SECURE Act Final Regulations: What They Mean for IRA Beneficiaries

When the SECURE Act was passed in 2019, it reshaped retirement planning—particularly for inherited IRAs. Then, in 2022, the IRS issued proposed regulations that further complicated interpretations of the law. Now, with the July 2024 Final Regulations, we have clarity—but also new challenges.

For investors using trusts as IRA beneficiaries, these new rules significantly impact distribution timelines and tax liabilities. Here’s what you need to know.

Why Name a Trust as an IRA Beneficiary?

Historically, IRA owners have named trusts as beneficiaries for several reasons:

• Control: Ensuring structured distributions for heirs (e.g., spendthrift protection).
• Protection: Safeguarding assets from creditors, especially after Clark v. Rameker (2014) ruled inherited IRAs are not protected in bankruptcy.
• Tax Efficiency: Pre-SECURE Act, some trusts could "stretch" distributions over a beneficiary’s lifetime, reducing tax impact.

The SECURE Act’s Big Change: The 10-Year Rule

Under the SECURE Act, most non-spouse beneficiaries must withdraw all inherited IRA funds within 10 years, eliminating the "stretch IRA" for most trusts.

How the Final Regulations Clarify (and Complicate) Things

The IRS introduced a 4-step process to determine how an inherited IRA within a trust must be distributed:

1. Is the Trust a “See-Through Trust”?

• If yes, distributions follow the beneficiary rules.
• If no, it’s treated as a non-designated beneficiary, forcing either 5-year liquidation or "at least as rapidly" RMDs.

2. What Type of Trust Is It?

• Conduit Trusts: Require all IRA withdrawals to be passed directly to beneficiaries.
• Discretionary (Accumulation) Trusts: Allow IRA withdrawals to be retained in the trust, but trigger harsher tax treatment if non-eligible beneficiaries are involved.

3. Who Are the Trust Beneficiaries?

• Eligible Designated Beneficiaries (EDBs):
  • Surviving spouses
  • Minor children (until age 21)
  • Disabled or chronically ill individuals
  • Beneficiaries <10 years younger than the decedent
  • Certain applicable trusts
• Non-Eligible Designated Beneficiaries (NEDBs):
  • Adult children, grandchildren, most non-spouse heirs.
• Non-Designated Beneficiaries:
  • Charities, estates, or trusts that don’t qualify as “see-through.”
    
    

4. What Are the Distribution Rules?

• EDBs: Can still stretch RMDs based on life expectancy.
• NEDBs: Must withdraw all funds within 10 years.
• Non-Designated Beneficiaries: Must follow a 5-year rule (if the decedent died before RMD age) or continue withdrawals "at least as rapidly" (if they died after RMD age).

Key Planning Considerations

• If a trust has any NEDBs, it eliminates the stretch option and forces a 10-year payout.
• Roth IRAs still follow the 10-year rule, but without RMDs.
• Applicable Multi-Beneficiary Trusts (AMBTs) for disabled/chronically ill individuals get special treatment—allowing some stretch provisions.

The Bottom Line

These regulations create new complexities for estate planning, especially for those using trusts to manage IRA distributions. Trust language, beneficiary classifications, and payout rules must be reviewed carefully to avoid unintended tax burdens.

^{This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.}