The recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act represents one of the most significant changes to our retirement system in over a decade. The SECURE Act includes many changes to retirement planning in general, such as the increase in the age for required minimum distributions (RMDs) to 72 and the elimination of the maximum age for making contributions to a traditional IRA, provided the individual has earned income. With respect to estate planning, however, perhaps the most notable change comes in the form of the elimination of a beneficiary’s ability to “stretch” an inherited IRA over the beneficiary’s lifetime for all but a limited class of beneficiaries. The elimination of the lifetime stretch has caused practitioners to collectively rethink some of their long-held norms with respect to legacy planning and tax planning for retirement benefits, particularly with the use of trusts that will receive retirement plan benefits.

As a result of the SECURE Act, for decedents dying after Jan. 1, the beneficiary of a retirement plan will be required to withdraw the retirement plan benefits within 10 years of the account owner’s death unless a beneficiary an “eligible designated beneficiary” (a new term introduced by the SECURE Act). This change eliminates the beneficiary’s ability to stretch withdrawals of an inherited retirement account over his or her life expectancy. This lifetime stretch previously provided beneficiaries with potentially decades of continued tax-deferred growth. The clear (and stated) impact of the SECURE Act is to substantially accelerate the required withdrawals out of the inherited retirement account, which forces the recipient to recognize income over a much shorter period of time (as an important aside, the SECURE Act does not use the “required minimum distribution” terminology that has become synonymous with IRA withdrawal requirements prior to 2020; instead, the SECURE Act models the 10-year payout requirement after the five-year payout rule for nondesignated beneficiaries). By way of example, the IRS single life expectancy tables provide that a 50-year-old individual has a remaining life expectancy of 34.2 years. Instead of enjoying withdrawals out of an inherited IRA using a life expectancy factor in excess of 30 years, the SECURE Act requires the beneficiary, regardless of age, to withdrawal the account over a 10-year period. Withdrawals from the account can be made pro rata, all in one year, or by any other distribution format provided the entire account balance is withdrawn no later than Dec, 31 of the year containing the 10th anniversary of the participant’s death. The result, therefore, is to cause the beneficiary to recognize income on the entire account balance much sooner than before and to eliminate the tax-deferred growth on the account in future years.