The SECURE Act significantly changed how retirement assets are distributed to beneficiaries, replacing lifetime payouts with a 10-year distribution rule for most non-spouse heirs. In our alert, we explain the impact of these changes—especially on estate plans involving see-through trusts—and outline the narrow exceptions available to eligible designated beneficiaries under newly finalized IRS regulations.
Enacted on December 20, 2019, the law commonly known as “the SECURE Act” makes several changes to rules regarding retirement assets, such as pension plans and individual retirement accounts. In 2024, the IRS issued final regulations under Code Sec. 401(a)(9), effective as of September 17, 2024, which implement changes conforming the regulations to the SECURE Act, in addition to other changes. The new rules are somewhat confusing, and clear IRS guidance remains scant.
Prior to the Act, it was possible for the beneficiary of a retirement account (a qualified plan or IRA) to stretch the required distributions (known as “Required Minimum Distributions”) from the account over the beneficiary’s life expectancy, as long as the beneficiary was a “designated beneficiary.” A beneficiary is a designated beneficiary if the beneficiary is an individual. The Act’s primary change was to eliminate the ability to have a retirement asset paid out over the lifetime of a designated beneficiary (unless the designated beneficiary is an “eligible designated beneficiary”) and instead require payout to designated beneficiaries within ten years of the participant’s death.
The life expectancy payout is still available for a narrow class of designated beneficiaries, referred to as “eligible designated beneficiaries,” as discussed further below. One of the Act's primary impacts on estate planning clients is related to the use of “see-through trusts” when planning for retirement benefits. See-through trusts were designed to provide benefits including:
- Allowing retirement benefits to be paid over the longest possible distribution period when the benefits are payable to a trust, rather than being paid to a recipient outright.
- Providing the ability to look through the trust and treat the trust beneficiary as the designated beneficiary (and in some cases the eligible designated beneficiary) of the retirement assets.
Prior to the Act, retirement assets left to a properly structured see-through trust could be paid out over the life expectancy of the oldest trust beneficiary. Now, retirement assets left to a see-through trust will generally have to be paid out over ten years following the participant’s death. However, in some circumstances, if the trust is for the benefit of an eligible designated beneficiary (“EDB”), the life expectancy payout may still be available. Proposed Regulations were published in February 2023, and final Regulations were published on July 19, 2024.
Eligible Designated Beneficiaries (EDBs) and Their Entitlements
There are five categories of EDBs:
- The surviving spouse
- A minor “child” of the participant (but only until the age of majority is reached, at which time the 10-year payout applies)
- A disabled beneficiary
- A chronically ill individual
- A person not more than ten years younger than the participant
If a beneficiary of a trust falls into one of these categories, then a payout of Required Minimum Distributions over the life expectancy of the beneficiary may still be available. Careful drafting of the trust is still necessary to ensure it qualifies as a see-through trust, and only certain trusts will qualify for the life expectancy payout. .
Note that for a minor child, the life-expectancy payout applies only while the child is a minor (unless the exception for disabled or chronically ill beneficiaries applies). Once the child reaches majority, the retirement asset must be paid out over the next ten years.
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