incurring the 10% excise tax.

  • Example 5: Althea dies in 2020, age 60, died leaving her spouse Jerry, age 75, as the Designated Beneficiary of her substantial IRA. If Jerry rolled the account over to his own IRA, distributions would need to begin by December 31, 2021. If instead, Jerry treats Althea's account as an inherited IRA, Jerry can defer distributions for 12 years, until Althea would have been required to begin distributions at age 72.

Minor children of the Participant

First, note that this category only applies to children of the Participant, and not any other minors, regardless of their relation. Specifically, stepchildren, grandchildren, nieces and nephews or other minor Designated Beneficiaries will not qualify as Eligible Designated Beneficiaries permitted to receive life expectancy payments.

Second, the smaller life expectancy payments only apply until the point in time when the minor attains the age of majority. While the Secure Act does not provide a specific definition of "age of majority," it does include an obscure reference which appears to provide Eligible Designated Beneficiary status to any child of the Participant "who has not completed a specified course of education and is under age 26." Put simply, defaulting to state law and this cross-reference, a Participant's child can receive life expectancy payments until the later of (a) attaining the age of majority (age 18 in 47 states) or (b) the earlier of the (1) completion of a specified course of study, or (2) attainment of age 26. Upon attaining majority, an Eligible Designated Beneficiary who is a child of the Participant will then have to take distribution of the remaining Retirement Account in 10 years. This is a straightforward, optimistic read of the Secure Act, but additional regulatory guidance will be necessary to be certain of these results.

  • Example 6: Art died leaving his Retirement Account to his only child, Gene, who was 12 years old at the time of his father's death. Gene lives in a state where the age of majority is age 18. If Gene stops his education at high school and attains age 18 shortly after his graduation, Gene will have had 6 years of life expectancy payments (from age 12 to age 18), then will need to take distribution of the remainder of the Retirement Account in the 10 years following, effectively emptying and fully taxing the account by age 28.

Conversely, if Gene continued his education, he could continue life expectancy payments until the earlier of his completion of his course of study or his attainment of age 26. At that point, the life expectancy payments end and Gene has 10 years to take distributions from the account. Assuming Gene engaged in significant post-graduate education, he could be eligible for life expectancy payments until age 26 and would then have to receive the rest of the Retirement Account by age 36.

Trusts that are Designated Beneficiaries need to be reviewed. Certain Trusts that were designed to limit a young beneficiary's access to a Retirement Account will not achieve that goal for very long under the Secure Act. Conduit trusts will still technically work, but the tax compression and much quicker payouts will significantly change their results in practice.

Most conduit trusts are designed to control the beneficiary's access to the Retirement Account and spread payments out over a beneficiary's lifetime. Under the Secure Act, a conduit trust will no longer accomplish that goal. Accumulation trusts will still work to achieve creditor and spendthrift protection, but the entire Retirement Account will generally have to be distributed to the trust and taxed in 11 years.

  • Example 7: Sara has created a conduit trust for her daughter, Lucy, as the Designated Beneficiary of Sara's Retirement Account. Lucy is age 50 and has always depended on her parents for support. When Sara did the planning, Lucy would have been entitled to distributions over 34 years (i.e., life expectancy for a non-spousal beneficiary at age 50) and the Trustee could have controlled distributions to Lucy to protect her from her own imprudence. Secondarily, the distributions would have been taxed at Lucy's marginal tax rate over 34 years.

Post-Secure Act, conduit trusts—which are designed to pass through annual payments (less expenses) to the trust beneficiary, not accumulate trust income or principal—only allow a Retirement Account to remain untaxed for up to 11 years. Now, it is unlikely that the conduit trust achieves Sara's goals. The conduit trust cannot provide a lifetime income stream to Lucy and, because distributions will need to be more compressed, Lucy's tax rates will be higher. The loss of trustee control of assets can be addressed by making an accumulation trust the Designated Beneficiary rather than a conduit trust. To address both the tax and trustee-control issues, you may consider utilizing a Charitable Remainder Trust (see below).

  • Example 8: Bob left his Retirement Account to an accumulation trust benefitting his children Ken, age 22, and Bill, age 16. Ken has completed college and is working, but Bill is still a minor in high school. Unfortunately, Bill's status as a minor does not qualify the accumulation trust for life expectancy payments, and the entire Retirement Account must be paid to the trustee subject to the 10-Year Rule. With trusts reaching the highest marginal tax rate at only $12,750 of income, the accumulation trust is very tax inefficient. While, the accumulation trust will allow the trustees to manage the assets for a longer time and will offer spendthrift protection, the entire balance of the Retirement Account must be distributed to the accumulation trust, with taxes paid on the distribution, over 11 years.

Disabled and chronically ill Eligible Designated Beneficiaries

Both "disabled" and "chronically ill" Eligible Designated Beneficiaries are determined with medical certification. This determination would take place at the time of the Participant's death, not before. Under current rules, if a Designated Beneficiary was subjected to the 10-Year Rule and later becomes disabled or chronically ill, they would not qualify as an Eligible Designated Beneficiary.

A disabled and chronically ill Eligible Designated Beneficiary can use an existing conduit trust, because payments will continue over his or her life expectancy and taxes will be paid at the individual's tax bracket over his or her life expectancy. Unlike a spouse, a minor or an individual who is no more than 10 years younger, the disabled or chronically ill beneficiary could also use an accumulation trust and receive life expectancy payments. If you intend your Retirement Account to benefit a disabled or chronically ill individual, please consult your Withers Bergman lawyer.

  • Example 9: Anna, age 65, dies leaving her sister Rachel, age 50, whose pre-existing condition qualifies her as "disabled," as the Designated Beneficiary of her Retirement Account. Rachel can qualify as an Eligible Designated Beneficiary and receive life expectancy payments.

  • Example 10: Anna, age 65, dies leaving her sister Rachel, age 50, who has no pre-existing conditions, as the beneficiary of her Retirement Account. Because Rachel cannot qualify as an Eligible Designated Beneficiary, she is subject to the 10-Year Rule. If 3 years after Anna's death, Rachel is in a car accident that leaves her permanently injured in a manner that would constitute "disabled," under a plain reading of the Secure Act today (absent further IRS guidance), Rachel would still be subject to the 10-Year Rule and would not be entitled to life expectancy payments as an Eligible Designated Beneficiary.

Beneficiaries who are no more than 10 years younger than the participant

An individual who is no more than 10 years younger than the Participant, or a conduit trust for the benefit of such individual, can qualify for life expectancy payments. This will typically apply to a Participant who is leaving his or her Retirement Accounts to a sibling or close companion.

  • Example 11: Bob, age 75, dies with a significant Retirement Account. Bob has never been married and has no children. His sister Kay, age 66, is his Designated Beneficiary. Because Kay is less than ten years younger than Bob, she is an Eligible Designated Beneficiary and can take life expectancy payments.

  • Example 12: Brian, age 81, dies with a significant Retirement Account. Brian, who is a widower with no children, names his sister Georgia, age 70, as his Designated Beneficiary. However, because Georgia is 11 years younger than Brian, she does not qualify as an Eligible Designated Beneficiary and must take distributions under the 10-Year Rule.

Planning for Beneficiaries under the Ten-Year Rule

Reconsider your current plan

First, reconsider your estate plan in its entirety. If you are making charitable bequests, would it make sense to leave your Retirement Account to a charity, which will be tax-free as a charitable beneficiary? If you are providing in your estate plan for a sibling or companion who would qualify as an Eligible Designated Beneficiary under the "no more than 10 years younger" definition, perhaps eliminate or reduce the bequest and instead pay the Retirement Account to that individual. If you have a loved one who likely will be classified as "disabled" or "chronically ill" and can qualify as an Eligible Designated Beneficiary permitted to receive life expectancy payments, perhaps that individual should benefit from your Retirement Account, and other assets should be reallocated to the individual(s) presently named on a beneficiary designation under your pre-Secure Act planning. Sit down with your Withers Bergman attorney to discuss these matters and decide if your current plan can be improved.

Charitable trusts

A better alternative to many trust solutions for non-spousal beneficiaries, particularly if you have charitable inclinations, would be to consider naming a Charitable Remainder Trust ("CRT") as the Designated Beneficiary of your Retirement Account. A CRT would give a desired beneficiary access to increased cash flow, as the CRT would not pay tax on the receipt of Retirement Account distributions. Your desired beneficiary would receive annual annuity or unitrust payments which could last for a fixed term of up to 20 years, or if the desired beneficiary is not too young, for his or her lifetime. The payments each year must be at least 5% of the initial account value or the annual account value, depending on the type of CRT used. . The assets within the CRT can also compound on a tax-free basis. It is important to understand that tax owed on the distribution from the Retirement Account and the reinvestment of the proceeds is being deferred, not completely eliminated. Each payment made to the non-charitable beneficiary is taxable at a rate which is no more than such beneficiary's regular marginal rate under pre-Secure Act rules.

The CRT must be funded within 5 years of the Participant's death and must provide that at least 10% of the initial present value of the trust will be available to a charity of your choice upon termination of the trust. Volumes could be written on CRTs but, if you are struggling for a vehicle to provide long-term control and reasonable taxation with respect to a loved one's inherited retirement assets, contact your Withers Bergman attorney to discuss whether this sophisticated option would work for you and your family.

Roth conversions

Although long-term, tax-free growth for most inherited Roth IRAs has been eliminated under the Secure Act, there still may be reasons to at least consider a Roth conversion to address the tax compression and higher marginal tax rates that accelerated payments pose for most designated beneficiaries under the 10-Year Rule. If the Participant is in a significantly lower tax bracket than his or her Designated Beneficiaries, it may make sense to consider a Roth conversion. Additionally, in certain situations where the Participant is expected to have a taxable estate, reducing the estate with a Roth Conversion might be a worthy consideration. Likewise, if you believe income tax rates are likely to rise significantly in changing political climates, it might make sense to pay tax now at lower rates. In either event, you should consider contacting your Withers Bergman attorney and running the numbers.

Looking ahead

If your current estate plan handles Retirement Accounts in a simple fashion (e.g., outright to your spouse or adult children as Designated Beneficiaries) and you still believe that is appropriate, odds are very good that no action is required. Distribution and taxation of Retirement Accounts left to spouses are unchanged. Retirement Accounts distributed outright to competent adult children will simply be distributed and taxed under the 10-Year Rule, rather than over a beneficiary's life, and, unfortunately, this is unavoidable. Trusts for young children or individuals who don't have the necessary skills to manage finances will need special consideration. If your current estate plan has Retirement Assets being distributed to any type of non-spousal trust, you need to contact your Withers Bergman attorney to determine the best option for you and your family.

1 For the avoidance of doubt, any individual or see-through trust is a "Designated Beneficiary" but only an individual who is a member of one (or more) of the five classes set forth below is an "Eligible Designated Beneficiary."

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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