New IRA Rules for You and Your Living Trust
How Do the SECURE Act Final Regulations Affect Your Estate Plan? Key Takeaways
As you may or may not be aware (if you’re not, you need to be!), at the end of 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Since then, Congress, the U.S. Department of the Treasury (Treasury), and the IRS have, in their wisdom, worked to amend and interpret, and reinterpret, the SECURE Act. As of the date of this article (October 14, 2024), we now have: the SECURE Act 1.0; SECURE Act 2.0; and Treasury’s (now) Final Regulations that interpret SECURE Act 1.0. Yes, trying to understand the SECURE Act and how it affects you and your retirement assets is a bit like trying to understand a black hole. But California estate planning attorney Ryan J. Casson works awful hard to do just that (how retirement assets are best handled in your estate plan and in accordance with your goals, not black holes).
Treasury’s August 2024 Final Regulations expand upon and clarify various parts of the SECURE Act. As a reminder, the SECURE Act amends much of the overarching framework for how the IRS looks at your retirement assets. By retirement assets, we are referring to “qualified retirement accounts,” from IRAs and 401(k)’s to Roth IRAs and 457(b)’s and almost everything else in between. Without getting into the weeds, this framework appears in Section 401(a)(9) of the Internal Revenue Code (which reads like a maze). So, if you thought you were “doing well” when you did your duty and contributed each month and for decades a chunk of your paycheck into your IRA (or 401(k), 403(b), etc.), and thought you would be able to enjoy financial ease in retirement, you had better understand the IRS’s new retirement forfeiture framework. That’s right: potential retirement account forfeiture!
Here are a few general takeaways and key points under the Final Regulations. As Attorney Ryan J. Casson is not a CPA or financial advisor and does not give out financial advice, these points are addressed for purposes of estate planning. Ryan works to assist his California clients understand how death, trusts, beneficiary designations, and retirement and inheritance objectives intertwine with the SECURE Act in light of the long anticipated, and now received, Final Regulations. Understanding the new rules is crucial for IRS compliance and optimal estate plan management.
For our purposes (planning for what happens to your retirement accounts after your death), the SECURE Act applies to deaths after 2019 (deaths on or after January 1, 2020), and the Final Regulations for Required Minimum Distribution (RMD) analysis purposes (discussed below) are applicable beginning on or after January 1, 2025.
· Required Beginning Date (RBD) for RMDs. April 1 of the year following the later of the year in which the account owner (often referred to as the employee, participant, or just “owner”) attains the “applicable age” or earlier retires. If you were born in 1951, the applicable age is 73.
· Parity for Designated Roth Accounts. Now, as was the case for Roth IRAs, owners of designated Roth accounts (a Roth 401(k)), are not required to take RMDs during their lifetimes. This is one of the few positive takeaways from the SECURE Act. Also, as 401(k) accounts, but not IRAs, are governed under the Employee Retirement Income Security Act (ERISA), 401(k) planning may be able to achieve an amount of asset protection unavailable with IRAs, which can be discussed with your attorney and CPA.
· Special Rules for Surviving Spouses. A Surviving Spouse may elect to be “treated as” the deceased owner for RMD purposes. Depending on whether the owner died before or after the RBD, electing to be treated as the deceased owner for RMD purposes may or may not be automatic. The “treated as” rule can also cause RMDs to be smaller, meaning that more money would remain in the account, which could allow the account value to grow over time. The Surviving Spouse’s age and cash flow may also impact the choice of whether to elect to be treated as the deceased owner or rollover. If the account owner died before their RBD, the Surviving Spouse may elect to defer beginning taking RMDs until the end of the year in which the owner would have reached the applicable age. Jumping on to the rollover bandwagon is not always the best move, in particular if the Surviving Spouse is not yet 59 ½ years old. Consulting with a CPA and an estate planning attorney is critical for the Surviving Spouse.
· RBD. Unless the qualified retirement account is a Roth account, in general, the owner must begin taking RMDs no later than April 1 of the year following the year in which they attained the age of 73.
· RBDs After the Death of the Owner. After the owner has died, whether RMDs are required and the deadline for liquidating the inherited account depends on (1) whether the account owner died before or after their RBD and (2) whether the beneficiary is an EDB, DB, or NDB. It gets complicated, quick:
If the deceased owner or participant died before their RBD, an EDB must begin taking RMDs no later than the end of the year following the calendar year containing the decedent’s death. Such RMDs are paid/taken each year and are based on the remaining life expectancy of the EDB (Life Expectancy Rule).
If the death occurred after the RBD, the EDB’s annual RMD requirement remains, except the RMDs will be based on a term and concept known as the “at least as rapidly” rule (ALAR): the life expectancy of the younger of the deceased owner/participant or EDB is used to calculate and satisfy the EDB’s RMDs (in other words, the longer remaining life expectancy gets used). Estate planning attorney and IRA guru Natalie Choate terms this the “Ghost Rule.” Stated another way, the “Outer Stretch” is the earlier of the end of the tenth (10th) year after the calendar year of the decedent’s death or the EDB attaining his or her life expectancy as of the end of the calendar year following the calendar year of the deceased owner’s death.
Note that, unlike DBs (beneficiaries who are designated beneficiaries but are not eligible designated beneficiaries), who do not have annual RMD requirements but who must liquidate the account no later than December 31 of the calendar year that contains the tenth (10th) anniversary of the deceased owner’s death if the owner died before their RBD, and fall under the ALAR and RMD methodology for ten (10) years after the owner’s death (annual RMDs and the account must be distributed no later than the end of the calendar year that contains the tenth (10th) anniversary of the deceased owner’s death) if the owner died after their RBD, EDBs live under the Life Expectancy Rules, have annual RMD requirements (whether or not the deceased owner died before or after their RBD), but are not required to distribute the account in full within ten (10) years after the deceased owner’s death.
As you can tell, there are important planning points to consider, with potential pros and cons depending on whether a potential beneficiary of your IRA or 401(k) is a DB or EDB and your other estate planning objectives (RMDs requirements versus account growth over an EDB’s remaining life expectancy, for instance). At the end of the day, though, unless we’ve already reached our RBD (age 73 for those born between 1951 and 1959, and age 75 if in 1960 or later), we cannot predict whether our death will be before or after our RBD.
The rules are different (and perhaps less kind, depending on how you look at it and the particular facts) if the beneficiary is a Non-Designated Beneficiary (Non-DB or NDB). This is where the Five-Year Rule may come in.
So, if you have a revocable living trust, it is beyond critical that your revocable living trust follow these final rules under the SECURE Act. Even if your beneficiary will be a mere DB, you want to ensure that your DB qualify as a DB under your trust agreement. Again, in general, if the owner died before their RBD, the DB (but not the EDB) will not be required to take RMDs and may wait until year 10 to liquidate the account (the beneficiary (DB) will be wise to consult with a CPA during the first year after the owner’s death). But if the owner died after their RBD (and the inherited account/plan is not a Roth account/plan), both DBs and EDBs will be required to take RMDs each year after the owner’s death (Ghost Rule for EDBs and ) and liquidate the full amount in accordance with the ALAR Rule.
· RMD Requirements for Beneficiaries: So Long, Stretch IRA! As just outlined above, one of the biggest questions that the Final Regulations clarified and confirmed was the controversial rule that, where the owner dies after their RBD, DBs will need to continue taking RMDs every year for 10 years after the owner’s death (unless the beneficiary earlier liquidates). Many commentators argued to Treasury that this rule is unfair, tosses out the longstanding “Stretch IRA” (which allowed beneficiaries to do nothing except let the inherited monies grow inside the IRA/401(k)), and penalizes folks with a retirement nest egg. Treasury disagreed. So long, Stretch IRA! (Unless the account/plan is a Roth or the beneficiary is an EDB.). It appears that Treasury is concerned with preventing a perceived “having your cake and eating it to” scenario: Some folks (EDBs) are allowed to grow an inherited IRA over their life expectancy but, in exchange, are required to take annual RMDs, while others (DBs) do not have to take RMDs where the owner died after their RBD but nevertheless also have an annual RMD requirement (and hence the controversy). Many practitioners had hoped that Treasury and IRS would have agreed that, if the account owner died on or after his or her RBD and the inheritor/beneficiary is a DB who is required to liquidate within ten (10) years, the DB would not be required to take annual RMDs, as the account would be distributed within ten (10) years. We did not win on this point.
· Qualifying as an EDB. Prior to the enactment of the SECURE Act, a living, breathing beneficiary (a person . . . and certain trusts with beneficiaries that are persons) could grow an inherited over their own remaining life expectancy (the “Stretch IRA” referenced above). Such beneficiaries were known as “Designated Beneficiaries” (DBs). Now, Congress and Treasury have given us a new class carved out of Designated Beneficiaries: EligibleDesignated Beneficiaries (EDBs). Whether a beneficiary is a DB or an EDB matters, as EDBs alone can utilize the Stretch IRA rules; DBs, in general, must liquidate the IRA within 10 years of the deceased owner’s death! There are five classes of EDBs:
o Surviving Spouses;
o Minor Children of the Deceased Owner/Participant/Employee (note: under the SECURE Act, minor means age 21);
o Individuals Not More Than 10 Years Younger than the Deceased Owner;
o Disabled Individuals; and
o Chronically Ill Individuals.
In addition, a trust that qualifies as a “See-Through Trust” often qualifies as a DB and, depending on whether the trust beneficiaries are DBs or EDBs and a host of other rules, a distribution period of 10 years or more may often be attained.
Appropriate beneficiary designations are a critical part of your estate plan and should be discussed in depth with your estate planning attorney.
· An Example. Suppose that Divorced Danny, dies in 2025 at age 74. Danny died after his RBD. Danny had met with his California estate planning attorney and CPA and designated his daughter, Diana, age 40, as the 100% beneficiary. Under the Final Regulations, Diana is required to take RMDs every year beginning in 2026 and liquidate the entire account balance no later than December 31, 2035. (Note that Diana will also need to take any remaining 2025 RMD for Danny’s year of death, by December 31, 2025!)
· An Example. Suppose the facts as above but Danny died at age 70, before his RBD. Diana would be required to liquidate the entire account balance no later than December 31, 2035. During this period, Diana would be required to take annual RMDs.
· More Special Rules: Minor Children. As outlined above, if an owner dies after their RBD and the beneficiary is not an EDB, in general, the beneficiary (DB) will be required to take RMDs each year after the owner’s death and liquidate the full amount of the account no later than 10 years after the owner’s death (but in compliance with the ALAR Rule). However, the rule is different for minor children of the deceased owner: a minor child of the deceased owner (an EDB) is required to take annual RMDs, but upon the minor child attaining the age of majority (21 years old), the Life Expectancy Rule changes to the 10-Year Rule, with full account liquidation being required no later than December 31 of the year in which the child turns 31 years old. This is true regardless of whether the deceased owner died before or after their RBD! This framework applies to certain trusts, too, but the rules are nuanced (i.e., the Immediately Divided Trust Rules and the Separate Account Rules).
The lesson is that, if you have a minor child, you want to discuss your retirement account beneficiary designations with your estate planning attorney and CPA to ensure that maximal monetary benefits and other estate planning benefits are achieved, including a potential stretch-to-age-31-trust.
· An Example. Suppose the facts as above, but Diana is 14 years old when her father dies. Whether or not Danny died before or after his RBD, Diana would be required to take annual RBDs; but in the year in which Diana attains age 21, and each following year, Diana would be required to take an RMD based on the 10-Year Rule rather than the Life Expectancy Rule and liquidate the account no later than December 31 of the year that includes her 31st birthday.
· An Example. Suppose the facts as above, except Danny has two daughters, Diana and Elizabeth. At Danny’s death, Diana is 22 years old, and Elizabeth is 10 years old. If Danny’s Beneficiary Designation Form lists the individual names of his daughters, or “My Children in Equal Shares,” or a like designation, Diana, a DB but not an EDB, would be required to liquidate her 1/2 interest in the account no later than the end of the 10th year after Danny’s date of death; whether RMDs (based on Diana’s remaining life expectancy) would be required would depend on whether Danny died before or after his RBD. As to Elizabeth, her 1/2 interest would not need to be liquidated until the end of the year that includes her 31st birthday (a 21-year stretch!). Elizabeth (an EDB) would be required to take Life Expectancy RMDs until her 21st birthday and RMDs based on a 10-Year Payout each year from age 21 through age 31. The same outcome would be achieved if Danny had utilized and designated separate sub-trusts (one for Diana, one for Elizabeth) in his revocable living trust, as per the Immediately Divided Trust Rule and Separate Share Rule. However, through utilizing what estate planning attorneys refer to as a common or pot trust in a revocable living trust, Danny could have achieved a bit of a stretch for Diana, too: with a common trust sub-trust, the Separate Share Rule can be “switched off” and the older adult child (older than 21 years old) can benefit from and, in essence, “claim,” the younger, minor child’s stretch, but with annual RMDs based on Diana’s remaining life expectancy (the life expectancy of the oldest beneficiary would be used) until she (or the youngest minor child) attains age 21 (the account would be required to be distributed in full by December 31 of the year in which the youngest minor child attains age 31, with RMDs (under the 10-Year Rule) continuing each year after age 21 through 31, with Elizabeth too, now, not being required to liquidate her 1/2 within 10 years of Danny’s death)! This technique can minimize what is, in effect, Congressional forfeiture, under the SECURE Act, of children’s inherited retirement assets. If you have larger retirement accounts and a minor child, you will want to discuss this technique with your California estate planning attorney.
· Charitable Beneficiaries. Attorney Ryan J. Casson enjoys working with folks who have charitable intent. Sometimes, it may make excellent sense to name a charity as a beneficiary of a qualified retirement account (outright or in trust), upon consulting with your estate planning attorney and CPA. When a charity is named as a trust beneficiary and an IRA or other qualified retirement account is payable to the trust, whether the trust is a “Conduit Trust” or “Accumulation Trust” matters. In short, in many instances, if a charity is to be a beneficiary of a trust into which a qualified retirement account will be payable, it may be best for the trust to be drafted as a Conduit Trust. A Conduit Trust contains terms that require that all IRA distributions paid to the trust must be distributed and paid out to the beneficiary, each year, whereas an Accumulation Trust give the trustee the discretion to retain in trust or distribute out of the trust the IRA withdrawals. If the trust is an Accumulation Trust, if individuals such as children are named as primary trust beneficiaries and if delaying IRA withdrawals is a goal (in general, the 10-Year Rule would be applicable with adult children trust beneficiaries), the charity may need to be named as a contingent beneficiary.
In addition, unless the account is a Roth account, withdrawn amounts that are not distributed but instead retained inside the trust (which the trustee of an Accumulation Trust would have the discretion to do, such as for asset protection purposes, or if the beneficiary were a spendthrift or struggles with substance abuse), are taxed at compressed income tax rates, which may be undesirable. It is crucial that you talk to your estate planning attorney about your overarching objectives and the potential risks or wrinkles you are willing to accept.
Retirement account planning with charities can be complex and adds an additional layer (or two, or three) to the estate planning onion. The above paragraph does not even scratch the surface of the onion.
In summary, while the Final Regulations confirm advisors’ understanding (and concerns!) under the Proposed Regulations as to certain RMD rules where the deceased owner died after their RBD, there is planning flexibility with minor children and beneficiaries who are disabled or have a chronic illness. Creating what in essence may be called a Stretch IRA via a common trust with at least one minor child beneficiary may be an important technique moving forward (though perhaps not without certain risks). Spouses retain much flexibility, too. Those with more modest retirement assets may wish to name their individual beneficiaries outright and free of trust (in their own name on the Beneficiary Designation Form) rather than the revocable living trust, as the cost and complexity of more advanced trust planning may outweigh the perceived benefits. However, every client is different, and the perceived pros and cons may be different for different individuals. At the Law Office of Ryan J. Casson, the particular estate planning goals of each individual are considered, explored, and discussed in an understandable and straightforward manner, including utilizing common trusts and the Separate Account Rules where appropriate.
Note to the Reader: These rules and techniques may not be as relevant if your retirement accounts are more modest, where administrative ease and inexpense may be more important to you. And, as always, this content is not legal advice and may not be relied on as legal advice; this content is for informational and educational purposes alone.
