SECURE Act considerations

Under the new SECURE Act, effective January 1, 2020, various IRA and qualified plan rules, long applicable to planning, have changed.

First, those over age 70½ may make contributions to IRAs (after that age) but may not use post-age 70½ contributions to fund qualified charitable distributions (a current exception allowing up to $100,000 from a plan to pass tax free to a qualified charity).

Second, the mandatory date for required mandatory distributions or RMDs is now 72 instead of age 70½.

Third, rules for RMDs after death have changed dramatically. Generally, instead of stretching out distributions over the life expectancy of the designated beneficiary (if there is one), all amounts standing in a decedent’s account would be distributed and taxed within 10 years of the year when the plan participant or IRA owner died.  There are exceptions.  The rules for a surviving spouse will be unchanged, and a surviving spouse’s ability to make a rollover to her own IRA will also remain in place.  Further, stretch will be allowed for certain beneficiaries, including: those who are less than 10 years the deceased participant’s junior; a disabled or chronically ill individual; and a child, but only until he reaches the age of majority.

These changes require planners and taxpayers to reconsider how to administer qualified plans.  “Best practices” will emerge over time, but that is in the future, as the IRS has not yet even released regulations for the law changes.

Over the past several decades many planning attorneys have used a “conduit trust” strategy that uses revocable living trusts as secondary beneficiaries of IRAs.  With this strategy, a spouse designates her spouse as the primary beneficiary and if he survives her, he can use “spousal rollover rules” to avoid taking RMDs and to ensure his “required beginning date” (“RBD”) is (now) age 72.  Often, to provide creditor protection for children of a couple, a living trust would be designated as the contingent beneficiary.  This strategy works well when asset protection is desired and children are approximately the same age.  Under this strategy, the successor trustee of a trust is required to designate or identify qualified beneficiaries of the trust no later than September 30 in the year after death (“YAD”); provide the IRA custodian with required paperwork by October 30 YAD; and create separate accounts for individual beneficiaries by December 31 YAD.  When subtrusts are used, a trustee manages the subtrust for the individual beneficiary (could be the beneficiary serving as successor trustee of the subtrust share), and (prior to January 1, 2020) such trustee was required to make annual withdrawals in amounts equal to that beneficiary’s RMD.

Under the new law, adult children beneficiaries (who do not meet an exception above) are not required to begin withdrawing amounts for their IRA share until the end of 10 years after death of the owner; but at that time must withdraw the entire share and pay tax on all amounts in the IRA.  The economic loss to death beneficiaries subject to the 10-year rule versus lifetime stretch distributions is significant.  For example, an IRA owner who named his son as the IRA’s death beneficiary dies at age 85. At the time of his father’s death, the son is age 50. The value of the son’s inherited IRA is $500,000. If the son immediately withdraws the account and pays income taxes at an effective rate of, say, 45% (federal and state combined), the son’s net after-tax value is $275,000.  If the son instead waits 10 years and then withdraws the entire account, and assuming that the rate of investment return inside the inherited IRA is 7% and that the son’s after-tax rate of return is 3.9%, the son’s after-tax net present value is $370,771—an improvement of $95,771 over immediate withdrawal.  Thus, as the example shows, when another strategy is not used, it may still be in the son’s best interest to allow the share to grow and then remove it at the end of 10 years.

One potential strategy for owners (whose proposed qualified plan beneficiaries will be subject to the 10 year rule) will be to name a charitable remainder trust (“CRT”) as beneficiary, which might greatly increase value compared to the application of the proposed 10-year rule. As an example, assume that the IRA owner establishes and names as the IRA’s beneficiary a testamentary charitable remainder unitrust (“CRUT”), paying the son 5% of the trust’s value each year (5% unitrust) for life, assuming that the CRUT earns an annual return on investment of 7% and makes payments to the son at the end of each year. Assuming the son lives to age 87, the present value of the son’s payments at the time when the CRUT is funded is $668,811—an improvement of $393,811 over immediate withdrawal (above example). In addition, the present value of the charity’s remainder interest is $81,132 (7% discount rate assumed, because neither the CRUT nor the charity pays income taxes). The after-tax value to the son and charity combined is $749,943.

Other potential strategies still being developed include splitting beneficiaries in any case where a beneficiary is subject to a 10 year withdrawal rule; giving qualified plan benefits to those not subject to the 10 year rule and other assets to those subject to the rule; and ROTH IRA conversions.

Clients with larger IRAs and beneficiaries who will be subject to the 10 year withdrawal rule should begin now considering the best option to protect their IRA investment, which is often a family’s largest asset after their home.

If you have questions or would like to explore options, please contact me at your convenience,


Michael Reagor
Dymond • Reagor, PLLC
Attorneys at Law