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Do I Need to Amend My Trust Because of the Secure Act?

Last month, in our last blog, we addressed the basics of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act’) and how retirement plan beneficiary designations will be impacted for individuals who die in or after 2020. But what if you already set up an estate plan with a trust as beneficiary of your retirement account? Do you need to amend your trust or your beneficiary designation form as a result of the passage of the SECURE Act?

The answer is that it depends on whether the trust is an “accumulation” trust or a “conduit” trust and how you want such retirement accounts to be treated. Generally, in an accumulation trust, assets payable to the trust are to be distributed in the trustee’s discretion. A conduit trust, on the other hand, generally requires that assets must be distributed to the beneficiary – in other words, the trust simply acts as a conduit to deliver the assets to the beneficiary, and the assets cannot stay (that is, cannot accumulate) in the trust. It is possible to draft the trust as an accumulation trust with respect to all assets except retirement accounts, just as it is possible to draft a conduit trust that requires only outright distributions of retirement accounts (leaving the remainder of the funds at the trustee’s discretion).

The Secure Act: Retirement Accounts and Your Estate Plan

Beginning on December 20, 2019, the Secure Act substantially changed the rules for designated beneficiaries of retirement plans, with wide raging implications for estate planning.

The old rule used to be that upon the death of a retirement account owner, the beneficiary of the plan would be able to take required minimum distributions based on that beneficiary’s life expectancy. This was beneficial especially for younger beneficiaries with long life expectancies who could “stretch” the payments over many years, allowing the assets to stay invested in the plan longer. It was also possible for beneficiaries to receive these stretch payments if a trust for their benefit was named as the beneficiary, as long as the trust qualified as a “see-through” trust. If no beneficiary was named, or if a non-see-through trust was named as beneficiary, the entire plan had to be distributed within 5 years of the date of death of the participant. Because many clients wish to leave their assets in trust for their children, much of the focus of estate planners up until this point had been drafting trusts so that they qualified as see-through trusts in order to avoid the 5-year rule.

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