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SECURE Is Not a Toddler Anymore

Jan 18, 2024

During the 58th Annual Heckerling Institute on Estate Planning, Natalie Choate of Ataxplan Publications took us on a journey through the ever-changing landscape of estate planning for retirement benefits.

We have SECURE, SECURE 2.0, Proposed Regulations, and we’ve gained some clarity. While we have some answers, there are still several questions that need to be addressed to determine proper treatment and the applicable distribution period of an inherited IRA. The new general rule of thumb is an inherited IRA has a ten-year withdrawal period and the account needs to be completely distributed by the end of the tenth year following the IRA account owner’s death. During the ten-year period, the proposed regulations clarify that a beneficiary cannot wait until year ten to withdraw the entire IRA.  Also known as the “at least as rapidly” rule, the proposed regulations state that the IRA must be withdrawn over the beneficiary’s life expectancy beginning the year after the participant’s death. 

However, before we utilize the general rule of thumb, the following questions should be asked:

  1. Did the decedent die before or after their required beginning date (RBD)?
    1. SECURE and SECURE 2.0 made changes to the RBD. Now there are four different age-based RMD starting times:
If the participant was born…    The first “distribution year” is the year they reach this “applicable age”   RBD is April 1 of the year after the first distribution year (i.e.. the year participant reaches age…)  
Before 7/1/1949   70 1/2 71 1/2
After 6/30/1949 but before 1951   72 73
Born after 1950 but before 1960   73 74
Born after 1959   75 76
  1. *The above referenced table was prepared by Natalie Choate and included in her materials from Heckerling.

2.  What category is the beneficiary?

    1. There are now three different categories of beneficiaries:
      1. Eligible designated beneficiaries (EDBs), which include the following individuals/beneficiaries:
        1. A surviving spouse,
        2. Minor children of the participant (minor considered under the age of 21),
        3. Disabled or chronically ill individuals, or
        4. A beneficiary not more than ten years younger than the participant.
      2. Plain old designated beneficiaries (PODBs), which include the following individuals/beneficiaries:
        1. All non-EDB beneficiaries and/or
        2. For example, siblings, children older than age 21, and grandchildren.

iii.  Non-designated beneficiaries (NDBs), for instance, the participant’s estate.

b.  If a trust is named as the beneficiary of the retirement account, you need to look at who the beneficiaries of the trust are, and what beneficiary category do they fall into. Are the beneficiaries EDB, PODB, NDB, or a combination of all three?

Once the questions above have been answered, the journey to determine the appropriate distribution period for the beneficiaries has just begun.

Prior to the participant’s death, there are a few items that should be considered and planned for related to the retirement account:

  1. Charitable planning:
    1. To help achieve the desired charitable intent, do you allocate a specific portion of the retirement account balance for charitable beneficiaries, or
    2. Do you include language in the trust agreement that allows for the trustee to allocate trust income toward charitable contributions?
  2. Trust for the benefit of multiple beneficiaries:
    1. If a trust for the benefit of multiple beneficiaries is named as the beneficiary of the retirement account, consideration should be given whether that trust should be kept as one account, or if the account should be separated into separate shares for the beneficiaries.
    2. The age range of the beneficiaries needs to be understood to make an informed decision. For younger beneficiaries, it could mean that their deferral options are cut short.
  3. Roth IRA accounts:
    1. While inherited Roth IRAs are subject to the same rules as traditional IRAs, if a participant has both types of accounts, consideration should be given whether the beneficiaries for each account should be the same.
    2. Is there still an option to continue the post-tax growth of the Roth IRA account?

While the SECURE Act and SECURE 2.0 have given us new guidelines and rules to follow, the complexity of planning for inherited retirement accounts remains. If you’re wondering whether you have properly accounted for your retirement accounts as part of your estate and income tax plan, speak to your advisor.

Stay tuned for an upcoming EisnerAmper webinar covering even more Heckerling highlights.

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Derek M. Dockendorf

Derek Dockendorf is a Tax Partner

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