Chris Holtzclaw
Chief Fiduciary Officer
Western Region
Families looking for ways to improve their retirement and estate planning and maximize the wealth they pass down to loved ones received clarity from the IRS on provisions in the SECURE Act, the landmark bill signed into law in December 2019.
The SECURE Act – officially called the Setting Every Community Up for Retirement Enhancement Act – was the most significant overhaul of retirement plan regulations in more than a decade. The sweeping legislation provided Americans with more options than ever before to accumulate wealth in their individual retirement accounts (IRAs) and employer-sponsored retirement programs, such as 401(k) and 403(b) plans.
Like most broad legislative changes, the SECURE Act’s statutory language was vague and created confusion for savers and practitioners. That changed on Feb. 24, when the IRS published proposed regulatory amendments to the Act (a PDF of the filing can be downloaded here). Although the IRS’s suggested rules are not final, they provide further clarification that will affect retirement planning and wealth management strategies in the future.
Here are three important takeaways on the proposed regulatory changes:
1| Beneficiaries of inherited IRAs must take annual required minimum distributions
One clarification causing the most reaction involved inherited IRAs and what has been commonly called the “10-year rule.” Under the initial interpretation of the SECURE Act, a non-eligible beneficiary who inherited an IRA from an owner who died on or after the required beginning date (RBD) must withdraw all funds from the IRA by the end of the 10th year following the owner’s death. There also were no annual required minimum distributions (RMDs). Beneficiaries were allowed to withdraw as much as they wanted and whenever they wanted – as long as the full amount was withdrawn by the end of the 10th year.
The proposed regulations now mandate that RMDs be made annually for years 1-9 and the balance withdrawn by year 10. That is a substantial change because, for example, if you inherited an IRA from a deceased family member, the RMDs could significantly reduce tax planning options previously afforded.
2| Definition of eligible designated beneficiaries clarified
Another important change centers on the age of a person who is deemed an eligible designated beneficiary (EDB) for an IRA.
The IRS kept in place the following rules that determine EDBs:
• The surviving spouse of the IRA owner
• A child of the IRA owner who has not reached the “age of majority” (meaning the age when a person becomes an adult)•
• A person who is disabled or chronically ill
• A person who is not more that 10 years younger than the IRA owner
• Certain trusts named as an IRA beneficiary
The new proposed rule now defines a minor child as one who is under the age of 21. The IRS also provided clarification on who qualifies as disabled or chronically ill. The important point is that the EDB must be under the age of 21 – even if state law defines the age of majority as being 18 years old.
3| Detailed regulations on trust as beneficiaries provided
Given the length of the IRS’s regulatory filing (275 pages), a review of how different trusts are affected is a topic unto itself. Nevertheless, the IRS did clarify certain issues related to trusts named as beneficiaries for retirement plan accounts.
The IRS devoted a section detailing the rules for trusts, including, for example, see-through and multiple beneficiary trusts. The recommendations do not differ greatly from the SECURE Act, but provide much-needed adoption of trust terms commonly used by practitioners (i.e., “conduit trust” or “accumulation trust”), how trust beneficiaries are treated as beneficiaries of the retirement plan account owner, treatment for retirement plan rollovers, to name a few.
One final thought: The IRS’s proposed regulations still could change, but at this stage in the process the published guidelines serve as a reliable guideline for what eventually will become law. Now is the time to meet with an estate planning professional and financial advisor to assess how these changes could affect how you are managing your wealth for your family and future generations.
If you would like to learn more about trusts and estate planning, please contact one of our advisors. We are ready to help.
