On January 1, 2020, the SECURE Act significantly changed the rules for IRA and individual retirement account [401(k), 403(b), and 457(b)] beneficiaries. These changes will impact nearly every American and their family.

A review of your retirement account beneficiary designations should be undertaken promptly. This is intended to provide general information only and is not intended as specific legal, financial planning or tax advice. While the new rules may appear somewhat straightforward, there is a lot to consider when designating retirement account beneficiaries based upon personal circumstances and estate plan objectives as illustrated below.  Moreover, the SECURE Act is less than a year old and the IRS will certainly issue clarifying rulings on the SECURE Act in the future. You should always seek legal advice of an estate planning attorney, often in conjunction with your financial advisor and CPA or other tax professional, in making beneficiary designations on retirement accounts.

Prior to 2020, when a retirement account owner died any individual who inherited (and certain trusts) could use the old “stretch rules” to make withdrawals from the inherited retirement account over his or her lifetime.  Now, the lifetime stretch rule has mostly been eliminated.  The ability for the beneficiary to stretch out distributions from an inherited retirement account depends upon the beneficiary’s classification.

Under the Secure Act, there are 3 classifications of retirement account beneficiaries:

  1. Designated Beneficiary (DB)
  2. Eligible Designated Beneficiary (EDB)
  3. Non- Designated Beneficiary (Non-DB)


A DB is an individual or “qualifying trust”, also commonly known as a “see-through” trust. The Secure Act eliminated the ability of a DB to stretch distributions over the DB’s lifetime. Now, the entire retirement account must be distributed to the DB (or qualifying trust) in full by December 31st of the 10th year following the year in which the account owner dies (known as the “10-Year Rule”).  Note, the inherited retirement account must be distributed by the end of the 10-year period but is not required to be distributed 1/10th per year. As such, a DB may take equal annual distributions, sporadic distributions, or none in years 1-9 and take all out in the 10th year.


However, the new category of EDB’s under the Secure Act has special rules.  An EDB is an exception to the 10-Year Rule. The five EDBs are:

(1)          Surviving Spouse;

(2)          A Minor Child;

(3)          A Disabled Person;

(4)          A Chronically Ill Person; or

(5)          An individual who is not more than 10 years younger than the decedent.

An EDB may still stretch out RMD from inherited retirement accounts based upon their own life expectancy, except in the case of a minor child. A minor child must take RMD based upon their life expectancy until age of majority, and upon reaching the age of majority the 10 -Year Rule will apply.  Note, as discussed below a qualifying Trust may also still qualify as an EDB thereby allowing the stretch of RMD from the retirement account to the Trust based upon the EDB trust beneficiary’s life expectancy.

NON-DESIGNATED BENEFICIARIES (Non-DB)- No Change: Five-Year or Ghost Life Still Applies

The old rules are still in effect when a Non-DB is the beneficiary. A typical example of a non-DB is charity, an estate, or non-qualifying Trust. If the retirement account owner died before the Required Beginning Distribution date (increased from age 70 ½  to age 72 by the SECURE Act), the entire retirement account must be distributed to the Non-DB by December 31st of the year that includes the fifth anniversary of the owner’s death (commonly known as the Five-Year Rule).  If the owner died after the RBD, then the account must be distributed in annual installments over what would have been the remaining life expectancy of the owner had he not died (sometimes referred to as the “ghost life”).


It should be noted that a Trust may still qualify as a DB so long as the Trust is a “qualifying trust”, commonly referred to as a “see through” or “look through” Trust. A qualifying Trust will be able to use the entire stretch period, just as before. However, the stretch period is the shorter 10-year deferral, unless the qualifying Trust beneficiary is also an EDB entitled to lifetime stretch.

There are two types of see-through trusts: conduit and accumulation. Conduit trusts have been more popular over the years for the reason RMD received by the trust must be distributed to the trust beneficiary and taxed at his personal income tax rate. In contrast, an accumulation trust may retain RMD in trust.  For many reasons, conduit trusts historically were favored by many planners.  Under the SECURE Act, however, conduit trusts may no longer be the best choice because all RMD funds will flow through the trust to its DB beneficiaries within 10 years, undermining the full benefits and creditor protections a trust could provide.  For example, if the beneficiary is a spendthrift, has substance abuse issues, or spousal concerns an accumulation trust may now be preferred to protect retirement assets longer than 10 years.


Now, only EDBs (i.e., Surviving Spouse, Disabled Person, Chronically Ill Person, or someone less than 10 years younger than you or a qualifying Trust for the EDB) can inherit your traditional IRA, 401(k) or 403(b) and stretch out the RMD based upon his or her life expectancy. A beneficiary that is a minor will have to distribute the entire inherited retirement account within 10 years of reaching the age 18 in Arizona.  All other DB’s (e.g., adult children, grandchildren, friends, and other non-spouse relatives more than 10 years younger than you or their qualifying Trust) will have to distribute in full the inherited retirement account under the 10-Year Rule. The old rules will still apply to non DB’s, such as charities, estates, and non-qualifying Trusts.

When updating beneficiaries on retirement accounts, you must fully complete and submit the Change of Beneficiary Form(s) from each financial institution(s) at which you hold retirement account(s). You should be sure to designate both primary and secondary beneficiary(ies) by name and percentage(s). The secondary beneficiaries inherit if the primary beneficiary dies prior to the account owner. Unfortunately, we have seen too many instances where the primary beneficiary died before the account owner and the estate ended up as beneficiary for the reason no secondary beneficiary was listed.  We have also seen instances where the account owner updated their estate planning documents (e.g., Will or Trust) to reflect a change in testamentary wishes but then failed to also update retirement account beneficiary designations to be consistent with the estate plan, resulting in unintended consequences.

Spouse Beneficiary Considerations

It is commonly recommended to designate your spouse as primary beneficiary of retirement accounts for the reason a spouse may stretch the RMD over his or her own life expectancy. Keep in mind, however, that the spouse will then be the account owner with authority to designate new beneficiaries.  If you have children from a prior marriage that you like to inherit remaining retirement funds after your surviving spouse’s death, you may wish to consider other planning alternatives such as a marital agreement or trust arrangement.

Children Beneficiary Considerations

If you wish to leave your IRA to your adult children, as primary or contingent beneficiaries, it may be simplest to designate your children each individually by percentage so they can each separately elect how they wish to set up their own inherited retirement account.  However, where a 40 year old male child could have previously stretched out inherited IRA distributions over his life expectancy (38.5 years), now the inherited IRA must be distributed to the child within the 10-year rule.  If this adult child is already in a higher income tax bracket the additional income tax created by withdrawing all the inherited retirement account proceeds out during his prime income earning years could be significant.  If you also wished to leave assets to grandchildren who were presumably in a lower income tax bracket, perhaps future income tax considerations would weigh in on retirement account beneficiary selection as part of the overall estate plan.

If your child is a minor, you may wish to designate a trust established for the benefit of the minor child under your estate plan as beneficiary of the minor child’s share your retirement accounts. This would avoid Conservatorship that would otherwise be required to manage the inherited retirement account and distributions therefrom until the child reached age of majority. Further, a trust could be used to manage inherited retirement accounts and distributions therefrom beyond age of majority (age 18 in Arizona), pursuant to terms you believe are more favorable (e.g., to age 25).

Disabled or Special Needs Beneficiary Considerations

Although a disabled person qualifies as an EDB for lifetime stretch purposes, it may be preferable to designate a supplemental needs trust (aka third party special needs trust) as the beneficiary of said disabled person’s share of your retirement account to provide proper management of the funds and/or prevent loss of important means-tested government benefits (e.g., SSI and Medicaid health insurance and long term care benefits). If you have a special needs beneficiary, it is important that you work with an estate planning attorney familiar with drafting and administering special needs trusts.

Charity Beneficiary Considerations

With the elimination of the stretch, there is even more value now in shifting charitable gifts from other sources to traditional IRAs and 401k accounts. This eliminates both the estate and income taxation on the retirement account, maximizing the value transferred to a favored charitable cause.

Trust Beneficiary Considerations

The rules regarding the treatment of trusts as a beneficiary of retirement accounts are complex. You should not designate a trust as beneficiary a retirement account without proper legal advice. If you have designated a trust as the beneficiary to your IRA or 401k an estate plan review is warranted to confirm whether (1) the trust is now the best beneficiary designation under current laws and personal circumstances; (2) if the trust qualifies as a “see through” trust; (3) whether the trust is a conduit or accumulation trust and if that is the best option now; and (4) whether any sub-trusts (e.g., minor’s trust, creditor protection trust, or supplemental care trust) under your trust should be designated as beneficiary rather than the revocable trust to ensure DB or EDB status, as the case may be, for the sub-trust.

If you have not had your estate planning documents and beneficiary designations reviewed this year, call 480-922-1010 or email us at info@bivenslaw.com today to schedule a complimentary estate planning consultation with one of our attorneys. We are available by phone, video conference or in-person.

-Stephanie A. Bivens, Esq.