Legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted December 20, 2019, renders any estate plan involving a Conduit Trust beneficiary of a big retirement account (including 401(k) accounts and IRAs) obsolete.
A provision of the Act repeals “stretch” payments over the life expectancy of most successor beneficiaries for inherited retirement accounts of decedents who die after December 31, 2019. The maximum time for distributions is 10 years after the death of the decedent/plan participant.
What is a Conduit Trust? The purpose of a Conduit Trust was to control a retirement account, usually with a minor beneficiary, and still qualify for distribution of the account over the beneficiary’s life expectancy, called stretch distributions. In order to qualify, the account had to be disregarded for income tax reporting with respect to the retirement account distributions. The way this was accomplished was to require that any retirement account distributions received by the trust be immediately distributed to the beneficiary.
Since life expectancy distributions are usually very small, a huge distribution would be payable to the beneficiary 10 years after the death of the account owner, probably subject to very high federal income tax rates and possibly subject to mismanagement by the beneficiary.
There are some exceptions to the new rule, including (1) the surviving spouse of the employee/participant, (2) a child who is under age 21, (3) certain disabled persons, (4) certain chronically ill persons, and (4) an individual not previously described who is not more than 10 years younger than the employee/participant.
When a child of the decedent reaches age 21, the balance of the account must be distributed within 10 years.
If a beneficiary of a retirement account inherited from a person deceased before 2020 is deceased after 2019, the 10 year limit applies to that person’s successor beneficiaries.
Since the Conduit Trust no longer provides a tax benefit, employees/participants with retirement accounts should consult with their attorney and tax consultant about eliminating the Conduit Trust as a beneficiary and making alternative estate plans for their retirement accounts.