Trusts and Designated Beneficiaries Under SECURE Act

Submitted by Randall Vaughan on Sat, 2020-01-11 17:07

Looking for comments on the following statements to confirm my understanding and belief on “go forward” new discretionary living trusts and potential amendment for owners of existing conduit trust that seems to be the most widely-discussed trust topic in the past few weeks.

1. It is my understanding that the IRS developed the concept of “see through trusts” to identify an individual beneficiary with a life expectancy to calculate RMDs for all beneficiaries of the trust, and that the oldest beneficiary was “designated” because that person had the shortest life expectancy. Therefore, one RMD amount was calculated each year, that amount was withdrawn, and distribution occurred under the terms of the trust, each beneficiary paid income taxes on the amount received, and assuming full distribution occurred, no income taxes were paid by the trust.

2. The “qualified trust” concept is not part of the code and the IRS has not indicated whether it will remain a viable strategy for owners who die after 1/1/20.

3. What is certain is that stretch for most beneficiaries is gone, the 5-year default rule remains, the 10-year rule is now in place for individual designated beneficiaries, and “eligible designated beneficiaries” have rules that allow a “stretch” to some degree. It would seem that the qualified trust concept would remain of benefit for owners who want to protect/control the distributions for the additional 5 years and for those eligible designated beneficiaries.

4. The question I have is how the qualified trust would work under the SECURE Act and if there is any uncertainty, whether it makes sense for the owner to direct the creation of IRA fractional shares upon death that would be inherited by the trustees of separate individual trusts created for each beneficiary. The IRA trust and the beneficiary’s rights to non-trust assets would be coordinated but distributed separately based upon tax issues, control, and beneficiary needs.



Submitted by Alan - IRA critic on Sat, 2020-01-11 21:18

  1. Agree, however the look through provisions also apply to accumulation trusts, which likely outnumber conduits. For accumulation trusts, identification of the oldest beneficiary is more complex and the trust may pay taxes on accumulated distributions at the higher rates.
  2.  Qualified trusts are described in IRS Reg 1.401(a)(9)-4, and 9-5. Not sure if there is a need for revision for portions of these Regs. Secure has carved out stretch preferences for SNTs and other trusts for disabled or chronically ill eligible beneficiary types, but not for trusts that do not have at least one such beneficiary. Those trusts will apparently fall under the new 10 year rule in most cases, with questions remaining involving multi beneficiary trusts with no disabled beneficiaries and which include both eligible (eg within 10 years of age of the account owner) and non eligible beneficiaries.
  3.  Some minor children of the owner whose age of majority is extended by qualified student status can stretch until their mid 30s.
  4. Yes, separate trusts and perhaps partitioned IRAs will provide a partial solution. It will take time for the plethora of new recommendations from the trust industry to be developed, and the IRS will probably have to provide additional guidance and perhaps Regs. Meanwhile, some fairly ungent decisions will have to be made for some clients.
  5. Annuity structures may also warrant exploration, particularly since such offerings in qualified plans is about to explode. That could attract more attention to the arcane Regs of 1.401(a)(9)-6. IRA annuities have been under utilized to date.

 

Submitted by Bruce Steiner on Sat, 2020-01-11 23:39

  • I generally agree.  However, conduit trusts rarely made sense even under the old law, since they forced out all of the assets to the beneficiary, throwing them into the beneficairy’s estate and exposing them to the beneficiary’s creditors and spouses, and Medicaid.
  • Even under the old law, our clients would typically provide (in the beneficiary designation) for each child’s share to be payable to a separate trust.
  • Bruce Steiner

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