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When the Setting Every Community Up for Retirement Enhancement Act, known as SECURE, was enacted in 2019, it made waves in the estate planning world by substantially changing the treatment of inherited retirement plan accounts.
In the years following its enactment, the SECURE Act was modified on several occasions. Five years after SECURE became law, what is the state of estate planning and qualified retirement accounts?
Changes
The SECURE Act made substantial changes to the rules regarding a beneficiary’s withdrawals from an inherited retirement plan after the death of the account owner. Before the SECURE Act, an individual (designated beneficiary) could usually withdraw retirement plan assets over the course of his or her own life expectancy. Certain kinds of trusts, known as “conduit trusts” and “accumulation trusts” could also qualify as a designated beneficiary to allow for withdrawals based on the life expectancy of the oldest trust beneficiary.
The SECURE Act changed the life expectancy withdrawal provisions for all but a few types of beneficiaries (eligible designated beneficiaries). Eligible designated beneficiaries who can still withdraw inherited retirement account assets over their life expectancy include a surviving spouse of the original account owner, minor children of the original account owner (until they reach the age of majority), a disabled or chronically ill person, or any individual less than ten years younger than the original account owner.
A conduit or accumulation trust for the benefit of an eligible designated beneficiary may still qualify for life expectancy withdrawals as well.
Any person who inherits a retirement plan and is not an eligible designated beneficiary (such as an adult child of the account owner) usually must withdraw the entire amount of the account within ten years after the death of the account owner. The effect of that change can result in increased income taxes by condensing the account payout into a shorter term.
Before SECURE, clients usually did not have to choose between their heirs being able to defer income taxes on retirement plan withdrawals and maintaining control over the timing and amount of distributions from the plan to their heirs.
A parent could leave an IRA to a trust for an adult child and the child could defer income taxes on IRA withdrawals over their life expectancy, while the parent could rest assured that the trust would put some guardrails around the child’s access to the funds.
The SECURE Act took that option off the table in many cases. Instead, estate planners had to ask their clients to identify their highest priority: deferring taxes on retirement plan accounts or maintaining control over distributions from retirement plan accounts.
SECURE 2.0
Signed into law in December 2022, the “SECURE 2.0” Act left most of the new framework created by the SECURE Act in place.
SECURE 2.0 did make modifications to the rules governing required minimum distributions to a surviving spouse from a qualified retirement plan. SECURE 2.0 also allowed an accumulation trust for a disabled or chronically ill individual to qualify as an eligible designated beneficiary even if a charity is the remainder beneficiary of that trust (in contrast to accumulation trusts for other categories of eligible designated beneficiaries).
Final SECURE regulations
The original SECURE Act complicated estate planning for parents of minor children by creating ambiguity regarding whether a trust for multiple minor children (one of the most common ways to provide for minor children if both parents have died) would qualify for life expectancy payouts during the children’s minority.
Fortunately, final Treasury regulations promulgated in July 2024 resolved that ambiguity by allowing a single trust for the benefit of multiple beneficiaries to receive favorable eligible designated beneficiary treatment if at least one beneficiary is a minor child of the account owner (at least until the minor reaches the age of majority).
The final regulations also added flexibility regarding naming a trust as a beneficiary of a retirement account. Under prior law, if a single trust that split into separate sub-trusts for different beneficiaries was named as the beneficiary of a retirement account, the sub-trusts were still treated as a single trust for purposes of determining the minimum required distributions to be made from the retirement plan to the trust.
This could put younger trust beneficiaries at a disadvantage if the life expectancy of much older trust beneficiaries would be used to calculate the amount of minimum required distributions, potentially triggering higher income taxes. To avoid this outcome, each separate sub-trust had to be separately named on the retirement account beneficiary designation form.
The final regulations gave estate planners an option to avoid this result. If the trust provides that retirement plan assets must be immediately divided effective as of the original plan participant’s date of death and directs the proportions of the retirement plan account that each sub-trust is to receive, then separate accounts treatment may be achieved without naming the separate sub-trusts on the beneficiary designation form.
Last, the final regulations added flexibility regarding the inclusion of powers in a trust that could result in a redirection of retirement dollars to beneficiaries other than those initially identified in a trust.
Generally, the regulations provide that the possibility of post-death modifications of a trust will not create issues with respect to retirement plan assets unless and until the power is actually exercised. In light of the increasing use of decanting, non-judicial settlement agreements, and other modern trust modification options, this new regulation offers estate planners welcome flexibility.
Where does this leave us?
Although SECURE 2.0 and the final regulations provided some clarification and additional flexibility regarding estate planning with retirement accounts, the fundamental question that estate planners need to address with their clients in light of the SECURE Act remains unchanged: does the client want to minimize income taxes or maximize control over the distributions to their heirs?
Factors relevant to this decision may include the client’s age, family circumstances, and amount of pre-tax dollars in retirement plan accounts as a percentage of the client’s overall net worth.•
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Elizabeth Timme is a partner at Ice Miller LLP. Opinions expressed are those of the author.
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