CORONAVIRUS UPDATE: What We Are Doing to Protect Our Clients

Part 2: The Secure Act – Look at your trust, your beneficiaries, and get it reviewed

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).

It is necessary to understand the pre-SECURE Act rules relating to trusts. Prior to the SECURE Act, trusts were sometimes drafted as “see through” trusts in order to allow trust beneficiaries to take required minimum distributions (RMDs) based on each beneficiary’s individual life expectancy (for a basic summary of the pre-SECURE Act rule on naming trusts as beneficiaries of retirement accounts, and why the RMD rules are important, refer to Part 1 of the this blog on the Secure Act, posted on February 21, 2020). However, even if a trust qualified as a “see through” trust, if there were multiple beneficiaries of a trust, the IRS required that the eldest beneficiary’s life expectancy be used to calculate the RMDs. But who was the oldest beneficiary? What if you had named your child as beneficiary, with heirs as contingent beneficiaries? Was it necessary to find the oldest living heir in order to determine the RMDs? Making the trust a conduit trust with respect to retirement accounts was one way that some estate planners solved this problem — it eliminated the remainder beneficiaries from the pool of people who could be considered to calculate the RMDs. Since all distributions had to go out to the current beneficiaries, the remainder beneficiaries were not considered in the calculation of RMDs.

Fast forward to the SECURE Act, where for all beneficiaries except for eligible designated beneficiaries, all benefits of retirement plans must be withdrawn within 10 years of the plan owner’s death (with the exception of spouses, minor children, disabled and chronically ill beneficiaries). If the trust is a conduit trust with respect to retirement accounts, that means that in 10 years of the owner’s death, when the entire plan has to be withdrawn by the trustee, the trustee at that time must distribute the entire plan to the beneficiaries! In many cases this is not the intended result. The conduit trust provision was likely drafted with the expectation that only the RMDs would be required to be distributed each year. But as a result of the SECURE Act, the entire balance of the qualified retirement plan payable to the trust will be required to be distributed with properly drafted conduit provisions. Especially in those cases where retirement accounts comprise a large percentage of the trust estate, this could result in a very sizable portion of the trust assets being distributed outright and free of trust to the beneficiary, losing all of the protections and benefits that are afforded by trusts, and defeating the purpose for which the trust was established in the first place.

It is important to communicate with a knowledgeable estate planning attorney on a periodic basis to ensure that your estate plan is up-to-date. Changes in the law can have a drastic impact on the operation of your estate plan, and what worked yesterday may have unintended consequences today. If you are interested in more information on how the SECURE Act affects your existing estate plan, please do not hesitate to contact the lawyers at Chepenik Trushin LLP, who are experienced, ready, and willing to help – Bart Chepenik, (305) 613-3548, Brad Trushin, (305) 981-8889. We are available to answer your inquiries.

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