Effective January 1, 2020, the Federal SECURE Act Establishes New Rules for Distribution of Retirement Assets after Death

On December 20, 2019, President Trump signed into law an omnibus budget bill containing new rules on distribution of tax-deferred retirement assets, such as IRAs and 401(k)s, after the death of an account-holder. The new law dramatically changes the estate-planning alternatives for these assets.

In the past, estate planners have extolled the benefits of the “stretch IRA.” By naming a person or a qualified “see-through” trust as a designated beneficiary on a retirement account, that beneficiary could (1) take annual, required minimum distributions calculated on his or her life expectancy (thus the stretch), (2) pay taxes only on the annual distributions, and (3) defer until later any payment on the undistributed assets. This was particularly attractive for our clients with children. By setting up a see-through trust, you could prevent your kids from cashing out your IRA to buy a Ferrari after you die (accelerating the taxes due), and you could steer them toward growing the account. Tax-deferred accounts could remain largely tax-deferred. Your retirement savings could be part of your children’s retirement plan.

Effective January 1, 2020, the landscape changes considerably. Title V of the new law, entitled the “Setting Every Community Up for Retirement Enhancement” act (or the “SECURE Act”), provides that only an “eligible designated beneficiary” can stretch the IRA after the account-holder’s death. Every other human beneficiary must withdraw benefits within 10 years after the account-holder’s death. The Secure Act then limits who is an “eligible designated beneficiary” as follows:

  • Surviving spouses qualify and retain their ability to establish an IRA payout based on their own life expectancy, and to wait to take distributions until the deceased account-holder’s age would have triggered them (prior to the SECURE Act, this was age 70½ for the account-holder; now it’s age 72). When the surviving spouse dies, the beneficiaries on the account generally must take their distributions within 10 years of the spouse’s death.
  • Minor children of the decedent are “eligible designated beneficiaries” and can stretch the IRA while they remain minors. Upon reaching the age of majority, however, their eligibility disappears and they become subject to the 10-year distribution period. Note that grandchildren do not qualify as “eligible designated beneficiaries.”
  • Disabled and “chronically ill” beneficiaries are “eligible designated beneficiaries” and can stretch the IRA for their life expectancy. Upon the death of such individuals, the 10-year distribution period applies.
  • Beneficiaries who are less than 10 years younger than the decedent are “eligible designated beneficiaries” (e.g., the account holder’s siblings) and can stretch the IRA for their life expectancy. Upon the death of such individuals, the 10-year distribution period applies.

Obviously, the most significant impact of the SECURE Act is for families hoping to stretch the distribution of retirement assets to their children. Options remain available for determined parents. Accumulation trusts and charitable trusts are viable approaches. Each carries its own set of considerations on tax and other planning matters. In addition, families should consider meeting with our friends in the financial planning community to explore the possibility of conversions to Roth accounts and the use of trusted IRAs.

In 2020, Eckberg Lammers will be reaching out to its clients to offer a review of their existing estate plans. With the new law and the New Year, many will need to reconsider their approach to retirement benefits.


Contact us today if you have questions about this topic or if we can assist you with your Estate Planning needs. 

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