Did the SECURE Act Ruin Your Child’s Trust?

Picture of a family smiling under an imaginary roof

The SECURE (“Setting Every Community Up for Retirement Enhancement”) Act was signed into law by President Trump on December 20, 2019. Among other things, the Act significantly curbs the ability of owners of Individual Retirement Accounts to leave benefits to their surviving children in a manner that minimizes income tax consequences.


Prior to the enactment of the SECURE Act, owners of IRA’s and certain other retirement plans could designate most of their children as death beneficiaries in a more tax efficient manner. Payments to the children could be “stretched” over their life expectancy. For example, in the case of a 50-year-old son or daughter the life expectancy is 34.2 years. The life expectancy of a grandchild or great grandchild could be as long as 80 years. Because of the long life expectancy, assets in the plan could grow tax-deferred and be slowly distributed to the surviving children for decades after the death of the plan owner, minimizing the income tax consequences to the child beneficiaries.


Rather than directly name a child as a plan beneficiary, many people with IRA’s designated a special type of trust known as a “see-through” trust to receive the plan proceeds at their death. There are a variety of reasons for this, including a desire to protect the proceeds from being squandered, the need to have the proceeds managed by a suitable person, and to protect the proceeds from creditors.


In most instances, the SECURE Act replaces the possibility of a stretch payout with a flat 10 year payout. This compressed payout means that in many cases the tax deferred benefits of leaving a plan to a see-through trust are largely curbed. Worse, depending on how the trust was drafted, it may no longer deal with the assets properly, or in the worst cases, function properly at all.


If, as part of your previous planning, you executed a trust leaving retirement benefits to your family members, it is very important that you have that trust reviewed by an estate planning attorney. In some instances, the trust may continue to work properly, in others amendments will be needed, and in some cases the trust will need to be revoked and other planning options utilized. Special provisions applicable to minor and disabled children, spouses, chronically ill people, and beneficiaries close in age to the plan owner must also be considered.           


Contact the Law Office of Brandon L. Campbell to schedule a review of your existing trust planning.