By way of example, the IRS single life expectancy tables provide that a 50-year-old individual has a remaining life expectancy of 34.2 years. Instead of enjoying withdrawals out of an inherited IRA using a life expectancy factor in excess of 30 years, the SECURE Act requires the beneficiary, regardless of age, to withdrawal the account over a 10-year period.

Withdrawals from the account can be made pro rata, all in one year, or by any other distribution format provided the entire account balance is withdrawn no later than Dec, 31 of the year containing the 10th anniversary of the participant's death. The result, therefore, is to cause the beneficiary to recognize income on the entire account balance much sooner than before and to eliminate the tax-deferred growth on the account in future years.

Notably, the lifetime stretch remains available, with certain modifications, to a surviving spouse, a minor child of the participant (during minority), a disabled and chronically ill beneficiary or a beneficiary less than 10 years younger than the participant. These types of beneficiaries form a new category of beneficiary characterized by the SECURE Act as eligible designated beneficiaries or EDBs. Specifically, a surviving spouse can still utilize the lifetime stretch; however, upon the death of the surviving spouse, the 10-year payout will apply. With respect to minor children, the lifetime stretch rules continue to apply, but only until the child reaches the age of majority.

Importantly, the SECURE Act did not amend or eliminate the need for a "designated beneficiary" in order for beneficiaries to avail themselves of something more than the default five-year payout rule that is imposed on nondesignated beneficiaries.

Therefore, the five-year payout rule remains for beneficiaries such as estates, charitable organizations and trusts that do not qualify under the so-called "see through" rules. Only once a beneficiary has survived the nondesignated beneficiary hurdle can the beneficiary avail themselves of either the 10-year rule or the lifetime stretch, provided the beneficiary qualifies as an EDB.

The loss of the lifetime stretch will be significant. The result is particularly notable for trusts that have been designated as beneficiaries of retirement accounts. Historically, estate planning attorneys often drafted trusts to qualify as "conduit trusts" for purposes of the Section 401(a)(9) "see through" rules. The conduit trust rules were viewed as the one "safe harbor" for trusts that practitioners had available to them, and many lawyers drafted retirement account trusts to qualify as conduit trusts because of the certainty they provided.

Although the conduit trust rules require RMDs to be pushed out to the income beneficiary, the ability to disregard all other remainder beneficiaries with certainty was attractive to ensure the stretch of the account over the life expectancy of the income beneficiary. The overall impact of pushing out the RMDs was minimal because the beneficiary's typically lengthy life expectancy could be used for purposes of calculating the RMDs. Practitioners were therefore less concerned with the RMDs substantially increasing the beneficiary's taxable income and did not need to worry as much about endowing a beneficiary with an overly substantial amount of funds in a short period of time.

With the enactment of the SECURE Act, it is important to rethink the use of the conduit trust as default planning for retirement account trusts. Some practitioners have always viewed the conduit trust as impractical due to the requirement to push out the RMDs to the beneficiary. That argument is now substantially emboldened with the 10-year payout requirement.

For example, assume an individual dies with an IRA valued at $1.5 million and designates a conduit trust for the benefit of his 30-year-old son as the beneficiary. Further assume that the IRA earns a rate of return of 4% per year and that the trust makes approximately equal withdrawals over a 10-year period. Both before and after the SECURE Act, the conduit trust will qualify as a designated beneficiary. Prior to the SECURE Act, the year-one RMD payable to the conduit trust and distributable to the son would have been $28,142.59. After the SECURE Act, the year-one withdrawal payable to the conduit trust and distributable to the son will be $150,000, a difference of $121,857.41.

By year five, the pre-SECURE Act RMD would have been $32,922.85, and the post-SECURE Act withdrawal will be $175,478.78. By year 10, the pre-SECURE Act RMD would have been $40,055.68, with a remaining account balance of $1,803,787.36. The year 10 post-SECURE Act withdrawal will be $213,496.76, which will reduce the account balance to $0, as required under the new law.

Because the SECURE Act requires the account to be withdrawn within 10 years, a conduit trust is no longer appropriate for a beneficiary in a high-income tax bracket, a spendthrift or a beneficiary in need of creditor protection (assuming it was ever appropriate for such a beneficiary). It also may no longer be appropriate for any type of beneficiary if the participant desires the benefits of a trust, as those protections will be available for 10 years at best.

Instead, practitioners should consider the use of the "accumulation trust," which allows a trustee to accumulate retirement plan benefits within the trust, thereby preserving and protecting the benefits for subsequent distribution in accordance with the terms of the trust.

The trade-off is that the income tax brackets for trusts are much more compressed than for individuals. In 2020, a trust with taxable income over $12,950 will be subject to the 37% rate. However, a trustee should be able to mitigate this tax exposure through the use of standard fiduciary income tax principals, such as distributable net income and the income distribution deduction. To the extent the trustee determines that it is not advisable for the beneficiary to receive the distribution, then the trustee will have the discretion to retain the income within the trust and pay the income tax.

The difficulty with drafting accumulation trusts has always been the lack of clear guidance in the tax code and applicable regulations. The IRS has always allowed the use of accumulation trusts, although extraordinary care must be taken to ensure that nothing may be distributed or appointed from the trust to anyone other than an individual or a trust that benefits individuals. Best practices typically dictate that an accumulation trust be housed in a separate benefits subtrust that will be sequestered from the main trust and that will contain the necessary restrictions and limitations.

Much could be written on the ways to address the loss of the 10-year stretch. For example, Roth conversions during lifetime become more attractive, as does the use of life insurance as an alternative to retirement account savings.

Charitable remainder trusts may partially mimic the former lifetime stretch, although CRTs are only appropriate for an individual with some level of charitable inclination. Regardless, the elimination of the lifetime stretch will have a continued and substantial effect on traditional planning for retirement benefits, and practitioners should carefully review and, when necessary, amend prior plans in order to account for the changes brought about by the SECURE Act.

Andrew S. Rusniak is a member at McNees Wallace & Nurick and practices in the firm's estate planning and corporate and tax practice groups. He represents individuals, families, business owners, executives and professionals in all aspects of tax and estate planning, business succession planning, asset protection planning, charitable planning, and estate and trust administration. He practices out of the firm's Lancaster and Harrisburg offices.