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Adult Children or Trust Listed as Beneficiary of Your IRA?

The SECURE Act might make it a less than ideal strategy.


  • The SECURE Act changes the "stretch" distribution option for some beneficiaries.

  • All retirement plan account holders should revisit their designated beneficiaries.

  • If you name a trust as beneficiary of your retirement account, then work with your estate planning attorney and financial advisor to see whether it is still the right strategy for you.


With the current pandemic, it’s no surprise that one of the most substantial pieces of retirement legislation was passed in December 2019 with little media coverage. While the Setting Every Community Up For Retirement Enhancement (SECURE) Act was focused primarily on employer and individual retirement plans, it created significant questions for estate planning.

One of the most important effects of the SECURE Act concerns the “stretch” provision that allows certain beneficiaries to take smaller distributions over a longer period of time. Smaller distributions equates to smaller tax bills and more potential growth on the investments.

Effective January 1, 2020, the new rules impact how non-spouse beneficiaries of inherited retirement accounts are treated with respect to their distribution options and limit their ability to qualify for "stretch" distributions.

Historically, beneficiaries of retirement accounts (IRA, 401(k), 403(b), and alike) fell into one of two categories:

Because some trusts, including the very common Conduit or “See-Through” trust, were considered Designated Beneficiaries, many retirement account owners have listed their trust as beneficiary. The designated trust would allow retirement account assets to by-pass probate AND provide tax-efficiencies to beneficiaries through the "stretch" provision.

The SECURE Act creates three beneficiary categories that have their own distribution rules and removes the benefits of the "stretch" provision for some beneficiaries.

The newly created Non-Eligible Designated Beneficiary category includes non-spouses and certain trusts that are subject to a new 10-Year Rule.

With the 10-Year Rule, beneficiaries are not required to take any defined or annual distributions, but they must deplete the retirement account within 10 years from the decedent’s passing.

So, when might this change be a concern?

It is very common to see children named as beneficiaries of a trust. When children are listed as beneficiaries, the distribution rules are driven by the eldest beneficiary, and the age of that beneficiary affects which category all designated beneficiaries fall in. Here is an example of when concerns may arise.

Bill was an IRA owner and passed away on February 1, 2020. He named his Conduit Trust as beneficiary with the income beneficiaries as his daughters, Grace (22) and Samantha (17).

As a minor, Samantha would be considered an Eligible Designated Beneficiary and could stretch her distributions. However, because Grace is the eldest and has reached age of majority, she is a Non-Eligible Beneficiary, making all beneficiaries Non-Eligible Designated Beneficiaries and subject to the 10-Year Rule.

Now, let's assume that Samantha was the only beneficiary. While she would be considered an Eligible Designated Beneficiary who can stretch her distributions, her category would change to Non-Eligible Designated Beneficiary once she reached age of majority (18-21 depending on the state) and subject to the new 10-Year Rule.

As a result of these changes established under the SECURE Act, every retirement account owner, especially those who have their trust named as the beneficiary, should review their strategy with their financial advisor and estate planning attorney to determine whether any changes need to be made. Because the common trust was drafted with the intent of stretching distributions, trusts may not work as originally planned, and designated beneficiaries may end up with faster payouts and larger tax bills.

Frank Iozzo, CPWA®

President, Private Wealth Advisor


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