Accumulation Trusts Versus Conduit Trusts: New Rules for Old Tools Under the SECURE Act

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Accumulation Trusts Versus Conduit Trusts: New Rules for Old Tools Under the SECURE Act

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Bloomberg Tax - Estates, Gifts, and Trusts Journal

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act)[1] slams shut a valuable income-tax benefit for most inherited IRAs.[2] A clear result of the SECURE Act is that the “stretch” inherited IRA is now unavailable for most beneficiaries other than a surviving spouse, and a 10-year payout[3] is the new norm. The adage is that “where one door closes, another opens,” but the new rules suggest that estate planners will need to hold all the keys, and to pick the right one depending on the client's situation. For the reasons discussed in this article, accumulation trusts will in many cases be the correct door to select for inherited IRAs, but the conduit trust is the only type of trust that is guaranteed to qualify for the “stretch” inherited IRA under five limited exceptions contained in the SECURE Act.

Because of the 10-year payout requirement, a likely trend will be the increased usage of trusts to receive inherited IRAs in order to shelter that accelerated payout from creditors, divorce, and estate and generation-skipping taxes. For decades, estate planners who guided their clients into the world of inherited-IRA trusts were faced with a fundamental choice between so-called “conduit trusts” and “accumulation trusts,” and for many estate planners, either one could be implemented as the go-to option for almost all clients. Several factors now tilt in favor of accumulation trusts, but before adopting an always-accumulation strategy, attorneys will want to reconsider their standard form language for accumulation trusts, and all advisors should be familiar with certain circumstances in which the conduit trust can provide better results.

INHERITED IRAS UNDER THE SECURE ACT

The SECURE Act changed many of the fundamental rules and restrictions on using trusts as tax-favored IRA beneficiaries. These new rules apply to IRAs whose owners die on or after January 1, 2020. This article does not focus on planning options for a surviving spouse, based on the assumption that the spousal-rollover will continue to be the predominant option for surviving spouses.[4] This article instead focuses on inherited IRAs that will be held in trust for the benefit of persons other than a surviving spouse, and specifically planning issues related to IRAs that are held in “lifetime trusts,” meaning trusts that continue to exist for each beneficiary's entire lifetime, as opposed to distributing assets outright at certain ages.

Prior to the SECURE Act, inherited IRAs which were left to a “designated beneficiary” qualified for the “stretch.”[5] The “stretch” allowed the inherited IRA to be distributed in annual installments over the beneficiary's own life expectancy.[6] If the beneficiary did not qualify as a “designated beneficiary,” then the benefits were instead required to be distributed under the “five-year rule” (by the end of the fifth year after the IRA owner's death).[7] For some perspective, the “stretch” payout periods using the beneficiary's life expectancy would have been 17.0 years for 70-year-old, 34.2 years for 50-year-old, and 53.3 years for a 30-year-old.[8] To be sure, the “stretch” was a valuable way to defer income tax on distributions from inherited IRAs.

The “stretch” is now only available for individuals who qualify as “Eligible Designated Beneficiaries” under the SECURE Act (including surviving spouses).[9] Under the SECURE Act, there are three possible payout periods for IRA beneficiaries other than a surviving spouse:

  1. 10 years for a “designated beneficiary,”[10]
  2. five years for a beneficiary who is not a “designated beneficiary,”[11] or
  3. a “stretch” payout for an “Eligible Designated Beneficiary” during the period in which the beneficiary is an Eligible Designated Beneficiary.[12]

The SECURE Act did not change the definition of “designated beneficiary.” A “designated beneficiary” is either an individual named as a beneficiary of the IRA,[13] or a so-called “see-through trust.”[14]There are two types of see-through trusts: “conduit trusts” and “accumulation trusts.”

CONDUIT TRUSTS

The so-called “conduit trust” earns its name and favorable treatment because the trust serves as a hard-wired conduit between the IRA and the primary beneficiary. A trust is a “conduit trust” if the “trust instrument provides that all amounts distributed from [the IRA] to the trustee while [the primary beneficiary] is alive will be paid directly to [the primary beneficiary] upon receipt by the trustee.”[15] In other words, a conduit trust is a trust in which one living individual beneficiary is required to receive all IRA distributions that are received by the trust, when they are received. No IRA proceeds can be accumulated in the trust, and no IRA proceeds can be distributed to any other beneficiary during the primary beneficiary's lifetime.[16]

If the trust meets these requirements, the primary beneficiary of the trust is deemed to be “the sole designated beneficiary” of the IRA for purposes of determining the IRA payout period.[17] Importantly, the identity of the remainder beneficiaries of the trust are irrelevant because they “are mere potential successors” to the primary beneficiary's interest.[18]

Conduit trusts are attractive to some advisors primarily because of their relative simplicity and predictability. Unlike accumulation trusts, conduit trusts completely sidestep an analysis of the identity of the remainder beneficiaries of the trust. Specifically, conduit trusts avoid three issues which are inherent to accumulation trusts.

First, a charity or other non-individual can be a remainder beneficiary of a conduit trust without impacting the payout period.[19] This allows an IRA owner to name a charity as an ultimate contingent beneficiary under the IRA owner's estate plan. The IRA owner cannot achieve this result with an accumulation trust.

Second, a charity or other non-individual can be a permissible object of the primary beneficiary's testamentary power of appointment under a conduit trust.[20] This allows the primary beneficiary to hold a testamentary power of appointment which can be exercised in favor of charities (for charitable or tax-planning purposes) or the primary beneficiary's estate (to avoid generation-skipping transfer tax as a result of a taxable termination that may otherwise occur at the primary beneficiary's death).[21] This cannot be done with an accumulation trust.

Third, under prior law, the remainder beneficiaries of a conduit trust could be older than the primary beneficiary — but this is no longer unique to conduit trusts as a result of the SECURE Act. Unlike an accumulation trust, the age of the remainder beneficiaries of the conduit trust does not change the use of the primary beneficiary's life expectancy for determining the life expectancy for the “stretch” payout. As discussed below, the conduit trust's ability to achieve a “stretch” should no longer be a consideration except in special situations where the primary beneficiary is an “Eligible Designated Beneficiary.” Because the payout period is limited to 10 years for all other designated beneficiaries, the primary beneficiary's life expectancy is now irrelevant.

ACCUMULATION TRUSTS

A trust is a so-called “accumulation trust” if the only possible trust beneficiaries are individuals. In other words, there can be no non-individual trust beneficiaries.[22] However, depending on the trust structure, successor beneficiaries are not necessarily included in the determination. “A person will not be considered a beneficiary for purposes of determining who is the beneficiary … merely because the person could become the successor to the interest of one of the employee's beneficiaries after that beneficiary's death.”[23] The beneficiaries who “count” for purposes of this rule are sometimes referred to as the “countable” beneficiaries, as opposed to “mere successor beneficiaries.”[24]

It is critically important to be able to distinguish a “countable” beneficiary from a “mere successor beneficiary.” If a countable beneficiary is a non-individual, then none of the trust beneficiaries will be treated as a “designated beneficiary,” and the trust will not qualify as an accumulation trust.”[25] Because the IRA proceeds can be accumulated in the trust, the clearest IRS guidance seems to require that the determination of “countable” beneficiaries must be made by considering all possible future beneficiaries, with the inquiry ending at such time as the IRA proceeds would be distributed outright to a beneficiary under the trust instrument.[26] Where the goal is to permit the trustee to retain the IRA proceeds in trust for multiple generations, the analysis arguably must encompass all potential future trust beneficiaries.[27] To clearly delineate the countable beneficiaries, some practitioners include a provision for accumulation trusts that if at any time there is only one living individual trust beneficiary (and no living individual remainder beneficiaries), the trustee must immediately distribute the entire IRA to that individual free of trust.[28]

Fortunately, the analysis is limited to beneficiaries who are actually living as of the IRA owner's death.[29] Hypothetical and unborn beneficiaries are not counted.[30] Thus, if the trust instrument provides that upon the death of all living current and remainder beneficiaries, the IRA proceeds would pass outright to a person's heirs at law or other individuals, the trust would qualify as an accumulation trust.[31]

Notably, if a trust grants a current beneficiary a lifetime or testamentary power of appointment which is exercisable in favor of a non-individual, the trust will not qualify as an accumulation trust.[32] This presents the problem that if a current beneficiary can exercise any power of appointment in favor of a charity or the beneficiary's own estate, then the trust will fail to qualify as an accumulation trust. Similarly, if the trustee may distribute trust assets to a non-individual, even as a remainder beneficiary upon termination of the trust, the trust will fail to qualify as an accumulation trust.

Under the SECURE Act, the failure to meet these requirements will result in a five-year IRA payout to the trust instead of a 10-year payout. While not ideal, consider that the consequences of failing to meet these requirements are much less detrimental than they would have been under prior law, when the result would have been the loss of the “stretch.”

Finally, it should be noted that future IRS interpretation could change or relax the restrictions on permissible remainder beneficiaries of accumulation trusts. The IRS's interpretation of the determination of “countable” beneficiaries is found in Treasury regulations and in private letter rulings, and they are not always consistent.[33] The underlying policy support is ethereal: Why should a conduit trust beneficiary be able to appoint the trust remainder to any person, while charities and a beneficiary's estate are barred from being even remote remainder beneficiaries of accumulation trusts? How is the government's ability to tax the trust or beneficiaries any different under those scenarios? Given that the consequences are so much less important under the 10-year rule, one can hope that the IRS will revise these Treasury regulations to provide more clarity, flexibility, and simplicity for accumulation trusts.

WHY ACCUMULATION TRUSTS?

Under the SECURE Act, the major downside of a conduit trust is that the IRA proceeds must pass outright to the designated beneficiary by the end of the 10th year following the IRA owner's death (assuming the designated beneficiary is still alive).[34] For many years, some practitioners determined that conduit trusts were the preferred option because of their relative simplicity, guaranteed results, ability to name a charity as a remainder beneficiary, and ability to grant a testamentary power of appointment in favor of non-individuals, including the beneficiary's estate if necessary to reduce GST taxes. Inherent in this analysis was that though IRA proceeds must pass outright to the beneficiary as they are received each year, the lifetime “stretch” softened the blow.

Now, the SECURE Act guarantees that none of the IRA will remain in a conduit trust beyond that 10th year.[35] As the preeminent scholar on IRAs has noted, “Conduit trusts could prove disastrous in some cases.”[36] For any client, attorney, or advisor who is concerned with protecting inherited IRAs from a beneficiary's creditors, this fact alone may be a deal breaker for using conduit trusts. While some level of creditor exposure was always a concern with conduit trusts, in the words of Nigel Tufnel, under the SECURE Act, “These go to eleven.”[37]

The popular use of trusts to receive IRA proceeds is already on the rise for creditor protection reasons. The Supreme Court in 2014 held that inherited IRAs are not protected under the federal bankruptcy exemption.[38] With an accumulation trust, even though the trustee must withdraw the entire IRA by the end of the 10th year following the IRA owner's death, the IRA proceeds may then be accumulated in the trust, reinvested, and distributed only in the trustee's discretion, thus putting a lifetime obstacle between the beneficiary's creditors and the IRA proceeds. Similarly, though state law varies, a trust will generally provide significantly better protection in the event of divorce as compared to a beneficiary's outright ownership of an inherited IRA or receipt of proceeds from an inherited IRA.

Another positive attribute of accumulation trusts is that they may be structured as supplemental needs trusts that do not disqualify beneficiaries with disabilities from receiving government benefits. With a conduit trust, IRA proceeds must be withdrawn from the IRA and distributed to the beneficiary each year, which would almost certainly disqualify the beneficiary from receiving governmental benefits.[39]

Some post-SECURE Act commentary has suggested that an accumulation trust will result in increased income tax liability as compared to a conduit trust. This premise is based on the fact that trusts are generally taxed at the highest marginal tax rate, and the accumulated IRA income will be taxed to the trust. The first fact is true, but the second is not: Nothing prevents the trustee from making a distribution of IRA proceeds to the beneficiaries, in which case the beneficiary would receive a K-1 and would be taxed on the income, with the trust receiving a corresponding income tax deduction.[40] In short, if the trustee wants an accumulation trust to achieve the same income tax result as a conduit trust, then the trustee can generally do so.[41] Another notable benefit of an accumulation trust is that the trustee can distribute the IRA proceeds among any number of individual beneficiaries, considering their relative needs, their combined state and federal tax brackets, and their ability to responsibly handle the money.

In addition, GST planning is now virtually nonexistent for a conduit trust with a 10-year payout requirement. If the IRA owner has sufficient GST exemption to shelter the IRA, then the accumulation trust is a viable option for GST planning. That being said, multi-generational planning for inherited IRAs presents challenges. Foremost, the IRA will be valued at its gross date-of-death value for purposes of allocating the decedent's GST exemption, but the IRA proceeds will be subject to income tax when received, thus being an inherently inefficient allocation of GST exemption.[42] If the decedent's available trust assets are in excess of the decedent's available GST exemption, the executor will be faced with a choice between sheltering IRA proceeds versus other assets, and it may be unattractive to fund a GST-exempt trust with an inherited IRA.

Finally, the SECURE Act effectively removed one major limitation on accumulation trusts. Previously, an accumulation trust was required to use the life expectancy of the oldest countable beneficiary for determining the “stretch” period. Because the “stretch” is dead and the 10-year payout is now reality, the class of individual beneficiaries is now unlimited. Previously, many trust instruments eliminated all remainder beneficiaries who were older than the designated beneficiary. Because life expectancy is no longer relevant for an accumulation trust, age is just a number. The only number that matters now is 10 — as in 10-year payout.

REVIEW OF FORM LANGUAGE

Attorneys who previously relied on conduit trusts as their go-to form provisions should carefully review that position. Simplicity is a noble cause, and it may be reasonable to determine that simplicity is still the goal. After all, a conduit trust with a 10-year payout does not put the beneficiary in any worse position than they would have been in with as an outright beneficiary of an inherited IRA. However, if creditor protection and GST planning are important goals, then the SECURE Act presents significant new challenges for conduit trusts. It also remains true that if a beneficiary requires a supplemental needs trust, then the conduit trust is inappropriate.[43] If a conduit trust is to be used, then consider granting a trust protector the power[44] to modify or eliminate certain powers and interests to allow the trust to instead be converted to an accumulation trust.[45]

For accumulation trusts, standard form language should now be revisited. The identity of the oldest “countable” beneficiary no longer matters, because the 10-year rule replaces the “stretch.” Most accumulation trusts contain a savings clause that eliminates all beneficiaries who are older than the designated beneficiary. That limitation serves no purpose under current law. Importantly, that limitation could eliminate some deserving beneficiaries and create unintended consequences.

Consider a typical situation in which the IRA owner has two children. The IRA owner signs and files a beneficiary designation which divides the account into equal shares for his children, and directs each child's share to be retained in a separate accumulation trust under the IRA owner's estate plan, to be held for the child's lifetime. The trusts contain old form language that prohibits beneficiaries who are older than the designated beneficiary from receiving any IRA proceeds. At the IRA owner's death, the children's trusts are funded, and they qualify as accumulation trusts with a 10-year payout. Later, the youngest child dies, and the oldest child is prohibited from being a beneficiary of the accumulation trust. Consider the following scenarios:

Scenario 1: The youngest child has no kids of her own; the oldest child has one child. As a result, at the youngest child's death, the accumulation trust passes to the older child's own child.

Scenario 2: Neither child has kids of her own. As a result, at the youngest child's death, the accumulation trust passes to the IRA owner's heirs at law who are younger than the deceased child.

This age limitation is now obsolete, and drafters should consider eliminating it from their trust forms.[46] Also, the designated beneficiary can be granted a testamentary power of appointment exercisable in favor of any individuals, regardless of age. These provisions will not work in all cases to prevent IRA proceeds from passing outside the beneficiary's immediate family, but they eliminate some of the potentially harsh results and provide the IRA beneficiary with the ability to avoid some unintended consequences.

As discussed above, two remaining issues with accumulation trusts are that (1) a charity or other non-individual generally cannot be named as a remainder beneficiary of the trust,[47] and (2) a beneficiary cannot be granted a general power of appointment over the trust assets, even if such a power is necessary to prevent a generation-skipping transfer tax from applying at a beneficiary's death.

These two issues prove that the accumulation trust is not a magic bullet. Unless the IRS issues new Treasury regulations or other interpretation, the solutions to these issues pose their own challenges.

If a client is set on allowing IRA proceeds to potentially pass to a charity named as a remainder beneficiary, then the client's advisors should be cognizant of this issue in the planning stage, so that standard form language in an accumulation trust does not override the charity's interest. A client may be willing to accept the consequence of a five-year IRA payout in order to overcome this obstacle and allow the charity to benefit. Specifically, the attorney should be aware of the common savings clause in accumulation trusts that eliminates all non-individual beneficiaries. If that clause is removed, the IRA will be limited to a five-year payout, but the charity will be a permissible remainder beneficiary.

The second issue can be addressed with careful post-death planning. If the accumulation trust is GST-exempt, then there is no need for a beneficiary to possess a general power of appointment, because a taxable termination cannot occur. However, if the trust is non-GST exempt, then action must be taken to avoid a GST tax upon the primary beneficiary's death.[48] One solution is for the trustee to distribute the trust assets outright to the primary beneficiary prior to the primary beneficiary's death, thus avoiding a taxable termination. Another solution is for the primary beneficiary to exercise his or her testamentary power of appointment in a manner to avoid a taxable termination. Both solutions would preserve the 10-year payout for the accumulation trust, but they require affirmative action to be taken by the trustee or the beneficiary prior to the taxable termination.

Another option would be to grant a trust protector the power, exercisable prior to September 30 of the year following the IRA owner's death, to grant a testamentary general power of appointment to a beneficiary of the trust, even if that would result in the trust no longer qualifying as an accumulation trust. While some trust instruments already include form provisions that allow a trust protector to grant a general power of appointment, this power should be reviewed for this purpose, because the trust instrument's specific prohibition against non-individual beneficiaries of the accumulation trust may trump the general provisions governing the trust protector. If the trust protector does not exercise the power to grant the general power of appointment, the general power of appointment cannot exist on September 30 of the year following the IRA owner's death, and thus the trust should qualify as an accumulation trust.[49] If the trust protector exercises the power and grants the general power of appointment, the trust would no longer qualify as an accumulation trust and would only be eligible for a five-year payout of the IRA. The denial of the 10-year payout would have to be weighed against a potential 40% GST tax upon a taxable termination.

EXCEPTIONS TO THE ACCUMULATION TRUST

Advisors should be aware of the new “Eligible Designated Beneficiary” rules to allow them to issue-spot situations in which an accumulation trust may not be desirable.

The SECURE Act creates five types of Eligible Designated Beneficiaries:

  1. The surviving spouse of the IRA owner.[50]
  2. A minor child of the IRA owner.[51]
  3. A disabled beneficiary.[52]
  4. A chronically ill individual.[53]
  5. A beneficiary who is less than 10 years younger than the IRA owner.[54]

If the designated beneficiary of a conduit trust meets the definition of Eligible Designated Beneficiary, then clearly the conduit trust qualifies for a “stretch” payout over that beneficiary's life expectancy during the period in which the designated beneficiary is an Eligible Designated Beneficiary.[55] Under the SECURE Act, subject to further IRS interpretation, the general rule appears to be that an accumulation trust for a surviving spouse, a minor child, or a 10-year-younger beneficiary will not qualify for a “stretch” payout even if the sole current beneficiary of the trust is an Eligible Designated Beneficiary.56 However, the SECURE Act contains a new exception that allows an accumulation trust to qualify for the “stretch” if it is for the benefit of a disabled or chronically ill beneficiary, as long as that beneficiary is the sole lifetime beneficiary of the trust.57 Therefore, advisors should be aware that if the IRA owner desires to allow an Eligible Designated Beneficiary to qualify for a “stretch” payout within a trust structure, the analysis of whether to use a conduit trust or accumulation trust will vary depending on the type of Eligible Designated Beneficiary.

While the “stretch” is clearly a valuable benefit, the practical application of the Eligible Designated Beneficiary rules under the SECURE Act will reduce this benefit in the following situations:

  1. The surviving spouse remains eligible for a complete rollover to the surviving spouse's own IRA, which reduces the frequency with which a spouse will be named as the beneficiary of a trust that owns an inherited IRA. Clearly, if the goal is for the IRA to pass to a trust for the spouse's benefit, a conduit trust must be used to obtain the “stretch.”
  2. Upon the death of the Eligible Designated Beneficiary, the 10-year payout rule applies. This will limit the usefulness of the “stretch” for an Eligible Designated Beneficiary who is a chronically ill individual, and in some cases for a beneficiary who is less than 10 years younger than the IRA owner.
  3. If the Eligible Designated Beneficiary is a disabled beneficiary who receives government benefits, then establishing a conduit trust for that beneficiary risks making the beneficiary ineligible for those government benefits. Instead, the trustee will need discretion to make distributions only in a manner that will not disqualify the beneficiary from those government benefits. The SECURE Act seems to have considered this conundrum and provided a solution for accumulation trusts: If a disabled beneficiary is the sole lifetime beneficiary of the trust, then it appears that an accumulation trust will qualify for the “stretch” as long as the beneficiary remains disabled.58
  4. If the Eligible Designated Beneficiary is a minor child of the IRA owner, the stretch may be quite valuable. However, upon the child reaching majority, the 10-year rule applies. As a conduit trust, the entire IRA proceeds must be paid out before the expiration of that subsequent 10-year period.

Of the non-spouse Eligible Designated Beneficiary exceptions for which a conduit trust would be needed, the minor child exception has the greatest potential application and savings. Note that “a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26.”59 Therefore, the child's own life expectancy could in some circumstances apply until age 26, after which the 10-year rule would apply. The question for planners will be whether to use a conduit trust for minor children, and allow a substantial majority of the IRA to continue to grow tax-free as an inherited IRA, potentially extending the child's mandatory payout to age 36. However, the flip side is that by age 36 (and potentially as early as age 28), the non-tax benefits of a trust structure will be lost, as will any potential GST-exempt nature of the trust.

OTHER TOOLS

Advisors will want to be familiar with two other tools which have been much discussed in the wake of the SECURE Act: Roth conversions, and Charitable Remainder Trusts.

A Roth conversion may be particularly useful where the IRA owner is very likely to have a taxable estate. The conversion from a traditional IRA to a Roth will cause income tax to be due on the entire value of the IRA.60 However, the payment of income taxes will reduce the size of the decedent's estate for estate tax purposes, and it will eliminate the need for a conduit trust or accumulation trust. Because all proceeds from the Roth IRA will be received tax-free by the trust or beneficiaries, there is no tax benefit to be gained by a 10-year payout versus a five-year payout. However, advisors should also consider factors such as the time value of money and the relative rate of income taxes versus estate taxes, because the Roth conversion will cause income taxes to be immediately due, as compared to a potential postponement of taxes up to 11 years after the IRA owner's death. In situations where the IRA would likely be held in a non-GST exempt trust, or where a charity is a desired remainder beneficiary, the Roth conversion may be a particularly useful tool.

A Charitable Remainder Trust (CRT) may also be desirable in the right situation.61 A CRT is not a designated beneficiary, so all of the IRA proceeds must be withdrawn under the five-year rule. However, the CRT is not subject to income taxes. Thus, the IRA proceeds can be withdrawn and reinvested, tax-free, inside the trust. The annuity or unitrust payments to the individual beneficiaries of the CRT will carry out taxable income. In practice, this will allow the beneficiaries to spread the income taxation of CRT payments over a period of 20 years or life. The CRT will also provide an estate tax charitable deduction equal to the actuarial value of the charitable remainder interest. However, the CRT should only be used where the IRA owner has a significant non-tax charitable motivation, because the inherent nature of a CRT makes it very likely that significant value will pass to the charitable remainder beneficiary upon termination of the trust.

CONCLUSION

The SECURE Act represents a profound shift in the way wealth planners will have to approach inherited IRAs. Estate planners who regularly recommend “lifetime trusts” to clients should consider the accumulation trust as the default plan design for inherited IRAs. The accumulation trust is not a magic bullet, and there will continue to be many potential trips and traps with any one type of plan for inherited IRAs. While neither the accumulation trust nor the conduit trust will be all things to all people, attorneys and other advisors would do well to understand the differences.

Originally published in Bloomberg Tax - Estates, Gifts, and Trusts Journal. (Subscription required)


[1] Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94.

[2] This article uses the terms “IRA” and “IRA owner” as generic placeholders for various types of tax-qualified retirement accounts (including any IRA, 401(k), 403(b), SEP, or SIMPLE IRA) and the owner, employee, or participant who established the account. Though the SECURE Act refers to the “employee,” the same rules apply to the “IRA owner” under Reg. §1.408-8A-1(b), and to the “participant” in a 403(b) plan. All section references herein are to the Internal Revenue Code of 1986, as amended (the “Code”), or the Treasury regulations promulgated thereunder, unless otherwise indicated.

[3] The payout must occur by the end of the 10th year following the IRA owner's death.

[4] The unlimited spousal rollover was not impacted by the SECURE Act. See§408(d)(3)(C)(ii); Reg. §1.408-8, Q&A-4, 5. However, planning opportunities for spouses as beneficiaries of trusts with inherited IRAs are beyond the scope of this article. Thus, this article's discussion of inherited IRAs and trusts are focused solely on beneficiaries other than the surviving spouse of the IRA owner.

[5] See§401(a)(9).

[6] Reg. §1.401(a)(9)-3, Q&A-1. The beneficiary of an employer-based plan must make a “direct trustee-to-trustee transfer” from the employer-based plan to an inherited IRA in order to avoid the five-year rule. § 402(c)(11)(A). Note that if the IRA owner dies after his or her required beginning date (generally age 72), the “stretch” is the longer of: (1) the designated beneficiary's life expectancy, or (2) the IRA owner's remaining life expectancy. Reg. §1.401(a)(9)-5. There may be a circumstance in which a taxpayer could take the position that a payout of greater than 10 years is allowed, if the participant dies after his or her required beginning date but before reaching age 81. See Steve R. Akers, Ronald D. Aucutt, and Kerri G. Nipp, Heckerling Musings 2020 and Estate Planning Current Developments (February 2020) at 18.

[7] §401(a)(9)(B)(ii).

[8] Reg. §1.401(a)(9)-9, Q&A-1.

[9] §401(a)(9)(H). See §401(a)(9)(E)(ii) for definition of “Eligible Designated Beneficiary.”

[10] §401(a)(9)(H)(i). For a “designated beneficiary,” the 10-year rule applies regardless of the deceased IRA owner's age at death. §401(a)(9)(H)(i)(II).

[11] §401(a)(9)(H)(i)(I). Note that the payout is not 10 years from the date of the IRA owner's death. Instead, the payout must occur by the end of the 10th year following the IRA owner's death. This allows beneficiaries or trustees to postpone for up to 11 years the income tax consequences of receiving the IRA proceeds, allowing the inherited IRA to be invested, tax-free, until the end of the 11th year.

[12] §401(a)(9)(H). See §401(a)(9)(E)(ii) for definition of “Eligible Designated Beneficiary.”

[13] §401(a)(9)(E).

[14] Reg. §1.401(a)(9)-4, Q&A-5.

[15] Reg. §1.401(a)(9)-5, Q&A-7(c)(3) Ex. 2.

[16] See Reg. §1.401(a)(9)-5, Q&A-7(c)(3) Ex. 2

[17] Reg. §1.401(a)(9)-5, Q&A-7(c)(3) Ex. 2

[18] See Reg. §1.401(a)(9)-5, Q&A-7(c)(3) Ex. 2.

[19] See Note 17, above, and accompanying text.

[20] See Note 17, above, and accompanying text. See Natalie B. Choate, Life and Death Planning for Retirement Benefits (8th ed., 2019), Chapter 6, paragraph 6.3.11 (hereinafter “Choate-Life and Death”).

[21] A lifetime power of appointment, however, would be problematic. See Reg. §1.401(a)(9)-5, Q&A-7(c).

[22] See Reg. §1.401(a)(9)-5, Q&A-7(c)(3) Ex. 1.

[23] Reg. §1.401(a)(9)-5, Q&A-7(c)(1).

[24] See Choate-Life and Death, Note 20, above, at paragraph 6.3.

[25] See Choate-Life and Death, Note 20, above, at paragraph 6.2.06; see, e.g., PLR 201840007.

[26] See Choate-Life and Death, Note 20, above, at paragraphs 6.3.07-.09. But see footnote 33 and accompanying text.

[27] See Choate-Life and Death, Note 20, above, at paragraph 6.3.08, distinguishingPLR 200438044 (trust for benefit of surviving spouse, with remainder to be distributed outright to the IRA owner's children), and citingPLRs 200522012, 200608032, and 200611026.

[28] See, e.g., Mezzullo, 814-4th T.M., Estate and Gift Tax Issues for Employee Benefit Plans, II.C. Penalty Taxes (citing Reg. §1.401(a)(9)-5, Q&A-7(b), Q&A-7(c)(3) Exs. 1, 2).

[29] See Choate-Life and Death, Note 20, above, at paragraph 6.3.08.

[30] See Choate-Life and Death, Note 20, above, at 6.3.08.B.

[31] See Choate-Life and Death, Note 20, above, citingPLR 200843042.

[32] See Mezzullo, 814-4th T.M., Estate and Gift Tax Issues for Employee Benefit Plans, II.C. Penalty Taxes (“no one should have a general power of appointment with respect to the plan benefit or IRA, including any amount distributed to the trust, and special powers of appointment should be limited to individuals who are younger than the individual whom the participant wants to be the designated beneficiary.”)

[33] See Choate-Life and Death, Note 20, above, at paragraph 6.3.13.

[34] Unless the designated beneficiary is an “Eligible Designated Beneficiary.”

[35] Unless the designated beneficiary is an “Eligible Designated Beneficiary.”

[36] Choate, “Planning for Retirement Benefits After the SECURE Act,” 54th Annual Heckerling Institute on Estate Planning, 7 (2020) (hereinafter Choate-Planning).

[37] See This is Spinal Tap (1984).

[38] Clark v. Rameker, 134 S. Ct. 2242 (2014). However, if a state has opted out of the federal bankruptcy exemptions, a state-law exemption for inherited IRAs may still apply. See “50 State Inherited IRA Chart,” ACTEC, https://www.actec.org/assets/1/6/50_STATE_INHERITED_IRA_CHART.pdf.

[39] See42 U.S.C. § 1382(a)(1)(B), §1382(a)(3)(B).

[40] See§661-§662.

[41] Assuming the trust instrument permits such distributions.

[42] The IRA distributions may give rise to a federal income tax deduction for any federal estate tax that was paid on the IRA, to the extent the IRA was income in respect of a decedent. See§691(a), §691(c).

[43] See Choate-Life and Death, Note 20, above, at paragraph 6.4.04.A.

[44] Exercisable by September 30 of the calendar year following the IRA owner's death. See Reg. §1.401(a)(9)-4, Q&A-4.

[45] See Choate-Life and Death, Note 20, above, at paragraph 6.3.12.B.

[46] Some commentators have suggested that the conservative approach would be to continue to use the age limit and wait for new Treasury regulations before updating trust forms. See Note 6, above, Akers et al., Heckerling Musings 2020, at 18. The concern is that to qualify as a designated beneficiary, “the class member with the shortest life expectancy” must be identifiable. Reg. §1.401(a)(9)-4, Q&A-1. However, the age-limitation issue does not change the ability to identity the potential remainder beneficiary with the shortest life expectancy for purposes of qualifying as a designated beneficiary under the 10-year rule — the age limitation only changes who such beneficiaries might be. See Notes 29-31, above and accompanying text.

[47] But see Choate-Planning, Note 36, above, at 21 (raising the possibility that IRS regulations could permit a charitable remainder beneficiary of an accumulation trust).

[48] This assumes that the default terms of the trust provide that the trust property will continue to be held in trust and will eventually pass to or for the benefit of a skip person.

[49] See Reg. §1.401(a)(9)-4, Q&A-4(a) (“any person who was a beneficiary as of the date of the employee's death, but is not a beneficiary as of that September 30…is not taken into account in determining the employee's designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee's death”). See alsoPLR 201840007 (trust qualifies as accumulation trust where beneficiary released power to appoint trust property to ineligible beneficiaries by September 30 of the calendar year following the IRA owner's death).

[50] §401(a)(9)(E)(ii)(I).

[51] §401(a)(9)(E)(ii)(II).

[52] §401(a)(9)(E)(ii)(III). “Disabled” is determined within the meaning of §72(m)(7).

[53] §401(a)(9)(E)(ii)(IV). “Chronically ill” is determined within the meaning of §7702B(c)(2).

[54] §401(a)(9)(E)(ii)(V).

[55] A conduit trust has only one designated beneficiary. See Choate-Planning, Note 36, above, at 11.

[56] See Choate-Planning, Note 36, above, at 11-12 (“Generally, without issuance of new regulations, an accumulation trust cannot qualify for EDB treatment, even if the primary or life beneficiary of the trust is an EDB, because if the EDB is not the sole beneficiary of the participant EDB treatment does not apply.”) Because all current and remainder beneficiaries who might ever be entitled to receive IRA proceeds are “counted” as beneficiaries for purposes of applying the minimum distribution rules, if any beneficiary is not an Eligible Designated Beneficiary, the trust will be ineligible for the “stretch” payout. There appears to be disagreement as to whether an accumulation trust which has only Eligible Designated Beneficiaries can qualify for the “stretch.”

[57] See§401(a)(9)(H)(iv)(I). See also Choate-Planning, Note 36, above, at 18 (“Thus an accumulation trust for a disabled beneficiary, for example, could get the life expectancy payout treatment, even though (under the regulations) the disabled beneficiary is not considered the sole trust beneficiary”).

[58] See§401(a)(9)(H)(iv)(I). However, if the trust is a multi-beneficiary trust, it is unclear whether the remainder beneficiaries must be considered as “countable” beneficiaries. See Note 6, above, Akers et al., Heckerling Musings 2020, at 14.

[59] §401(a)(9)(F).

[60] See§408A(d)(3)(A)-§408A(d)(3)(C).

[61] See Choate, Note 20, above, at paragraph 7.5.03-07.