THE NEW DISTRIBUTION RULES UNDER THE “SECURE ACT”

03/2023

1. When do I have to start distributions?

   The Required Beginning date is generally April 1, after the later of (i) the calendar year the employee turns 72, or (ii) the calendar year the employee terminates employment with the employer sponsoring the plan, unless the employee owns 5% or more of the employer. Ownership is determined in the year the employee turns age 72. (This only applies to qualified plans not IRAs.) Therefore, changes in ownership after age 72 should be irrelevant. Distributions are paid out based upon the Uniform Lifetime Table which assumes the contingent beneficiary is 10 years younger. If your spouse is the beneficiary and is more than 10 years younger, you can use the joint and survivor table which stretches the age out longer. For example, under the normal table, a 72-year-old with a spouse who is 62 or older, has a payout rate of 27.4 years. However, if the 72-year-old has a 40-year-old spouse, the payout rate is 46 years.

2. Death before the required distribution date.

   The payout is either over 5 years, 10 years, or possibly the life expectancy of the beneficiary, depending on whether you have a qualified Designated Beneficiary or an Eligible Designated Beneficiary. Remember, Roth IRAs are always covered by this rule.

   • What is a Designated Beneficiary?

     An individual or a Designated Beneficiary Trust – all of the countable beneficiaries are individuals. The designated beneficiary must be identifiable, such as “my children.” An estate or charity is not a qualified Designated Beneficiary. You make this determination on date of death, unless the beneficiary disclaims the benefit by no later than September 30 of the following year, subject to the 9-month rule, which could be well before September 30 or is paid out before September 30.

   • What is an Eligible Designated Beneficiary?

     A spouse, a child under age 21, a disabled or chronically ill person, or someone not more than 10 years younger than the employee. These rules are determined on the death of the employee. If a child becomes disabled after the death of the employee, the 10-year rule will apply.

   • What if I do not have a Designated Beneficiary or Eligible Designated Beneficiary when I die?

     If there is no Designated Beneficiary or Eligible Designated Beneficiary, it must pay out in five years. Five years means the year which is the fifth anniversary of the date of death. If the beneficiary dies anytime in 2022, the five years ends at the end of 2027, so it is really close to six years. The distribution can be delayed until the end of the five-year period.

   • What if I have a Designated Beneficiary who is not an Eligible Designated Beneficiary when I die?

     Ten years, if there is a Designated Beneficiary who is not an Eligible Designated Beneficiary. Ten years means the year which included the 10th anniversary of the date of death. If the person died anytime in 2022, the distribution must be paid out by the end of 2032. YOU CAN WAIT UNTIL THE 10TH ANNIVERSARY OF DEATH. You do not have to do annual distributions in this scenario, unlike death on or after RMD described below.

   • What if I have an Eligible Designated Beneficiary who is less than 10 years older?

     The existing life expectancy of the eligible designated beneficiary using the single life table reduced by one each year. On the death of the eligible designated beneficiary, it pays out by the 10th year after death or the remaining life expectancy of the eligible designated beneficiary. If the distribution is from a qualified plan, it can give the option to choose the ten-year rule or the life expectancy rule.

   • What if my spouse is the sole beneficiary?

     The surviving spouse could rollover or treat the deceased spouses IRA as an inherited IRA and delay distribution until that later of the year in which the first spouse would have attained age 72, or the year after death. (You cannot use the delay for the predeceased spouse if you remarry.) If the funds are coming from an IRA that allows the beneficiary to elect a 10-year deferral if death occurs prior to RMD, the surviving spouse could hold the inherited IRA for 9 years and then roll it over. But, if the surviving spouse would be in pay status on the rollover, you must remove the RMD amounts the surviving spouse would have received if she had transferred the funds to her IRA by age 72. Section 1.402(c) – 2(j)(3)(iii) of the proposed regulations. If spouse dies while still an inherited IRA, (not a rollover) then if the surviving spouse died prior to RMDs, she steps into the shoes of the predeceased spouse, and you test again to see the end date. If death of the surviving spouse occurs after the RMD, then the payment is the shorter of the remaining life expectancy of the surviving spouse, or 10 years.

   • What if my beneficiary is my child who is under 21?

     It pays out over the life expectancy of the child until they turn 21 and then it must pay out over ten years.

   • What if I have multiple beneficiaries?

     For example, if the IRA provides for the owner’s children and a charity, if the charity is still a beneficiary by September 30 of the year after death, then all of the designations are tainted, and the distributions will not qualify for the 10-year rule. If you have a charitable beneficiary, make sure you pay the charity out before September 30 of the next year.

   • What is the definition of disabled or chronically ill?

     The payout can be over the life expectancy of the beneficiary. An individual is disabled if, as of the date of the employee’s death, the individual is 18 or older, and the individual is unable to engage in any substantial gainful activity by reason of physical or mental impairment that can be expected to result in death, or to be of long continued and indefinite duration. Or, if under 18, mental or physical impairment that results in severe functional limitations and can be expected to result in death, or to be long continued and indefinite duration. Or Social Security determined the individual is disabled.

   • What is chronically ill?

     – The individual must have a certification from a health care practitioner that the individual is unable to perform at least two activities of daily living for an indefinite period, which is expected to be lengthy in nature.

   • If desired, an eligible designated beneficiary could elect to delay distributions until the 10th year, rather than use the life expectancy rule. Section 1.401(a)(9) -3(c)(5)(i)(C).

3. Death on or After Required Minimum Distribution Date.

   • Payout Rate.

   • Eligible Designated Beneficiary.

     Upon the death of a participant on or after required minimum distribution date and it is payable to an eligible designated beneficiary (spouse, within 10 years of age of owner, minor, disabled, or certain trusts), you can use the longer of the eligible designated beneficiary’s life expectancy, or the participant’s life expectancy. However, no matter what, even if you use the participant’s life expectancy, the IRA must cash out by the end of the life expectancy of the eligible designated beneficiary. Section 1.401(a)(9) – 5(e)(5). Also, on the death of the eligible beneficiary before the expiration of their life expectancy, the payout continues to the beneficiary of the beneficiary over the earlier of the remaining life expectancy of the eligible designated beneficiary or participant but must end within 10 years of the eligible beneficiaries death.. Section 1.401(a)(9) – 2(a)(4).

   • Designated Beneficiary.

     You must also make annual required minimum distributions during that 10-year period based upon the life expectancy of the designated beneficiary, at which point the IRA must end on the 10-year anniversary of the IRA owner’s death.

   • An Estate or Non-Designated Beneficiary Trust.

     You can pay amount of the life expectancy of the owner, i.e., the ghost life expectancy reduced by one each year.

   • Example from article by Kathryn Kennedy cited in the bibliography.

     • Example.

       IRA owner dies after RBD date at age 75 and names older brother who is 80 as the beneficiary. The payout is based upon the life expectancy of the IRA owner who is younger, i.e., 14 years. However, the IRA must liquidate, but the life expectancy of the 80-year-old which is 11.2 years, so the IRA must liquidate after 11 years not the 14 years.

     • Planning Point.

       If you are naming an older beneficiary of an IRA, it can cause the liquidation of the IRA within a period much shorter than 10 years. The following example is from a seminar recently presented to the Marvin R. Pliskin Advanced Probate and Estate Planning Seminar by Natalie Choate, Esq.

     • Example.

       IRA owner, age 73, dies and names mother the beneficiary of IRA. Mother is 95 and the table gives her a 4-year life expectancy and the IRA must liquidate within that time. If you had named the estate or a Non-Designated Beneficiary Trust as beneficiary, the IRA could pay out over the remaining life expectancy of the participant, which would be 16 years.

4. Spouse to Spouse Distributions.

   Assume husband dies and pays to wife.

   • Option 1 – Rollover to Surviving Spouse.

     If surviving spouse is under age 72 after the rollover, she can wait to take RMDs until age 72 and she can use the life expectancy upon the Uniform Lifetime Table, which assumes the contingent beneficiary is 10 years younger. If instead, she decided to treat this as an inherited IRA, the RMD would pay out with the Single Life Table which is based only upon wife’s life expectancy, which will be a faster payout rate. Also, when wife dies from a rollover IRA and her children inherit the funds, they use the spouse’s life expectancy( or the children?) for RMDs for years 1-9 and must empty out the IRA by the tenth year if the death is after the RMD date, and if before the RMD date, by the tenth anniversary.

   • Option 2 – The surviving spouse treats the IRA as an inherited IRA.

     This may make sense when the deceased IRA owner died much younger than age 72. The RMD can be delayed until the later of the year after death or the end of the year the deceased spouse would have turned age 72. So, if a spouse dies at age 40, the surviving spouse has until the end of the year 32 years later. At that point she could start taking RMDs based upon her life expectancy using table one. Or better yet, the surviving spouse rolls the account into her IRA and uses the better Uniform Table.

   • Option 2A

     – If the IRA document allows, the surviving spouse could elect the 10-year rule and delay distributions for 10 years and then before the 10 years, roll into her own IRA. However, according to the proposed regs, the RMDs of the surviving spouse that would have occurred during the 10-year window must be distributed.

   • Planning point.

     If the surviving spouse is under age 59 ½, an inherited IRA is not subject to the 10% tax rule. However, it is important to make a beneficiary designation of the inherited IRA. If you fail to do that and the surviving spouse dies prior to the date her deceased husband would have turned 72, then the IRA must liquidate in five years.

5. Payment to a trust.

   First you must determine if the trust is a “see through” trust. That is the easy part. The trust: (i) must be valid; (ii) irrevocable during life or death; (iii) document must identity beneficiaries; and (iv) document must be given to the custodian by October 31 of the next year. If not a “see through” trust, payments will have to be made from the IRA by the fifth anniversary if the owner dies prior to the RMD date, or over the remaining life expectancy of the owner, using the single life table reduced by one each year. Even if a “see through” trust, if the beneficiaries are not designated beneficiaries, i.e., individual, or eligible beneficiary, you are subject to the five-year rule for pre-RMD ghost life expectancy if past RMD.

6. Payment to Trust for Children.

   Upon the death of the IRA owner, if the IRA pays to a trust for the children, as long as one child is under 21 the payout rate will be over the life expectancy of the oldest child, (even if over 21) but must pay out by the 10th year after the minor child turns 21. If there is more than one minor child, you use the age of the oldest minor. It can be an accumulation trust, not just a conduit trust.

7. Payment to Conduit Trust for Adults.

   If the trust mandates that the IRA distributions must be paid out immediately, then you just look at the current beneficiaries to determine the payout rules. Just like the old law. That means the payout rate will depend on who the current beneficiaries are. If they are designated beneficiaries but not eligible designated beneficiaries, (not a spouse, someone less than 10 years younger, disabled, minor child) then the payout rate will be 10 years as tweaked, as described above. If the owner dies prior to the RMD date, payment by the tenth anniversary. If the owner dies after RMD date, then payout in years 1 – 9 based on the life expectancy of the oldest beneficiary and then by the tenth anniversary it empties out.

8. Payment to a Conduit Trust for Beneficiary not more than 10 years younger.

   If the trust mandates distributions to a sibling or companion within 10 years or older than the decedent, then you can use the life expectancy of the beneficiary ( or the IRA owner if longer)using the single life table reducing it by one year. Once he dies, use the shorter of the first beneficiary’s life expectancy, or 10 years to liquidate the IRA.

9. Payment to a Trust Benefiting Spouse Conduit IRA.

   If the trust provides that on the death of IRA holder, it pays to trust for the benefit of the surviving spouse and mandates that IRA distributions pay to the surviving spouse, then the surviving spouse can delay taking distributions until the year the deceased spouse would have obtained age 72, and then take the distributions over her remaining life expectancy using the single life table recalculating.

10. Payment to IRA Accumulation Trust for the benefit of the spouse.

    If the trust does not provide for a mandatory payout of the RMD and the owner dies after the RMD date, then assuming the remainder beneficiaries are designated beneficiaries, such as adult children, payable in years 1 – 9 over the surviving spouses life expectancy and then in 10th year the IRA pays out.

11. Payment to Trust where assets can accumulate.

    Assume the owner dies prior to RMD date. Let us say you provide that IRA is payable to the trust for spouse and on her death the assets pay to the three children outright and if they don’t survive, it goes to charity. Since the children inherit only on the condition that the surviving spouse dies assuming the children are over age 21, the children and the spouse are “countable” beneficiaries, and the payout rate is only 10 years. The charity is ignored. If the beneficiary had been an Eligible Designated Beneficiary, such as a sibling less than 10 years, you would use the life expectancy of the oldest beneficiary as the payout rate, but the spouse would not be eligible for the recalculation rule. However, if you provided that the children and the spouse could receive distributions at the same time, and then when the spouse dies it pays to the children, because the children are current beneficiaries along with the spouse, the charity cannot be ignored, and the trust has a non-designated beneficiary, and the payout could be as short as 5 years.

12. Payment to Trust where assets can accumulate with a power of appointment.

    In the example above, if the children are the beneficiaries after the spouse, then you only have the ten-year rule. However, if you limit the power of appointment only to siblings less than 10 years, the surviving spouse could pay the amounts over the life expectancy rather than just the ten-year rule. This must be done by September 30th. If done later, it gets more complicated. This is true even if the children end up receiving the IRA because the power of appointment is not exercised. I DO NOT UNDERSTAND WHY THIS RULE EXISTS. BUT IT CAN HELP.

Bibliography

Kennedy, Kathryn J. (May 17, 2022), Financial Planning Journal: “The IRS’s Proposed Regulation on the Minimum Distribution Rules: Post – Secure Act”

Choate, Natalie (August 25, 2022), Steve Leimberg’s Employee Benefits and Retirement Planning Newsletter: “Three Options has Eve, Advising the Surviving Spouse of an IRA Owner”

Choate, Natalie (September 2022), “Estate Planning for Retirement Benefits Under SECURE and Proposed Treasury Regulations” Chapter 4.

Reaves, Craig C. (September 10, 2022), “We’re Not in Kansas Anymore – IRAs After the Secure Act & Proposed Regulations”

Gassman, Alan and Ketron, Brandon( April 5, 2022), “Powers of Appointment, An Amazing Planning Tool Under the New IRA Stretch Trust Regulations”