Significant Change in Rules Applicable to Retirement Plans

On December 20, 2019, Congress enacted the SECURE Act, which contains a significant change in how retirement plan benefits must be paid out to beneficiaries after the participant’s death.  For deaths occurring on or after January 1, 2020, the “life expectancy” payout option is no longer available to most beneficiaries.  This refers to the option whereby a beneficiary can use his or her life expectancy to determine minimum required distributions from an inherited retirement plan.  The new law requires that the entire retirement plan be paid out within ten years of the participant’s death.  There are some exceptions to the new ten-year payout requirement:


  1. The participant’s surviving spouses can still do a spousal rollover of an inherited retirement plan or can choose the life expectancy payout option,


  1. Minor children (not grandchildren or other minor beneficiaries) of the participant have until ten years after reaching the age of majority (as defined in their state of residence) to withdraw the entire retirement plan,


  1. Disabled or chronically ill beneficiaries can use their life expectancy, and


  1. A beneficiary who is less than ten years younger than the participant can also his or her life expectancy to calculate minimum required distributions.


Many of you with retirement plans have “conduit trust” language in your trusts.  This is language that requires minimum required distributions to be distributed outright to the trust’s beneficiary.  This language enabled the trustee to use that beneficiary’s life expectancy to calculate the minimum required distributions under the old law. 


With the change in the law, a “conduit trust” would, in most cases, result in all retirement benefits being distributed outright to the beneficiary within ten years of your death.  This will be especially problematic where the beneficiary is young, not good with money, in a bad marriage, or any other situation where a large payout is just a bad idea.  Of course, the larger the retirement plan, the larger the problem to be addressed.


Now that the life expectancy payout is not available to most beneficiaries, it may not be beneficial to have a “conduit trust”.  Instead, it may be better to have an “accumulation trust”, which as it sounds, is a trust wherein the trustee can accumulate minimum required distributions in the trust instead of paying them out to the beneficiary.  Of course, there are additional income tax consequences to using an “accumulation trust” that would have to be considered.


If you have any concerns regarding the payout of your retirement plan to your children, grandchildren, or any other beneficiary, please contact me to discuss your situation in more detail.