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Secure Act Proposed Regulations: Good News and...Other News

Natalie Choate shares how new proposed regulations will make leaving benefits to a trust easier.

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In February 2022, the U.S. Treasury issued proposed regulations for the Secure Act's changes to the minimum distribution rules for retirement plans. In 275 pages, the IRS took this opportunity to also update and streamline its “required minimum distribution trust rules.”

Looking back at Secure from a distance of two years, while practitioners and their IRA-owning clients were unhappy about the loss of the life expectancy payout for most beneficiaries, it seemed like there was one silver lining: At least things would be simpler now, with a 10-year rule for almost everybody...right?

Wrong. The proposed regulations do not opt for simplicity. For example, where Secure leaned toward eliminating the differences between payout rules for “death before the required beginning date” versus “death after” that date, the proposed regulations reinstate that difference with a vengeance:

  • Eligible designated beneficiaries can opt for the 10-year rule instead of the life expectancy payout, right? Yes, but only if the IRA owner died before his required beginning date. Otherwise no.
  • If the IRA owner died after his required beginning date, the payout period to an eligible designated beneficiary is the “longer of” the IRA owner’s life expectancy or the beneficiary’s life expectancy, right? Initially, yes. However, 100% distribution of the account must be made to the eligible designated beneficiary no later than the final year of the beneficiary’s life expectancy! So what started out looking like a “longer of” rule for eligible designated beneficiaries turns out to be a “shorter of” rule if the beneficiary was older than the IRA owner. If you are over 72, do not leave your IRA to your parents!
  • A “plain old designated beneficiary” (that is, an individual who is not an “eligible” designated beneficiary) who is subject to the 10-year rule does not have to take any minimum distributions from the inherited account until the 10th year, right? Wrong. That’s true only if the IRA owner died before his required beginning date. If the IRA owner died after required minimum distributions started, the beneficiary must take annual RMDs in years one through nine, then take any remaining balance in the 10th year.

Despite these “bad news” examples, the proposed regulations do have some good news: Leaving benefits to a trust will be easier.

Under current regulations (finalized in 2002), the “RMD trust rules” are brief: All beneficiaries of the trust would be considered beneficiaries named by the participant, except that beneficiaries who were “mere potential successors” to other beneficiaries could be ignored. Since “mere potential successor” was not further defined, practitioners had to piece together its intended meaning from a handful of private letter rulings issued over the next dozen years.

One example in the 2002 regulations gave clear approval to what has become known as a “conduit trust,” but the limits for nonconduit trusts were sketchy. Practitioners had strong opinions--but no authority--regarding how a power of appointment affected the “mere potential successor” concept. And the 2002 regulations seemed to prohibit any postdeath trust changes to trust terms through reformation or decanting, even as these practices became increasingly popular ways to fix trust problems.

The Proposed Regulations tackle all of these issues and (in my opinion) provide a sensible and helpful framework for determining the “designated beneficiary” status of a trust named as beneficiary of a retirement account. Here are some new RMD trust rules and concepts offered by the Proposed Regulations:

  • The Proposed Regulations formally adopt the terms “See-Through Trust,” “Conduit Trust,” and “Accumulation Trust.” Though these terms have been in common use by practitioners for years (and have appeared in private letter rulings), this is their first “official” appearance. The terms have the same meaning as has been common usage for practitioners, except that the IRS uses “Accumulation Trust” to mean only a see-through accumulation trust. A trust that allows accumulation of retirement benefits but does not qualify as a see-through trust would not be an “Accumulation Trust” within the meaning of the Proposed Regulations.
  • The Proposed Regulations would drop the requirement that it be possible to identify the oldest trust beneficiary (beneficiary with the shortest life expectancy) in order to qualify as a see-through trust. Because of the Secure changes to the minimum distribution rules, the identity of the oldest trust beneficiary is no longer relevant in determining the distribution period for the trust, so this requirement no longer serves a purpose. (Under the old regulations, the life expectancy of the oldest trust beneficiary would be the trust’s distribution period.)
  • Trust changes that “haven’t happened yet” (such as exercise of a power of appointment in favor of someone other than the default beneficiaries, decanting to another trust, or reformation) are recognized. If the change is finalized by Sept. 30 of the year after the participant’s death (for example, a court order reforms the trust to eliminate or add a beneficiary), the change is taken into account in testing the trust. Otherwise the potential for these things to happen in the future does not affect the trust’s see-through status. When and if the event occurs (for example, the trust is decanted or the power of appointment is exercised), the trust will be retested at that time. If that results in the trust no longer qualifying as a see-through trust, that may cause an accelerated required distribution of the benefits, but the effect would not be retroactive.
  • The Proposed Regulations ditch the “mere potential successor” concept. Instead they would set up three tiers of beneficiaries under a trust. The first tier comprises beneficiaries who are entitled or eligible to receive distributions after the participant’s death--without having to wait until someone else dies. The second tier comprises beneficiaries who become entitled or eligible to receive benefits only after the death of a first-tier beneficiary. Finally, the third tier comprises beneficiaries who get benefits only after the death of a second-tier beneficiary. Now, to test a trust for the “designated beneficiary” or “eligible designated beneficiary” status of its beneficiaries, one follows these simple rules:
    • First-tier beneficiaries always count.
    • Third-tier beneficiaries are always disregarded.
    • For a conduit trust, second-tier beneficiaries are disregarded.
    • For an accumulation trust, second-tier beneficiaries count unless disregarded under the next rule.
  • If a beneficiary will receive outright distribution of all the benefits by age 31, any beneficiary who would inherit the benefits only if the first beneficiary dies before that age is disregarded.

This distribute-by-31 “disregard” rule can be a great help to anyone trying to leave retirement benefits to a trust for a very young beneficiary. For example, a grandparent wants to leave an IRA in trust for a grandchild, age 13. The trust will provide that the trustee will take distributions from the IRA and then either use the distributions for the benefit of the grandchild or hold them in trust for later distribution to or for the benefit of the grandchild. The trust will terminate and distribute all remaining assets to the grandchild at age 31. If the grandchild dies before 31, the trust will pass to Charity X. Charity X is a nonindividual beneficiary. Normally an accumulation trust with a charity as its remainder beneficiary would not qualify as a see-through trust and therefore would not get “designated beneficiary” status. But with this trust, the grandchild is deemed to be the sole beneficiary, and the charity is disregarded. The trust will qualify as a see-through trust and be subject to the 10-year rule.

The 13-year-old grandchild is not an eligible designated beneficiary because he is not the “child of the IRA owner.” So this trust for the grandchild will not qualify for the life expectancy payout. But it will be a see-through trust (designated beneficiary) and qualify for the 10-year rule because the charity is disregarded.

The above summaries are based on a “first look” at the proposed regulations, but (so far) the new trust rules look like a big improvement over the old ones.

Natalie Choate is a lawyer in Wellesley, Massachusetts, who concentrates in estate planning for retirement benefits. The 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article do not necessarily reflect the views of Morningstar.