01/02/2020
In light of the enactment of the SECURE Act, effective for persons dying or after January 1, 2020, we would like to share our initial thoughts on the kinds of trust for retirement plan/IRA benefits that a client was planning on using. It may or may not continue to be a good idea to use a particular form of trust after the passage of the SECURE Act. Specifically, we are looking at whether the client has chosen to utilize for their beneficiaries a so-called conduit trust versus an accumulation trust.
In very simple terms, a conduit trust is a variety of retirement plan/IRA beneficiary trust whereby any required minimum distribution (RMD) that is paid by the retirement account to the trust is directly and currently distributed to the beneficiary - hence the use of the term “conduit.” In our assessment, conduit trusts almost always made great sense when a beneficiary had a time horizon for distributions of potentially many decades, as would be the case when a young person was named as the beneficiary under current law.
But under SECURE, with few exceptions, at the end of the 10-year deferral period, the entire retirement account will have to be distributed to the beneficiary outright. That could be disastrous if we are trying to help the client protect those funds for the beneficiary longer-term, especially if the beneficiary has substance abuse (not rising to the level of Internal Revenue Code defined “chronic illness”), creditor issues or divorce issues.
However, we believe that the issue can potentially be dealt with relatively easily by using an accumulation trust as opposed to the conduit trust. With an accumulation trust, although the trust is getting the required minimum distributions and eventually a lump sum distribution after 10 years, the trustee is not required to then turn around and immediately pass the distributions on to the beneficiary.
Instead, as the name indicates, the trustee has the discretion to and can accumulate those funds within the trust for the long-term benefit of the beneficiary. So, there will be a 10-year payout period, at the end of that period, the funds of the retirement account simply go into the trust account, where they continue to be protected for the beneficiary. If the beneficiary doesn’t have “issues,” the trustee has the discretion to distribute the funds outright. For clients who would have conduit trusts created under the terms of their wills or who have already created revocable trusts of this type, there will be a discussion and there is an easy fix. That is, in the appropriate cases, we simply amend the documents to create an accumulation trust as opposed to a conduit trust.
There is another possible form for “stretching” retirement plan/IRA payments other than the use of accumulation trusts. This involves making the retirement plan/IRA beneficiary a charitable remainder trust.
In this strategy, the individual designates the retirement plan/IRA assets into a charitable remainder trust, names a beneficiary of his/her choosing, and then defines a payment schedule out of the charitable remainder trust for the beneficiary’s lifetime or for a designated number of years.
The beneficiary receives a taxable payment each year from the trust, but the wealth withing the charitable remainder trust can continue to grow income tax-free within the trust over time. At the end of the term of years or the beneficiary’s death, whatever is left in the charitable remainder trust is passes to one or more charities of the designated by the participant/account owner who created the charitable remainder trust.
We will discuss this alternative with clients to address restrictions put on stretch retirement plan accounts/IRAs and, if the client has an interest in charity, then they can set up one or more charitable remainder trusts that can serve as a sort of quasi-stretch IRA.
We invite you to reply or call to discuss options and opportunities for your retirement plan/IRA benefits after enactment of the SECRE Act.
