When it comes to the rules about required minimum distributions from individual retirement accounts and other retirement plans, the SECURE Act begs not only for clarification, but more like a complete translation. This is especially true for the provisions relating to changes related to post-death RMDs after the elimination of the stretch IRA and the addition of the 10-year rule for most non-spouse beneficiaries.
WHEN WILL WE SEE ANSWERS?
IRS has just given us their first cryptic clue as to when we will see the proposed regulations on the SECURE Act’s RMD provisions. When can we expect them? IRS says “soon.”
“I always say it’s in the ‘soon’ category; that means later than imminent but before eventually,” Stephen Tackney, deputy associate chief counsel for employee benefits in the IRS Office of Chief Counsel, said last Friday at the virtual Federal Bar Association Insurance Tax Seminar.
Tackney said the proposed regs will be substantial and will include RMD rules for trusts that are named as IRA beneficiaries.
“The bad news is, boy, does this area get really complicated,” he said. “There are a lot of permutations of what folks want to do that have to be addressed in the regs.” No kidding! Thanks, Congress.
Since actual tax law is rarely written in English (some think it’s Sanskrit), the IRS must write regs to explain what the agency thinks Congress meant by the law. This is no easy task. In fact, when the RMD rules were originally enacted in 1986, the rules were so complicated that it took the IRS 15 years to issue the final regs.
In addition, it’s often the case that the law, as passed by Congress, leaves certain items open for the Treasury Department and IRS to rule on, and that is also done by issuing regs.
There are still numerous unanswered post-death RMD questions as a result of the elimination of the stretch IRA, the addition of the new 10-year rule and the question of how RMDs will work from inherited IRAs for eligible designated beneficiaries, or EDBs, who still qualify for the stretch IRA. The SECURE Act’s IRA trust rules also left many open items for IRS to provide guidance on.
The answers the regulations provide will be essential for advisers to share with affected clients, many of whom will have to take RMDs this year.
With regard to whether the SECURE Act will need technical corrections with respect to the beneficiary RMD rules, Tackney said that he doesn’t think so and that the proposed regs will address these issues with many examples to illustrate how the rules will work.
Here are just some of the unknowns left by the SECURE Act that the proposed regs will likely address:
SEPARATE ACCOUNTING FOR MULTIPLE BENEFICIARIES
Multiple beneficiaries and separate accounts are not addressed in the SECURE Act. Will each individual designated beneficiary be able to use their own life expectancy for RMDs? There’s nothing in the SECURE Act that suggests that they will not. In any case, this will be less of an issue because most non-spouse beneficiaries are now subject to the 10-year payout rule.
TREATMENT OF PRE-2020 INHERITANCES
The SECURE Act says that when an IRA owner died before 2020, the account is grandfathered and the stretch IRA will still apply. RMDs can continue to be paid over the life expectancy of the designated beneficiary. However, upon the original beneficiary’s death, any successor beneficiary will be subject to the 10-year rule.
How this would apply in the case of a trust with multiple beneficiaries where the IRA owner died before 2020 is unclear. At which trust beneficiary’s death would the 10-year rule apply?
TRUSTS WITH MULTIPLE BENEFICIARIES (EDB AND NON-EDB)
The SECURE Act includes provisions allowing trusts for disabled or chronically ill individuals to stretch RMDs from an inherited IRA over the single life expectancy of the trust beneficiary — even if such trusts have other designated beneficiaries who are not eligible designated beneficiaries. Other trust beneficiaries who are not disabled or chronically ill would be subject to the 10-year payout rule.
The SECURE Act does not indicate whether such treatment would be available for trusts with both non-eligible designated beneficiaries and other EDBs besides disabled or chronically ill individuals, such as a spouse, a minor child (up to majority) or beneficiaries not more than 10 years younger than the IRA owner.
While there is no official IRS guidance at this point, it appears that see-through conduit trusts that qualified under the old rules should still qualify under the new rules as designated beneficiary trusts, allowing the stretch IRA, but only for EDBs.
TRUSTS WITH MULTIPLE EDBs
It’s not clear what would happen with a trust with multiple minor children as EDBs. Would the 10-year clock rule apply after they all reach majority? Or when the oldest beneficiary reaches majority?
APPLICABLE MULTIPLE BENEFICIARY TRUSTS WITH MULTIPLE SPECIAL NEEDS BENEFICIARIES
While the SECURE Act will limit most beneficiaries to a 10-year payout, there are special rules for trusts for disabled or chronically ill beneficiaries that allow RMDs to be paid from the IRA to the trust using the beneficiary’s life expectancy.
For disabled or chronically ill beneficiaries, the SECURE Act includes a provision allowing for “applicable multi-beneficiary trusts.” However, it is unknown how an AMBT with more than one disabled or chronically ill individual would be handled for stretch IRA RMDs.
This is only a sampling of the many SECURE Act issues we expect the IRS to address in the proposed regs that will be coming, well, “soon.”
Ed Slott: When to name a trust as an IRA beneficiary
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.