The SECURE Act: Retirement Plan Distributions after the Death of a Beneficiary

Abstract

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 made very significant changes to required minimum distributions (RMDs) paid to beneficiaries of defined contribution retirement plans, including IRAs. The Act generally applies to beneficiaries of a defined contribution plans if the plan participant dies after 2019. The most significant provisions of the Act limit RMDs that are life or life expectancy distributions. Life-expectancy RMDs are now available only for eligible designated beneficiaries (EDBs). EDBs are defined as (1) the surviving spouse of a plan participant, (2) a minor child of the participant, (3) a disabled individual, (4) a chronically ill individual, or (5) an individual who is not more than ten years younger than the participant. The Act also replaced the alternative five-year distribution rule with a comparable ten-year rule. Under the new ten-year rule, a plan is required to distribute the participant’s entire benefit before the end of the tenth calendar year after the participant’s death. The Act also generally requires a plan to distribute all the plan’s remaining benefit before the end of the tenth calendar year following the death of an EDB who was receiving distributions over his or her life expectancy. The Act imposes a similar rule on the post-2019 death of a designated beneficiary in a plan that otherwise would not be subject to the Act because the participant died before 2020. These distributions required after the death of an EDB (or a designated beneficiary in a pre-2020 plan) are referred to in this Article as successor ten-year distributions. They are the focus of the Article. A major problem may occur on the death of an EDB in a plan with multiple EDBs. In addition to applying the successor ten-year rule to the benefit of the deceased EDB, the SECURE Act will also generally apply the rule to the interests of the other living EDBs. The underlying theory is that a plan is allowed only one method for payment of RMDs, and the SECURE Act imposes that method upon the death of an EDB. Solutions to the problem of multi-beneficiary plans lie in the ability of a participant or trustee to divide a plan into separate accounts for each beneficiary. If such a separation is timely, the death of an EDB in one separate account should not affect the method or period under which RMDs are being made from the separate accounts of other EDBs. Unfortunately, the separate account solution generally does not work for multiple EDBs who are beneficiaries in a “see-through” trust. The interest of a see-through trust in a plan cannot be divided into separate accounts for trust beneficiaries. Instead, the solution lies in the proper creation of separate subtrusts for each beneficiary that insulate the plan interests of living EDBs from the successor ten-year rule applicable to the interest of a deceased EDB. Note though that, in some unique circumstances, a special type of trust allowed by the SECURE Act, an “applicable multi-beneficiary trust” (AMBT) may provide a more convenient way to divide a trust into separate subtrusts. Similar solutions that limit the effect of the successor ten-year rule may also be available for designated beneficiaries in a pre-2020 plan that is otherwise not subject to the SECURE Act.