In a companion post, I discussed four major changes resulting from the passage of the SECURE Act and strategies to manage them (Top 4 SECURE Act Changes That May Impact You and How To Plan For Them found here). In this post, I will discuss the new class of retirement plan beneficiaries called Eligible Designated Beneficiaries (EDBs) and naming a trust as a beneficiary of a retirement plan after passage of the SECURE Act.

The “stretch” IRA has been eliminated for most non-spouse beneficiaries, requiring a 10-year payout instead of “stretching” Required Minimum Distributions (RMDs) over their own lifetime (please see the companion post Top 4 SECURE Act Changes That May Impact You and How To Plan For Them for more information about “Stretch” IRAs and RMDs).

Every rule has an exception, however, and those exempt from the 10-year rule are called Eligible Designated Beneficiaries (EDBs). They are still able to stretch distributions under the old rules, and they include:

  • Surviving spouse
  • Disabled
  • Chronically Ill
  • Individual not more than 10 years younger than decedent

Beneficiaries that are the minor children of the IRA owner (not grandchildren) are not subject to the 10-year payout until they reach the age of majority.

The “stretch” elimination will alter how your beneficiary receives RMDs from your trust. In fact, it may contradict your original intent when you created your trust. For example, if your trust was created to prevent a beneficiary from overspending by allowing only the RMDs to be distributed to the beneficiaries, they will now receive a lump sum payment 10 years after your death instead of annual distributions spread out over their lifetime.

With the additional class of Eligible Designated Beneficiaries, you may have some beneficiaries that are able to “stretch” RMDs and some that are not. You may need to create separate trusts for EDBs and non-EDBs or include language that allows EDBs to take advantage of their special classification.

There are generally two types of trusts named as beneficiaries of retirement plans. One requires that RMDs are paid to the beneficiary immediately and taxed at the beneficiary’s rate. The other type of trust grants the trustee discretion whether to pay the RMD or keep it in the trust. However, if kept in the trust, it will be subject to trust income tax rates instead of individual tax rates. The trust income tax rate for 2020 is 37% when trust income exceeds $12,950. For a single filer that tax bracket isn’t reached until there is $510,301 of income and for married couples its $612,351. That is a lot of additional income tax to pay to keep your beneficiary from overspending.

With either type of trust, your original intent when establishing the trust may no longer be met post-SECURE Act, so it is critical to review your beneficiaries.

Please contact Wingate Wealth Advisors if you’d like to discuss how the SECURE Act may affect you, or any of the strategies mentioned here.

Written by Andi McNamara, CFP® Director of Financial Planning at Wingate Wealth Advisors