When the SECURE Act (or the "Setting Every Community Up for Retirement Enhancement Act") was signed into law in 2019, it upended traditional estate planning strategies for retirement accounts. One of the biggest changes was the end of the “stretch IRA” for most non-spouse beneficiaries that allowed individuals to take RMDs (or Required Minimum Distributions) based on their own life expectancy rather than the prior owner. 

Instead, under the SECURE Act, most non-spouse beneficiaries of IRAs or 401(k)s must deplete the account by December 31 of the tenth year following the original owner's death. There are no required minimum distributions (RMDs) during those ten years—just the requirement that the account be empty by the end of the period.  One key exception is Eligible Designated Beneficiaries (EDBs)—such as spouses, minor children of the decedent, disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the decedent—may still stretch distributions over their life expectancy.

These new rules are further complicated when combined with a trust based estate plan. Trusts can offer control of assets use after death and thus protection for younger or spendthrift beneficiaries, but when named as IRA beneficiaries, they must be carefully drafted to qualify as a “see-through trust” to allow the ten-year stretch. If not properly structured:

• The IRA may need to be distributed within five years instead of ten.

• Income from IRA distributions may be taxed at compressed trust tax rates, which hit the top federal bracket (currently 37%) at just over $15,000 of income.

• Ambiguities in the trust language may lead to litigation or unintended tax consequences.

If control is important (such as for a minor or spendthrift heir), consider a properly drafted conduit trust or accumulation trust, reviewed by an estate planning attorney familiar with post-SECURE Act rules.