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Providing for the Surviving Spouse After SECURE

Contributor Natalie Choate examines how the SECURE Act affects popular strategies for leaving IRAs and retirement plans to a spouse.

The SECURE Act has upended estate planning for retirement benefits by replacing the popular and tax-saving "life expectancy payout method" with the much more stringent "10-year rule" for most beneficiaries. The surviving spouse, as an "eligible designated beneficiary," is exempted from this harsh change. SECURE decrees that retirement benefits payable to an eligible designated beneficiary may still be paid out based on a modified version of the life expectancy payout. Thus, at first glance, it appears that planning options for a participant who wishes to leave his IRA to benefit his surviving spouse are unchanged.

A closer look reveals that's not quite true.

Here's a look at the four most popular modes for leaving an IRA to the surviving spouse or to a trust for his/her benefit and how SECURE has impacted those modes. The IRA is an example; the same options apply to most other types of qualified retirement plans left to a surviving spouse.

Outright to the Surviving Spouse, Followed by Rollover As was true before SECURE, the surviving spouse is entitled to "roll over" to her own IRA any retirement benefits left outright to her. This has always been (and continues to be) the most tax-favorable option in most situations, and it is little changed by SECURE. By rolling the inherited benefits over to her own IRA, the surviving spouse gets three tax advantages:

  • She can defer taking any distributions from the rollover IRA until she reaches age 72.
  • Once she starts taking required minimum distributions, those distributions will be calculated using the Uniform Lifetime Table, which the IRS uses to determine RMDs for retirees over age 72. This table provides a longer life expectancy and more tax deferral than the Single Life Table, which applies to beneficiaries taking RMDs from an inherited IRA. Under the Uniform Lifetime Table, the account will not be substantially depleted until she is in her 90s (assuming positive investment results and that she does not take more than the RMDs).
  • Upon her death, she can name a new designated beneficiary to inherit what's left in the account. Unlike before SECURE, of course, the spouse's beneficiary will be subject to the 10-year rule in most cases. However, if the spouse lives to her life expectancy, the 10-year forced payout will apply to a reduced amount than if it had applied at the death of the first spouse.

Outright to the Surviving Spouse, not Rolled Over If the surviving spouse is named as outright beneficiary, but for some reason does not roll the inherited benefit over to her own IRA, the payout rules will be somewhat less favorable. She will have to take distributions over her own single life expectancy (not the much more generous period afforded by the Uniform Lifetime Table applicable to a rollover IRA). She will have to start taking RMDs the year after the participant's death (or the year the participant would have reached age 72 if later). Upon her later death, the 10-year rule will kick in and apply to her successor beneficiaries. This result is similar to what prevailed prior to SECURE.

To a Conduit Trust for the Surviving Spouse Some clients do not want to leave benefits outright to the surviving spouse but still want the advantages of a life expectancy payout. This combination can be obtained by leaving the benefits to a "conduit trust" for the spouse: The IRA is payable to a trust. The trustee holds the inherited IRA and makes investment and withdrawal decisions. The trustee must withdraw the RMD each year and can withdraw additional amounts if required by the trust instrument (such as "additional amounts needed for my spouse's health or support"). Whatever amounts the trustee withdraws from the IRA must (after deducting applicable fees) be forthwith distributed out to the surviving spouse (or applied for her benefit). The trustee does not have the ability to keep IRA withdrawals inside the trust.

The IRS has ruled that under a conduit trust, the surviving spouse is considered the sole beneficiary of the trust and of the retirement plan. Thus, the spouse's "eligible designated beneficiary" status would apply, and RMDs would be determined based on the surviving spouse's life expectancy (recalculated annually) rather than on the 10-year rule.

As with the two preceding options, this option was not substantially changed by SECURE--except that the 10-year rule will kick in upon the surviving spouse's death.

To a See-Through Accumulation Trust for the Spouse The final popular option is the one radically altered by SECURE. Assume a trust that pays the surviving spouse "all income for life" or "all income for life plus principal if needed for health or support." This form of trust is chosen by a client who does not want the surviving spouse to receive the entire retirement plan either immediately upon the client's death or in a gradual payout over her life expectancy. The client wants the spouse's rights limited to "trust income" with or without possible additional payments for health, support, and so on. Assume that upon the surviving spouse's later death whatever is left in the trust (and in the trust-held IRA if it still exists) will pass to the client's children.

Sounds like an innocent normal type of family trust, right? But even though this trust qualifies as a "designated beneficiary" and a "see-through trust" and even though the spouse is the sole life beneficiary of the trust, the minimum distribution regulations dictate that the spouse is not considered the "sole beneficiary" of this trust. According to the IRS, the trust beneficiaries are the spouse and the children. Accordingly, the trust is not entitled to the special "eligible designated beneficiary status" available to a surviving spouse who is sole beneficiary of the IRA and accordingly is not entitled to a life expectancy payout. It is subject to the 10-year rule. The IRA will be entirely distributed to the trust and subjected to income tax (mostly at trust rates) within 10 years after the client's death.

Does that sound harsh? It is! That is the result SECURE intended when it eliminated the life expectancy payout. The purpose of SECURE's changes was to raise revenue by increasing and accelerating the income taxes on inherited retirement benefits. The Treasury could change this result (as applied to a nonconduit life trust for the spouse) when it issues regulations under SECURE, which we still await. Unless that happens (and there is no particular reason to think they would make that change), despite the "exemption" for the surviving spouse as an "eligible designated beneficiary," the tax increase/acceleration will apply to this popular form of trust for the spouse's life benefit. In short, the surviving spouse will pay part of the hefty tax increase SECURE places on inherited benefits if she inherits benefits through a nonconduit trust. To benefit from her status as "eligible designated beneficiary," she must inherit the benefits either outright or (somewhat less favorably) through a conduit trust.

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.

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