Designing and Drafting Trusts in Light of the SECURE Act

May 5, 2020 | General Estate Planning, IRS / Tax Guidance, Podcasts, T&E Administration

SECURE Act — 5 Part Special

  1. Updating Existing Estate Plans Under the SECURE Act – posted April 21, 2020
  2. Planning for Common Scenarios Under the SECURE Act – posted April 28, 2020
  3. Designing and Drafting Trusts in Light of the SECURE Act – (this podcast)
  4. Disabled or Chronically Ill Beneficiaries Under the SECURE Act – posted May 12, 2020
  5. Charitable Planning and the SECURE Act – posted May 19, 2020

Welcome to part three of a five-part series offering professionals information about the SECURE Act, which was signed into law in December 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement. “Designing and Drafting Trusts in Light of the SECURE Act,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Susan Snyder, ACTEC Fellow from Chicago. The SECURE Act has reduced the period over which most people can take distributions to only 10 years, which affects the way trust and estate attorneys are going to design and draft trusts. Designing and drafting accumulation trusts, trust clauses for IRAs and other retirement plans has changed. To give us more information on this topic, you will be hearing today from ACTEC Fellow Steven Gorin, of Saint Louis, Missouri. Welcome, Steve.

As you know, the SECURE Act has reduced the period over which most people can take distributions to only 10 years, and this certainly affects the way that we are going to draft trusts. First, I am going to spend a moment talking about the way we used to draft trusts under the old law, and then I will talk about options available under the new law and the flexible drafting I think you should use.

Prior to SECURE Act

So, under the old law, whenever you drafted a trust to accumulate, you always had to determine the oldest possible beneficiary and it had to be an individual, and that was very challenging and complicated in our drafting. And so, we tended to use conduit trusts for a lot of people. In a conduit trust, any distribution from the IRA that the trust receives must be immediately distributed out to the beneficiary. Now, of course, that does not let you accumulate anything inside the trust, which frustrates the purpose of the trust, but it would let you use the beneficiary’s life expectancy. So, let us suppose you had a 40-year-old beneficiary, and then maybe they would have 35 or 40 years left on their life expectancy. So, for example, if it is 40 years left, they could take out 1/40th in the first year, 1/39th in the second year, 1/38th in the third year etcetera. And so, they would not really be invading principal very much until they actually reached their own retirement age. So, it really was not a big deal to have a conduit trust, and in fact, for younger people, they maybe could take it out over 70 years. And again, for many, many, many years it really was not distributing a lot out of the trust.

Now, under the SECURE Act, for most beneficiaries, they can take out under a period of only up to 10 years. And that period of up to only 10 years certainly does not let them stretch it and it forces it out of trust, and so it is not nearly as attractive as it was under the old law. So, under the new law, I think people are going to be doing a lot more drafting of accumulation trusts.

Drafting an Accumulation Trust Under the SECURE Act

So, what do you have to do for an accumulation trust? The accumulation trust needs to provide distributions only to individuals. It could be any individual. You do not have to figure out the maximum age now under the SECURE law, but it is only individuals. So, you have to make sure that during the time there are any assets in trust, it is only going to individuals.

And then, you want to plan for what happens when it is not individuals. When it is not individuals, let’s say it will go to maybe charities eventually, then you need to have standing in between the trust and that charity or whoever; you have to have at least one individual who would receive outright. So, your accumulation trust can last for however long you want to have it last, but then there needs to be one individual left standing who would get it outright before it might pass to a charity or some other person who is not an individual. We call that “last person standing.” So, those are the two requirements: distributing during life, plus an outright distribution to the last person standing.

Now, that is the way any accumulation trust would be done. If you have a conduit trust, then you do not have to worry about who is going to be getting it down the road. So you do not have to have that last man standing clause. Now, with an accumulation trust, you need to worry about GST planning. So, generation-skipping transfer tax that applies when you transfer assets to, for example, grandchildren or more remote beneficiaries, that is an extra tax that gets imposed if the assets are not included in the beneficiary’s estate. So, what we like to do is we like to put in a general power of appointment, so that allows the beneficiary to appoint, perhaps, the beneficiary’s estate or the creditors. But let us suppose you limit it to creditors. Well, the creditor might be an entity; might not be an individual. Could you make a general power of appointment to only creditors who are individuals? I do not know the answer. I do not know any law that says you can or you can’t, but I am just not necessarily comfortable with it.

Mixing and Matching Accumulation Trust and Conduit Trust Under SECURE

So, what you might want to do is kind of have a mixture. If your assets are protected by GST exemption, it could be in an accumulation trust. If they are not protected by GST exemption, you might put it into a conduit trust and then you can have your general power of appointment; because with a conduit trust, you do not have to worry about who takes what after the beneficiary dies.

Now, another thing to think about is, what if you have a disabled or chronically ill individual? And for those people, they can take it out over their life expectancy. So as long as the only people who can currently receive distributions are disabled or chronically ill, you can stretch it out over their life expectancy. So, that is a much better accumulation trust vehicle to use. (Disabled or Chronically Ill Beneficiaries Under the SECURE Act )

Now, there is also, if you have a minor child, you have some significant stretches available that are listed and described in other podcasts. And for those, you might want to have a conduit trust or you might want to mix and match. You might have some that goes to a conduit trust, and we know that it was going to be spent in the beneficiary’s 20s and 30s just because of the financial plan. And so, you might have part of it going to the conduit trust for that person and then part of it going to an accumulation trust. (Planning for Common Scenarios Under the SECURE Act)

What I really like to do, though, is I like to have some flexibility built in. So, under current law—and this is expected to continue under the new law—if you eliminate beneficiaries any time before the beneficiary determination date, then the IRS will respect that and just look at the way the trust looks at, at the time of the beneficiary determination date. And, the beneficiary determination date is September 30th of the calendar year following the calendar year in which the person dies. So, what I really like to do is consider—you do not know what the IRA is going to look like when the person dies. They may spend it all during their retirement. They may spend none of it or just a little bit of it. You do not really know. So, what I really like to do is to draft clauses that will allow you to modify the trust sometime between the date of death and the beneficiary determination date. (Updating Existing Estate Plans Under the SECURE Act

So, I hope these tips have proven helpful to you and look forward to communicating with you on future podcasts. Thank you.

Thank you, Steve, for your designing and drafting recommendations.

Tune in next week for our next SECURE Act topic, Disabled or Chronically Ill Beneficiaries Under the SECURE Act.

Visit actec.org/secure-act to find additional resources.


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