Revocable Trusts

  1. I have a revocable trust that provides for a disabled child on my death. Do I need to amend it due to the new SECURE Act?
  2. Good question. The answer is no, but we are all still learning about this Act which was buried in 1700 pages of the Further Consolidations Appropriations Act of 2019, that concerns a 1.4 trillion-dollar budget.  The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act 2019) was signed into law by President Trump on 20 December 2019 after being passed by the House on 17 December 2019 and by the Senate on 19 December 2019.  NAELA intervened back in the spring when the House was first pushing the bill along to ensure language would be included to protect the disabled.    We can thank the NAELA Tax Section Steering Committee for its successful efforts.

This is a big one so let’s take a few steps back to ensure readers can follow along.

The qualified trust rules of Internal Revenue Code (herein after IRC) § 401(a) apply to traditional IRAs. A traditional IRA is an account funded with pre-tax dollars, which, with certain exceptions, is not subject to income tax until the funds are distributed from the account. The value of a traditional IRA lies in the ability to defer taxation on income earned by the IRA owner for many years into the future. The Act changes the stretch provisions of inherited traditional IRAs, 401ks and similar retirement plans that allowed the actuarial life expectancy of the designated IRA or qualified account beneficiary to be used after the original owner dies.  The new Act requires that all distributions of inherited IRAs must be made within ten years of the decedent’s date of death.  There are no required minimum distributions (RMDs) set for each year and even distributions over the ten-year period are not required.

Spouses are excluded under the new rules for inherited IRAs and retirement accounts, as are disabled and chronically ill beneficiaries.  Individuals who are not more than 10 years younger than the original IRA or qualified retirement account owner, or a child of the employee or IRA account owner who has not reached the age of majority are also excluded. (i.e. they still get the stretch and to defer taxes over their lifetimes).


The definition of disabled is like that of the Social Security Administration.

Section 72(m)(7) of the Act reads:


“(7) Meaning of disabled:  For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.”


If a person receives Social Security disability benefits and presents proof thereof it should be enough evidence of disability, however not all disabled adults receive SSI or SS disability benefits.  We assume other medical, vocational and school evidence should be enough.


Section 401(a)(9)(E)(ii)(IV) of the Act reads:


“(IV) a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature),


My current understanding is that the new law will not impact those who reside in a SC nursing or group home and receive Medicaid assistance.


Section 7702B(c)(2) refers to those who need help with at least two ADLs to include:


(B)Activities of daily living:

(i) Eating.

(ii) Toileting.

(iii) Transferring.

(iv) Bathing.

(v) Dressing.

(vi) Continence.


Another Section covers dementia type disorders.

For many, their individual retirement accounts and qualified plans may be their largest or second largest asset after their home.  Therefore, please note the Act also increases the mandatory age for taking one’s required minimum distributions from the current age of 70 1/2 to age 72.

Among the key changes for small business owners and their employees, the SECURE Act allows two or more unrelated employers to join a pooled employer plan, creating an economy of scale that lowers both employer and plan participant cost. It significantly increases the tax credit for new plans from the current cap of $500 to $5,000, and small employers that implement an automatic enrollment feature in their retirement plan design are eligible for an additional $500 credit.

Other key provisions include:

  • increasing the auto enrollment safe harbor cap from 10% to 15% of pay;
  • simplifying safe harbor 401(k) rules;
  • providing portability of lifetime income options;
  • allowing long-term part-time workers to participate in 401(k) plans;
  • allowing plans adopting by the filing due date to be treated as in effect as of close of year;
  • providing a fiduciary safe harbor for selection of lifetime income provider;
  • modifying the treatment of custodial accounts on termination of section 403(b) plans;
  • requiring disclosures regarding lifetime income; and
  • modifying the nondiscrimination rules to protect longer service participants; and
  • disaster-related plan withdrawals.

The law also includes a few provisions that are designed to raise federal revenue. Among those are increasing the penalties for late filing of retirement plan returns and notices. Its expected billions will be raised in taxes for the federal government by elimination of the stretch provision and new penalties.

Some changes took effect on January 1, 2020, others have later dates for compliance.

Planning opportunities still exist by using Roths in conjunction with a gifting plan.  A Roth IRA is an individual retirement plan that is funded with after-tax dollars. No deduction under IRC § 219 for a contribution to a Roth IRA is available. [ See IRC § 408A(c)(1)]. Any qualified distribution from a Roth IRA is not includible in gross income [ IRC § 408A(d)(1)]. A qualified distribution from a Roth IRA must be made on or after the date the Roth IRA owner reaches the age of 59 1/2, to a beneficiary (or to the estate of the Roth IRA owner) on or after the death of the IRA owner, or is attributable to the individual’s being disabled or is a “qualified special purpose” distribution.

Since the anti-deferral provisions of the SECURE Act applies to IRA owners (and qualified retirement plan account holders) who have not yet begun taking a required minimum distribution, if the account owner is eligible to begin taking required minimum distributions, he or she might want to consider doing so.  Additional planning, such as lifetime gifting and/or the purchase of a life insurance policy funded with the required minimum distributions, may be appropriate, and consideration should be given to the use of irrevocable life insurance trusts and charitable remainder trusts.  Other Medicaid crisis and non-crisis estate and elder planning strategies are suitable for clients with IRAs.

Spouses can continue to be named as IRA beneficiaries outright or in trust. Particularly when the IRA value is very high or there is a spouse from a second (or subsequent) marriage, the use of either an IRA trust or a hand-crafted document with qualified retirement trust provisions could still be considered.

Again a trust for a disabled or chronically ill person will still qualify for the stretch under the SECURE Act, but the trust can’t have any current beneficiaries who aren’t disabled or chronically ill.  Other trusts being funded with traditional IRAs should be reviewed with qualified professionals.


DISCLAIMER    The information given in this article is of a general nature and does not create an attorney-client relationship.  You should always consult with an attorney regarding the specific facts of your situation.  January 2020

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