Question: Did the SECURE ACT kill the ‘stretch’ IRA?  What if my client wishes to leave her IRA benefits to her disabled child (do we still lose the stretch)?  Finally, what the heck does SECURE actually stand for?

Answer: Under SECURE, the lifetime ‘stretch’ IRA is replaced with a 10-year rule for the vast majority of beneficiaries. Generally, this change applies to deaths after December 31, 2019. However, the effective date is extended for two years (for deaths after December 31, 2021) for governmental plans, including 403(b) and 457(b) plans and the Thrift Savings Plan (note that the new rules do not apply to defined benefit plans). The 10-year rule dictates that accounts must be emptied by December 31 of the tenth year following the year of death. There will be no annual RMDs.

Saying that the Setting Every Community Up for Retirement Enhancement (SECURE) Act ends the stretch IRA opportunity for many people is true, but not the entire story.  Until further guidance, regulations, or technical corrections are published, the answers to many SECURE Act questions are not completely known.

The SECURE Act addresses estate planning for IRA owners and qualified plan participants by putting beneficiaries into three categories:

1. Eligible designated beneficiaries (EDBs)
2. Non-designated beneficiaries (NonDBs)
3. Designated beneficiaries (DBs)

For EDBs, the pre-SECURE Act rules largely remain in place, so life-expectancy-based schedules of required minimum distributions (RMDs) remain possible, permitting extended tax deferral. EDBs include surviving spouses, disabled and chronically ill (DCI) individuals, minor children of the participant, and beneficiaries less than 10 years younger than the account owner or plan participant.

The terms “disabled” and “chronically ill” in this context, in my opinion, are not entirely clear, but it appears these terms are defined by reference to other sections of the tax code.

A disabled heir is defined in the tax code as “an individual who 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.  However, if the individual can engage in “any substantial gainful activity” even if very limited, that person will not qualify for this benefit.

A chronically ill heir is defined in the tax code as any individual who has been certified by a licensed health care practitioner as— (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, (ii) having a level of disability similar to the level of disability described in clause (i), or (iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. Each of the following is an activity of daily living: (i)Eating. (ii) Toileting. (iii) Transferring. (iv) Bathing. (v) Dressing. (vi) Continence.”

The above definition suffers from the same overly restrictive terms as the definition of “disabled” above. Many intended beneficiaries are living with challenges that may limit or even prevent gainful employment, but they are not so severely incapacitated as to meet the requirements of chronically ill according to the above definition. Yet, these same people who need the protection of a trust, and who may desperately need the economic benefits from the plan assets to be bequeathed, will be forced to have the plan balance distributed in 10-years and lose the continued tax-deferred growth, etc.