print facebook linkedin twitter envelope arrow-left arrow-right chevron-down chevron-left chevron-right chevron-up menu more-horizontal search x
Skip to content
College SavingsEstate and Wealth TransferInsurance/Risk ManagementInvestmentsRetirement/IncomeTaxes   Search

Putnam Investments Putnam Wealth Management

More from Putnam
Blogs
Perspectives Advisor Tech Tips
Sites
Financial Advisors Individual Investors DC Investment Only Institutional Investors
  • College Savings
  • Estate and Wealth Transfer
  • Insurance/Risk Management
  • Investments
  • Retirement/Income
  • Taxes
Trust strategies rattled by SECURE Act

Trust strategies rattled by SECURE Act

February 5, 2020 | Bill Cass, CFP®, CPWA®

The SECURE Act recast the rules for leaving retirement assets to heirs, creating challenges for beneficiaries and conflicts with certain trust strategies.

Under the SECURE Act, a new 10-year rule eliminates the possibility of most non-spousal beneficiaries from using a stretch distribution strategy. As a result, owners of IRAs with large balances may want to reconsider beneficiary designations. There are exceptions to the new 10-year rule including a spouse, beneficiary who is disabled or chronically ill, a minor child of the account owner (until age of majority is reached), or a beneficiary who is not more than 10 years younger than the deceased account owner. These are referred to as eligible designated beneficiaries.

Challenges for account owners and heirs

Taxes. Instead of being able to stretch required distributions over decades (depending on the age of the beneficiary), those who inherit IRAs (other than spouses) generally have to fully distribute the IRA within 10 years following the year the IRA owner dies. This acceleration of income may pose significant income tax challenges for heirs.

Control. Prior to the SECURE Act, owners of large IRAs looking to pass wealth to younger generations may have designated a trust as beneficiary of the IRA to control how quickly IRA distributions are paid out to heirs, and also provide legal protection from potential creditors. For example, this type of trust strategy may be applicable if leaving an IRA to much younger beneficiaries such as grandchildren.

Trust strategies must be reviewed

Historically, account owners who wanted to control distributions to heirs following their death may have designated a trust as the beneficiary of an IRA. This strategy could address the concern of passing significant wealth too quickly to a young beneficiary.

Before the SECURE Act, these trusts — often referred to as “look through” or “see through” trusts — had to meet certain requirements to ensure that required distributions could be stretched based on the remaining life expectancy of the beneficiary. For example, trust beneficiaries designated to receive IRA assets had to be clearly identified to determine the life expectancy factor for stretch distributions (Treasury Regulation 1.401(a)(9)-4, Q&A-5).

Typically, these trusts fall into two categories: conduit and accumulation trusts. Conduit trusts generally require that all distributions from the inherited IRA are paid out to the trust beneficiary. Accumulation trusts allow flexibility (per the trust language) to retain distributions within the trust.

Both types of trusts are impacted by the SECURE Act.

Conduit trust

  • All IRA distributions are paid out to the trust beneficiary who reports any income on his or her tax return; no income is retained within the trust
  • Typically designed to ensure heirs do not draw down the inherited IRA too quickly; for example distributions can be limited to required minimum distributions only
  • If the beneficiary is an eligible designated beneficiary (EDB), then the trust is considered an EDB, and it is eligible for life expectancy distributions
  • If the beneficiary is not an EDB, the 10-year rule applies

Accumulation trust

  • Trustee has discretion to retain distributions within the trust based on terms outlined in the trust document
  • Retained distributions are taxed at trust tax rates
  • May qualify for life expectancy distributions for certain EDBs, specifically if the trust beneficiary is disabled or chronically ill (In this case, the disabled or chronically ill beneficiary must be the sole lifetime beneficiary under the trust)
  • Other EDBs (e.g., spouses) will not generally qualify for life expectancy distributions
  • Although the IRA is still subject to 10-year rule, distributions do not have to be paid to trust beneficiaries as the trustee has discretion on having income accumulate within the trust

Both trust strategies face challenges

The new law creates potential issues for both types of trusts, assuming an exception to the new 10-year rule doesn’t apply. This also assumes that the IRS will continue, following passage of the SECURE Act, to treat beneficiaries of conduit and accumulation trusts as individuals. For conduit trusts, the requirement to distribute all of the IRA funds to heirs within 10 years conflicts with the objective of many IRA owners. The conduit trust may have been drafted to control the amount of funds the beneficiary receives.

In this case, the IRA owner should consult with an attorney on what options exist, if any, to modify the trust arrangement. In some instances, the conduit trust may be modified to an accumulation trust (if the account owner is still living), which can provide some control over payments from the trust to beneficiaries.

While accumulation trusts may offer the flexibility to control payments to trust beneficiaries and retain income inside of the trust, the IRA must still be distributed within 10 years after the year the owner dies. This may accelerate taxable IRA income retained inside the trust, which is taxed at higher trust tax rates (e.g., the highest marginal tax rate on trust income applies on taxable income exceeding $12,950 for 2020).

Trust law is complex, and it is critical for account owners or beneficiaries to consult with an attorney.

Advisors can join me and my colleague, Chris Hennessey, on February 13 when we will be live discussing the SECURE Act and taking your questions on planning implications. Register for the event here.


320467

More in: Estate and Wealth Transfer

Previous

Planning strategies for the SECURE Act 10-year rule

Planning strategies for the SECURE Act 10-year rule
Tax planning is a topic for all seasons

Next

Tax planning is a topic for all seasons

Putnam Investments
Follow us

Any Putnam funds referenced in the above articles are not available for sale outside the United States.

Services provided by Putnam may not be available in all countries or to all investors. This content is not an offer to any investor who is not qualified under local law.

The views and opinions expressed are those of the fund manager above, are subject to change with market conditions, and are not meant as investment advice.

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. Putnam, which earns fees when clients select its products and services, is not offering impartial advice in a fiduciary capacity in providing this sales and marketing material. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.

All funds and investment products involve risk, and you can lose money. See the prospectus for details. Any economic and performance information is historical and not indicative of future results.

If you are a U.S. retail investor: Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, contact your financial representative, call Putnam at 1-888-4-PUTNAM (1-888-478-8626), or click on the prospectus section to view or download a prospectus. Please read the prospectus carefully before investing.

A Member of the Power Financial Corporation Group of Companies™

In the United States, mutual funds are distributed by Putnam Retail Management.

Top