On May 23, 2019, the U.S. House of Representatives passed a bill that, if signed into law, would significantly change estate planning for Qualified Plans and IRAs (referred to herein, collectively, as "Retirement Benefits"). The Setting Every Community Up for Retirement Enhancement Act of 2019 (the "SECURE Act") received overwhelming support in the House, passing 417-3. The SECURE Act extensively amends the provisions of the Internal Revenue Code (the "Code") relating to Retirement Benefits, including provisions that apply during the life of the account owner or participant (referred to herein as the "participant"), as well as provisions applicable to Retirement Benefits inherited by beneficiaries at the participant's death.
In addition to other changes affecting contributions to and administration of retirement accounts, the SECURE Act would eliminate the maximum age for contributions to "traditional" IRAs (currently age 70 ½). It also would raise the age at which a participant must begin taking distributions (referred to as "Required Minimum Distributions" or "RMDs") from a Qualified Plan or traditional IRA from age 70 ½ to age 72. However, one of the more significant changes in the SECURE Act, from the perspective of estate planning professionals, is its effect on the ability to stretch distributions of inherited Retirement Benefits over the life of the beneficiary.
Currently, a beneficiary of inherited Retirement Benefits is permitted to stretch distributions of the Retirement Benefits over the beneficiary's life expectancy, if the beneficiary is a "designated beneficiary." This stretch-out of RMDs can prove quite advantageous, as it allows funds to remain in the retirement account for a longer period of time, maximizing the income tax-free compounding of income and interest earned on the funds. The Regulations define a "designated beneficiary" as an "individual," meaning that a non-individual, including the participant's estate or a trust, cannot qualify as a designated beneficiary. A beneficiary who is not a designated beneficiary will be required to withdraw all funds from the Retirement Benefits over a relatively short time-period. If the participant has not yet reached the Required Beginning Date for distributions at the time of the participant's death, the Retirement Benefits must be distributed within 5 years of the participant's death (often called the "5-year rule").
Although a trust cannot qualify as a designated beneficiary, it is possible to designate a trust as the beneficiary of Retirement Benefits and stretch the RMDs over the life expectancy of the oldest beneficiary of the trust, if the trust is properly structured as what is commonly called a "see-through" trust. See-through trusts come in two varieties – conduit trusts and accumulation trusts – and have been a common tool in the estate planner's toolbox for many years. A see-through trust operates by disregarding, or seeing through, the trust for purposes of determining post-death RMDs, so that the beneficiaries of the trust (more specifically, the beneficiaries of the portion of the trust that receives the Retirement Benefits) are treated as designated beneficiaries. This technique is critical in allowing clients to better protect their beneficiaries' inheritance by leaving it in trust, while still maximizing the value of inherited Retirement Benefits by stretching RMDs over a longer period of time.
The SECURE Act, if signed into law, will eliminate the life-expectancy stretch-out of RMDs for many, if not most, beneficiaries, even if they are designated beneficiaries. Under the SECURE Act, a designated beneficiary of Retirement Benefits would be required to withdraw the full amount of the Retirement Benefits within 10 years of the participant's death, subject to the exception discussed below. The 5-year rule will still apply to beneficiaries who are not designated beneficiaries. In many cases, this will shorten the time period over which the Requirement Benefits must be distributed by a significant amount, given that the life expectancy of most designated beneficiaries far exceeds 10 years. This shortened period in which the beneficiary or beneficiaries may take advantage of the income tax-free compounding afforded Retirement Benefits will reduce the potential value of the Retirement Benefits in the hands of the beneficiary.
The SECURE Act includes an exception to the new 10-year post-death distribution period for Retirement Benefits payable to "eligible designated beneficiaries." An eligible designated beneficiary is defined as a designated beneficiary who is (1) the participant's surviving spouse, (2) a minor child of the participant, (3) disabled, (4) chronically ill within the meaning of Code Section 7702B(c)(2) (with certain exceptions outlined in the bill), or (5) not more than 10 years younger than the participant. The SECURE Act specifies additional rules applicable upon a child's reaching the age of majority, and upon the death of an eligible designated beneficiary, which are beyond the scope of this discussion.
If enacted, these changes to the rules regarding post-death distribution of Retirement Benefits will alter one of the increasingly important considerations in an estate plan: whether and how to structure the plan to ensure see-through trust treatment and maximize the stretch-out period for RMDs. The structure and dispositive terms of a conduit or accumulation trust often differ from the plan a client otherwise would create, if obtaining the life-expectancy stretch-out of RMDs was not a factor. However, the potential benefit of the longer stretch-out period often is worth the slight deviation from the client's more "natural" estate plan. That calculation likely will change, in many circumstances, if the only advantage of creating a see-through trust is stretching RMDs over an additional 5 years (the 10-year period afforded a designated beneficiary v. the 5-year rule that applies to other beneficiaries). Many estate planners may determine that the relative advantages of see-through trusts no longer outweigh the additional complexity and restrictions they introduce into the estate plan, except perhaps in the case of an eligible designated beneficiary. However, the concept of the eligible designated beneficiary may further complicate estate planning, as attorneys and other advisors contemplate contingency provisions for beneficiaries who may or may not qualify as eligible designated beneficiaries.
Of course, the future of the SECURE Act is still uncertain, as it has yet to make its way to the Senate. The Senate is considering a bill known as the "Retirement Enhancement and Savings Act," which is similar to the SECURE Act, though the provisions affecting post-death RMDs differ by applying a 5-year distribution period to account balances over $400,000. Ultimately, the legislation signed into law may combine the SECURE Act with provisions of the Senate bill, or both bills may die if consensus is not reached. However, given the overwhelming support for the bill in the House, it seems safe to assume there is bipartisan support for the changes contemplated in the SECURE Act and the Senate bill. Accordingly, it is worth watching the progress of this important legislation, as it could have a significant impact on estate planning. Our team at InterActive Legal will continue to track this legislation and provide updates on any significant activity.
 H.R. 1994, 116th Cong. (2019)
 See Code Section 219(f), and the proposed revision under Section 107 of the SECURE Act.
 See Code Section 401(a)(9)(C) and the proposed revision under Section 114 of the SECURE Act. The date on which the participant is required to begin taking distributions (the "Required Beginning Date") is actually April 1 of the calendar year following the year in which the participant reaches the specified age, unless the participant has not yet retired, in which case it is April 1 of the calendar year following the year of retirement.
 Code Section 401(a)(9)(B)(iii).
 Treas. Reg. 1.401(a)(9)-4, A-3.
 Code Section 401(a)(9)(B)(ii).
 See Treas. Reg. 1.401(a)(9)-4, A-5.
 See Section 401(a)(1) of the SECURE Act.
 See Id.
 See Id. Section 401(a)(2).
 This discussion assumes the Regulations that allow for the use of see-through trusts will still apply if the SECURE Act is signed into law. That appears to be the case, reading Section 401 of the SECURE Act together with Treas. Reg. 1.401(a)(9)-4. However, the SECURE Act certainly leaves room for ambiguity and alternate interpretations.
 See S.972, Sec. 501, 116th Cong. (2019).
Meet Vanessa L. Kanaga, Esq.
President and Director of Content Development
Vanessa received her J.D. from Cornell Law School, Magna Cum Laude, in 2006, and holds a B.A. in Philosophy from Wichita State University, with a minor in Music, as well as an Advanced Professional Certificate from New York University School of Law. Following law school, Vanessa practiced in New York for several years, at Milbank, Tweed, Hadley & McCloy, LLP, and then Moses & Singer, LLP. In 2012, she returned to her home town of Wichita, Kansas, where she was an associate attorney in the estate planning and probate practice group at Hinkle Law Firm, LLC, before joining InterActive Legal.