THE “BEST PRACTICES” WHEN USING

FORE! TRUST SOFTWARE

AFTER ENACTMENT OF THE SECURE ACT
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act)
was signed into law on December 20th as part of the Further Consolidated Appropriations Act,
2020, a gigantic compromise spending package. As has been duly reported in newspapers,
magazine articles, professional periodicals and blogs on the internet, some of the SECURE Act's
major taxpayer friendly points include postponing the age at which distributions must begin from
70½ to 72, allowing additional contributions from “earned income” after attaining age 72,
liberalization of the rules governing “multiple employer plans”, and a requirement that part-time
workers be given greater opportunity to participate in 401(k) plans. But with these tax benefits
comes the necessity of “paying back” the lost revenue; and that is the rub!

Prior to the passage of the SECURE Act, individual beneficiaries of retirement accounts (for
simplicity, hereafter “accounts”) as well as “qualified trusts” could establish inherited accounts
and withdraw the funds from those accounts over the beneficiary’s life expectancy (or the eldest
beneficiary life expectancy in the case of a trust) This allowed the account funds to grow without
being subject to income tax until they were distributed to the beneficiary. The required minimum
distributions (“RMD’s”) from inherited accounts each year were percentages of the remaining
funds in the inherited accounts, and those percentages increased each year. Younger retirement
account beneficiaries with long life expectancies could benefit significantly from these minimum
distribution rules, as they were only required to withdraw small percentages from their inherited
accounts each year, and the remaining funds could continue to grow and defer income taxes. Most
qualified trusts required the RMD’s to be distributed from the trusts to or for the benefit of the
beneficiaries immediately after they were received by the trusts (known as a “conduit” trust).
Inherited IRA accounts that took advantage of this life expectancy payout method were known as
“Stretch IRAs.”

The SECURE Act largely eliminated the Stretch IRA for account owners who die after 2019 and
replaced it with a new scheme which generally requires an individual beneficiary (or a qualified
trust for an individual beneficiary) to withdraw the entire inherited account balance by December
31st of the year that contains the 10th anniversary of the account owner’s date of death (in the
interim, no distributions are required, as long as all funds are out of the inherited account by that
deadline). This 10-year rule will significantly accelerate the payment of income taxes for most
inherited accounts and will likely result in more income taxes as the beneficiaries are pushed into
higher income tax brackets because of larger inherited retirement account distributions during,
presumably, their higher earning years.

Certain categories of beneficiaries [known as Eligible Designated Beneficiaries (“EDB’s”)] will

still be able to use a Stretch IRA. These beneficiaries include surviving spouses, disabled or
chronically ill individuals (as defined by federal law), and individuals less than 10 years younger

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than the retirement account owner. In addition, qualified trusts for the benefit of these individuals
may also still use Stretch IRA’s. Note that surviving spouses may also continue to rollover
inherited accounts into their own IRA accounts under the SECURE Act. Minor children
beneficiaries of the account owner, or qualified trusts for the benefit of such minor children, may
use the child’s life expectancy for RMD’s until the child becomes an adult, but must switch to the
10-year rule thereafter. These new rules also increase the planning options of using an
“accumulation” trust rather than the “conduit” trust.

An accumulation trust gives the trustee discretion on whether to pay out or retain RMD’s within
the trust. For that reason, an accumulation trust can solve the problem of the trust beneficiary
receiving an unexpectedly large distribution, along with the risk of creditors accessing those assets.
However, because IRA distributions generate an income tax burden and income accumulated
within a trust often is taxed at the top income tax rate, the use of an accumulation trust could have
significant income tax consequences. There is good news for drafters: Since the life expectancy
payout is no longer an option for accumulation trusts, it no longer matters who is the “oldest
beneficiary” of the trust.

From an estate planning point of view, whether using FORE! TRUST SOFTWARE or not, every
advisor should review with their clients the client’s wishes and discuss how the client’s current
estate plan may be affected. This may result in:
• Revision of beneficiary designation forms.
• Revision of wills and trusts that include provisions creating trusts which had been intended
to hold IRAs and preserve the stretch IRA benefits while the beneficiary is still alive.
• Complete rethinking and restructuring of the planning for the IRA account. This might
include designating a charity as a beneficiary of the account and perhaps using life
insurance or other planning steps to address the economic value of what is given to charity.
Another possible alternative is paying the IRA balance to a Charitable Remainder Trust
(“CRT”) on death that will stretch out the distributions to the beneficiary of the CRT over
that beneficiary’s lifetime under the CRT rules; that plan might be paired with a life
insurance trust to replace the assets ultimate passing to charity under the CRT
requirements. With a Roth IRA, acceleration does not increase taxes, since the distributions
are tax-free—the acceleration just means loss of future tax-free growth; thus, another
response to SECURE will presumably be increased Roth conversions during life by IRA
owners, especially if the IRA owner is in a lower tax bracket than he/she expects his/her
beneficiary to be (often a correct expectation if the beneficiary is a trust).

The third bullet-point above is beyond the scope of our discussion here; it will be, I am sure, fodder
for many upcoming continuing education seminars and presentations. It is my purpose to review
some of the probable client scenarios and give my thoughts on how to best implement these
situations within the newly modified templates in the Fore! Trust Software “Trusts and Wills”
template set.

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That being our goal, let’s start with one caveat: Do not confuse the payout rule applicable to a trust
with the actual terms of the trust itself! Whatever payout rule applies to the trust (e.g., the 10-year
rule) does not change the terms of the trust; it just dictates when the trust must withdraw all the
money from the retirement account, not what the Trustee can/must do with that distribution once
received (with the exception of the conduit trust which requires all plan distributions to be
immediately distributed to the conduit beneficiary). For example, Client leaves his IRA to an
accumulation trust for the life benefit of his son, Junior. The trustee is to use all income and
principal as the trustee deems advisable for Junior’s benefit. Upon Junior’s death, the trust is to
terminate and be distributed outright to Junior’s issue, per stirpes. Client dies in 2020; the trustee
must withdraw all of the IRA money from the inherited account no later than December 31, 2030.
But that doesn’t mean the trust will suddenly terminate in 2030. The trustee will continue to hold
the after-tax proceeds of the IRA distribution on the same trust terms as before until Junior’s death.

There are basically three options (with some exceptions) for IRA beneficiary planning:
(1) Leave the IRA outright to the beneficiary using the account holder’s beneficiary
designation form (hereinafter the “Form”);
(2) Make a fully-funded revocable living trust or a testamentary trust under a Will (both
hereinafter as the “RLT”) the primary beneficiary or contingent beneficiary of the IRA;
and,
(3) Utilize a specialized, “stand-alone” IRA Beneficiary Trust as the primary beneficiary or
contingent beneficiary of the IRA (the “Beneficiary Trust”).

Within the Fore! Trust Software templates, there are very important differences and benefits:

(1) Our RLT language limits the division of the inherited account to only the account owner’s
issue, per stirpes (i.e., no other type of beneficiaries and no unequal distributions). The
RLT provides for the option of either a conduit trust or of an accumulation trust (the
selected type will apply to all beneficiaries) but it does provide that a share for a disabled
beneficiary shall be allocated to any Special Needs Trust (“SNT”) which has been or is
created for such disabled beneficiary.
(2) Our Beneficiary Trust can be the primary beneficiary of distributions for the lifetime of a
spouse which maintains the EDB status and life expectancy payout; the Beneficiary Trust
can hold for a single non-related beneficiary or for the issue of the account owner in equal
or unequal allocations. Only the Beneficiary Trust provides for the election to switch from
the initially designated type of trust distribution for each beneficiary to the other (i.e., from
a “conduit trust” for one beneficiary to an “accumulation trust” for that beneficiary or from
“accumulation” to “conduit”); this flexibility can be very important for tax planning,
creditor protection and a minor or a disabled or a potential “spendthrift” beneficiary. This
election must be made prior to September 30th of the year after the account owner’s death
and can only be made once.

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With the above in mind, let’s get started:

Scenario #1: No spouse and no issue.

Use either the Form or, if for only a single individual, the Beneficiary Trust. Do not make
the RLT the beneficiary.

Scenario #2: Spouse but no issue.

Use the Form designating the spouse as the primary beneficiary and either the Form or, if
for only a single individual, the Beneficiary Trust as contingent beneficiary. Do not make the RLT
the beneficiary.

Scenario #3: Spouse (no issue on the spouse’s control) and then to issue.
Use the Form designating the spouse as the primary beneficiary (note, this allows the
spouse to “roll-over” the IRA to the spouse’s IRA and, thus, have the right to change the
beneficiaries of the IRA after his/her death – hence, use only when there is no issue on the spouse
having this control) and designate the children as the contingent beneficiaries either on the Form
(for outright distributions); in lieu of outright distributions to the children, designate the RLT or
the Beneficiary Trust as the contingent beneficiary for the additional planning options mentioned
above.

Scenario #4: Spouse (no control is to be given to the spouse) and then to issue.
Designate the Beneficiary Trust as the primary beneficiary to provide for the spouse for
his/her lifetime and then to hold and distribute to a single designated beneficiary or distribute
equally or unequally to the children. Do not use the Form or the RLT.

Scenario #5: No Spouse (or Spouse not to be included in IRA); to issue, per stirpes.
Use the Form to designate the issue as the beneficiaries either on the Form (for outright
distributions); in lieu of outright distributions, designate the RLT or the Beneficiary Trust as the
beneficiary for the additional planning options mentioned above.

Scenario #6: No Spouse (or Spouse not to be included in IRA); to issue but not per stirpes.
Use the Form to designate the issue and the percentages as the beneficiaries either on the
Form (for outright distributions), or designate the Beneficiary Trust as the beneficiary for the
additional planning options mentioned above. Do not make the RLT the beneficiary.

Scenario #7: Spouse and minor children.

Use the Form designating the spouse as the primary beneficiary if there is no issue on
control; otherwise, designate the Beneficiary Trust as the primary beneficiary to provide for the
spouse for his/her lifetime and then to hold and distribute to distribute equally or unequally to the
children. If the spouse is the primary beneficiary using the Form, either designate the RLT or
designate the Beneficiary Trust as the contingent beneficiary for the additional planning options
mentioned above.

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Scenario #8: No Spouse (or Spouse not to be included in IRA) and minor children.
Either designate the RLT as the primary beneficiary (all children will get equal shares and
all shares are the same type of trust) or designate the Beneficiary Trust as the primary beneficiary
for the additional planning options of equal or unequal shares and the right to switch from the
initially designated type of trust distribution for each beneficiary to the other (i.e., from “conduit”
to “accumulation” or from “accumulation” to “conduit”).

Scenario #9: Spouse and a disabled or chronically ill beneficiary (hereinafter “disabled”).
If there is no issue on control, use the Form to designate the spouse as the primary
beneficiary; otherwise, designate the Beneficiary Trust as the primary beneficiary to provide for
the spouse for his/her lifetime. If using the Form for the spouse as primary beneficiary, you can
also designate on the Form, as the contingent beneficiaries, the appropriate percentage for the
disabled beneficiary to be distributed to a “stand-alone” SNT (Fore! has both an irrevocable 3rd
person SNT and a revocable 3rd person SNT as options) and the remainder in equal or unequal
percentages to the other beneficiaries outright or you can just designate the RLT as the contingent
beneficiary if all beneficiaries, including the disabled beneficiary, are the children of the account
owner and all will receive equal shares (as mentioned, our RLT retirement language provides for
an existing SNT to receive the disable child’s share). Do not use the Beneficiary Trust

Scenario #10: No Spouse (or Spouse not to be included in IRA) and a disabled beneficiary.
Use the Form to designate, as the primary beneficiaries, the appropriate percentage for the
disabled beneficiary to be distributed to a “stand-alone” SNT (Fore! has both an irrevocable 3rd
person SNT and a revocable 3rd person SNT as options) and the remainder in equal or unequal
percentages to the other beneficiaries outright or you can just designate the RLT as the primary
beneficiary if all beneficiaries, including the disabled beneficiary, are the children of the account
owner and all will receive equal shares (as mentioned, our RLT retirement language provides for
an existing SNT to receive the disable child’s share). Do not use the Beneficiary Trust

PLANNING NOTE: Because of the favorable treatment of an inherited account for the benefit of
a disabled beneficiary, an accumulation trust for a disabled beneficiary is the exception to the
general EDB rule—it can qualify for EDB treatment (i.e., life expectancy distributions) even
though the disabled/chronically ill individual, as the life beneficiary of the accumulation trust, is
not deemed to be the “sole” beneficiary of the retirement plan (as with a conduit trust). At the
death of the disabled lifetime beneficiary, the 10-year rule would then apply. Given this favorable
treatment, it may be advisable to use the IRA benefits to fund a SNT (or allocate a higher
percentage of the benefits).
For example, Client has three sons, Junior (who is disabled), Mike and Charlie. Client has
a $1M IRA and has $2M in other assets; it is Client’s wish that all three sons are to be treated
equally. Client has created, during his lifetime, an unfunded, revocable SNT using the Fore! Trusts
& Wills software for Junior’s benefit; Client’s beneficiary designation for the IRA account
provides that the primary beneficiary will be the SNT. Client’s RLT provides that Mike and Charlie
will be equal beneficiaries of the RLT. Client dies in 2020. The SNT is funded with the $1M IRA

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account but only Junior’s life expectancy payouts need to be actually distributed to the SNT (and
taxed at Junior’s tax bracket); these payouts continue for Junior’s lifetime and then, at his death,
no taxable distributions would have to be made for an additional 10 years. Once all IRA benefits
have been distributed to the trust, the trustee would terminate the trust and distribute the remaining
trust corpus as Client has specified (e.g., equally to Mike and Charlie or, perhaps to a charity).
Obviously, real life does not generally provide the perfect allocation of assets, but a formula
provision can result in the same equal allocation.

Scenario #11: Any of the above scenarios but including a charity.

A charity can be the primary beneficiary of an IRA account with no adverse income tax
consequence (a charity pays no income tax). If a conduit trust is created as the primary beneficiary,
a charity can also be the contingent beneficiary because all distributions made from the inherited
account to the trust must be passed out more or less immediately to the “conduit” beneficiary of
the trust. Thus, the conduit beneficiary is considered the sole beneficiary of that trust and of the
plan for RMD purposes, regardless of who will inherit the trust and remaining plan benefits if the
conduit beneficiary dies prior to complete distribution of the retirement plan.

It is different with an accumulation trust since the trustee can “accumulate” inherited account
distributions in the trust during the lifetime of the initial beneficiary for possible later distribution
to another beneficiary. All beneficiaries who might ever be entitled to receive such accumulations
are “counted” as beneficiaries for purposes of applying the minimum distribution rules. Thus, an
accumulation trust qualifies as a see-through trust only if all of the countable beneficiaries are
“identifiable individuals” [i.e., individuals, not an entity, and are able to be determined if a class
of potential beneficiaries (“my descendants” vs “in the discretion of the trustee”). The exception
to this rule is an accumulation trust being held for a disabled beneficiary.

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