Articles / Insights & Guidance from our Leading Professionals

by Seamus Smith, JD, LLM | June 11, 2020

The SECURE Act & Trust Planning


The SECURE Act was the most significant and wide-sweeping retirement plan legislation adopted in well over a decade. In addition to its direct impact on retirement plans, it triggers a need to revisit planning if your retirement account is left payable to a trust.


A retirement account, such as an IRA or 401k account, is made payable to a trust by naming the trust as beneficiary. Once the retirement account owner dies, the retirement account effectively becomes an asset of the trust. If a withdrawal is made from the retirement account, the withdrawal is transferred out of the retirement account to the trustee of the trust. Once the withdrawal is held by the trustee, the trustee will use the funds as directed by the trust agreement. Some trust agreements direct that all retirement account withdrawals are automatically distributed to the beneficiary. Other trust agreements direct that retirement account withdrawals do not have to be automatically distributed to the beneficiary and can instead be retained in the trust for future use.


Why leave a retirement account payable to a trust in the first place? There are many reasons, but the two most significant reasons are control and asset protection:

  • If a retirement account is left directly payable to an individual, the individual has full control and discretion over the retirement account. There is nothing that prevents the beneficiary from fully withdrawing the retirement account balance.  The result can be disastrous for certain beneficiaries, including younger beneficiaries, beneficiaries that lack financial maturity or experience, and beneficiaries with substance or gambling addiction problems.  A trust provides a platform to impose restrictions on the access and use of the retirement account.
  • While retirement accounts receive extensive protection from creditors of the original retirement account owner under federal and state law, protection is not uniformly extended to inherited retirement accounts. On the contrary, assets held through a trust can generally be protected from a beneficiary’s creditors.


Retirement accounts, including ones left payable to trusts, are subject to certain mandatory withdrawal periods.   The mandatory withdrawal periods effectively establish the longest period of time over which you can defer income tax on a retirement account.  Mandatory withdrawal periods are enforced with a steep 50% penalty.


Prior to the SECURE Act, there were two primary types of mandatory withdrawal periods for retirement accounts payable to a trust.   First, if the trust was not structured as a “look-through trust,” the entirety of the retirement account had to be withdrawn within five years.  If the trust was structured as a look-through trust, the mandatory withdrawal period was based on the life expectancy of the beneficiary.  There are two kinds of look-through trusts, accumulation trusts and conduit trusts.


An accumulation trust structure does not require retirement account withdrawals to be automatically distributed to the beneficiary.  The withdrawals can instead be retained in the trust for investment and future distribution.   However, retaining withdrawals within the trust can have negative income tax consequences.  If a retirement account withdrawal is distributed to the beneficiary, the withdrawal will generally be taxed at the beneficiary’s income tax rate.   If a retirement account withdrawal is retained within the trust and not distributed to the beneficiary, the withdrawal will be taxed at the trust’s income tax rate.  A trust will generally have a higher income tax rate because a trust hits the highest federal income tax rate with income of only $12,950.  A single individual will not hit the highest federal income tax rate until his or her income exceeds $518,400.


A conduit trust structure requires the trustee to distribute all retirement account withdrawals to the beneficiary of the trust.  As a pre-SECURE Act example, assume a beneficiary that is 30 years old and inherits a retirement account with an initial value of $1,000,000 through a conduit trust.  The mandatory withdrawal period would be based on the beneficiary’s life expectancy, 53.3 years for someone that is 30 years old.  The retirement account withdrawal and distribution to the beneficiary in the first year would be 1/53.3 of the retirement account, approximately $18,762.  In each subsequent year, the withdrawal and distribution would be the product of: (a) the value of the account at that time; and (b) a fraction.  The numerator of the fraction would always be one and the denominator would be 53.3, less the number of years for which distributions have already been made.  Assuming no investment growth for the retirement account, the formula will result in a withdrawal and distribution of $18,762 each year for the remainder of the beneficiary’s life expectancy.  The amount withdrawn and distributed in a given year will be a relatively small percentage of the original retirement account value, approximately 1.876% per year.


Post-SECURE Act, our example conduit trust will have a vastly different result.  Since the trustee only has ten years to fully withdraw the retirement account and must distribute all withdrawals to the beneficiary, the entire retirement account will end up being distributed to the beneficiary within ten years.  If the trustee waits until year ten to maximize income tax-deferral and we assume no investment growth for the retirement account, there will be $1,000,000 withdrawn and distributed to the beneficiary in that tenth year. Under the pre-SECURE Act rules and assuming no investment growth for the retirement account, there would have been only approximately $187,620 withdrawn and distributed to the beneficiary over the same ten year period ($18,762 x 10).


Conduit language was prevalent before the SECURE Act because it provided certain planning flexibilities and helped avoid withdrawals being taxed at the higher trust income tax rates.  However, the accelerated ten year withdrawal and distribution period required by the SECURE Act now makes conduit trusts inappropriate for certain younger beneficiaries, beneficiaries that lack financial maturity or experience, beneficiaries with substance or gambling addictions, and beneficiaries with creditor risks.   If these beneficiaries receive the million dollars from our example all in one year, the money might be squandered.  Even worse, it might feed destructive behavior that ends up hurting the beneficiary.  A change to an accumulation trust structure may be a better option for these beneficiaries because the trustee is not forced to distribute the retirement account withdrawals to the beneficiary.  The trustee can instead hold the withdrawals in the trust, invest the withdrawals, and then make distributions to the beneficiary as appropriate in the future.


If you are charitably inclined but also want to maximize tax deferral for a non-charitable beneficiary, a charitable remainder trust can provide some deferral that mimics what was available for trusts pre-SECURE Act.


If you utilize a charitable remainder trust, your retirement account is left payable to the charitable remainder trust at your death.  The trustee of the charitable remainder trust withdraws the entirety of the retirement account.  While retirement account withdrawals generally create an income tax liability, there is no immediate income tax on this withdrawal because the charitable remainder trust is a tax-exempt entity.  The trustee then invests the account proceeds, usually in marketable securities.  The trustee is directed by the trust agreement to make a particular distribution from the charitable remainder trust to the beneficiary.  A common distribution is 5% of the trust per year, the minimum distribution amount allowable for charitable remainder trusts.  Distributions can be higher, but are capped at the lower of (a) 50% of the trust; or (b) a percentage low enough to ensure that there is a projected remainder for the charitable remainder beneficiary of at least 10% of the initial value of the trust.  Projecting the remainder takes into account the age of the beneficiary and current interest rates.  Due to current rates being very low, the distribution limitation is well below 50% for almost all age groups.


As the beneficiary receives distributions from the charitable remainder trust, the distributions will be taxed to account for the income tax that was avoided when the retirement account was initially withdrawn.   However, since the beneficiary receives the distributions over his or her lifetime, the income tax is deferred out over the beneficiary’s lifetime as well.


The payments continue to the beneficiary from the charitable remainder trust until either the beneficiary dies or the charitable remainder trust exhausts its assets.  If the beneficiary dies and there are assets remaining in the charitable remainder trust, the assets pass to one or more designated charitable organizations.  The charitable recipients can be churches, educational institutions, public charities and even your own private foundation or donor advised fund.   Since the remaining assets pass to a charity, a charitable remainder trust is really only a solution if you have charitable intent.   If you have that intent, a charitable remainder trust can be a great way to satisfy it while providing pre-SECURE Act tax deferral for a non-charitable beneficiary as well.


It is always important to periodically review your estate plan to make sure that it still reflects your desires.  You now also need to consider your estate plan in light of the SECURE Act to avoid unintended or unwanted distributions to beneficiaries and fully-explore options for tax deferral.



This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please consult with your tax and legal professionals for more information.

Seamus P. Smith is an attorney with Creative Planning Legal and practices in the areas of estate, business and tax planning. Using an array of techniques, he helps clients protect the well-being of their families and shield their wealth from taxes, probate and creditors.

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