Does Your Trust Need Updating? Secure Act Created Unintended Consequences for Inherited Retirement Accounts

By Christian Cameron, Esq.

It used to be the case that all individuals named as beneficiaries of an IRA or 401(k) could take their required minimum distributions over their life expectancies. This allowed all individual beneficiaries to extend the tax-deferred growth of the inherited retirement account for their lifetimes, known as a “stretch payout”. If you named your trust as the beneficiary, the rules were a little different – the beneficiary of the trust could still get a stretch payout over his or her life expectancy, but the trust had to meet certain requirements.

One of the ways that trusts were sometimes structured to qualify for this benefit was to make the trust a “conduit trust” – that is, if any distributions were made from a retirement account to the trust, the trust then required that amount to be immediately distributed to the current beneficiary outside the trust. This ensured that the current beneficiary’s life expectancy could be used to calculate the required minimum distributions from the inherited retirement account (and not any other successor beneficiaries).

That may not have been an ideal arrangement if your goal was to keep assets protected in trust for your beneficiaries, but those conduit provisions only applied to the required minimum distributions of the inherited retirement account. At least the rest of the assets in trust, as well as the undistributed portion of the retirement account, remained protected in the trust.

These conduit provisions may be buried deep in the boiler plate of your trust document. You may not even be aware that they are there.

The Secure Act changed all of that in 2019, eliminating the stretch payout for all but certain eligible designated beneficiaries (spouses, minor children, disabled beneficiaries, and individuals who are not more than 10 years younger than the original owner). For most other beneficiaries, the whole retirement account has to be distributed out in 10 years.

What does this mean for retirement accounts naming old trusts as beneficiaries that have conduit provisions in them? Remember that conduit provisions require all distributions from a retirement account to the trust to be distributed to the current beneficiary immediately.

What happens when that distribution is the whole retirement account in year 10? Oops!

The conduit provisions may not have been a problem when the only distributions were the required minimum distributions, but under the Secure Act, it’s possible the entire account will be terminated and distributed to the trust in year 10.

If your trust has conduit provisions, the trust will then in turn require that entire lump sum to be paid to the beneficiary immediately, outside of the trust. Depending on the size of the retirement account, you may not have intended that your beneficiary receive such a large distribution outside of trust, and you may prefer that the trust not require all distributions from the retirement account to be distributed immediately to the beneficiary.

If you are wondering whether your trust has conduit provisions or whether the Secure Act affects you, call for a free consultation and review regarding your retirement accounts!