Many of you probably are hearing that a new tax law called the SECURE Act was passed this year. From an estate planning perspective the main thing to be aware of in this law is the provision regarding Accelerated Distribution Requirements After Death.
What this provision does is force an accelerated distribution timeline of an IRA and other defined contribution plans balances to certain beneficiaries. Before this law was passed any inheriting person either named directly as a beneficiary or via a revocable living trust being named as a beneficiary could slowly over their lifetime take ‘stretched’ distributions from these tax-deferred retirement accounts.
As a revenue raising measure, to offset the cost of other provisions, the SECURE Act greatly shortens the period over which some beneficiaries of IRAs and defined contribution plans must receive distributions of their inherited account balances. The types of beneficiaries who are considered “eligible designated beneficiaries” and therefore able to take distributions over a longer time period still are as follows:
- surviving spouses,
- children younger than the age of majority (who cease to be “eligible designated beneficiaries” when they reach that age),
- beneficiaries who are totally and permanently disabled or who are chronically ill and are medically certified as reasonably expected to remain so for a “lengthy” period, and
- beneficiaries who are no more than ten years younger than the account owner.
A natural person who is identified as a beneficiary by the terms of the plan or IRA (either by name or by relationship to the decedent) is a “designated beneficiary.”
Non-eligible “designated beneficiaries,” such as grandchildren, formerly followed the same distribution rules as “eligible” beneficiaries. Now they are required to receive the entire balances of their inherited accounts no later than the end of the tenth calendar year after the account owner’s date of death. Minor children have ten years after reaching their majority to empty their accounts.
Multi-beneficiary trusts with only natural persons as beneficiaries are generally not “eligible” beneficiaries, even if all of the trust beneficiaries meet the criteria for “eligible” status. To avoid the 10-year rule, the trust must be divided into separate trusts no later than the account owner’s death.
The distribution rule for each of the successor trusts is then the same as if the trust beneficiary were directly named as the beneficiary of the account. There is an exception for multi-beneficiary trusts whose beneficiaries are all disabled or chronically ill. Because these rules are already effective, estate planners will want to revisit their clients’ trust structures at the earliest feasible opportunity.
I recommend reaching out to me if you would like an appointment to better understand how this new law may or may not affect you or not. It is always best to reach out to me when things like this change so that I can do a case by case analysis of your individual situation in order to determine what, if any, steps need to be taken to protect your estate planning goals.