While the SECURE (Setting Every Community Up for Retirement Enhancement) Act became law in late 2019, the Internal Revenue Service has only recently proposed how to implement it. The 275 pages of regulations have not yet been finalized, but their publication affects many estate planning clients. These rules are a moving target, so it is important to learn about them from the source rather than relying on the expertise of custodians or financial advisors.
Read on to learn about the proposed SECURE Act regulations and how they would affect your clients.
Distribution Time Frames
When the account holder dies before the required beginning date (generally, April 1 of the calendar year following the calendar year in which the employee attains age 72 for IRA owners), the benefits will be distributed over one of three time periods.
If no qualified designated beneficiary exists, the proceeds must be distributed within five years. If a qualified designated beneficiary exists, the benefits are distributed over ten years. To be “qualified,” a beneficiary must be an individual (not an estate). A beneficiary of a see-through trust may also be treated as a designated beneficiary, though the applicable distribution period may vary.
When the account holder dies after the required beginning date, the “at least as rapidly” rule applies. That means the required minimum distributions must be taken at least annually during the 10-year period, as opposed to waiting until the final year.
Benefits may be distributed over the life expectancy of eligible designated beneficiaries (EDBs), who can fall into one or more of the following categories:
- Surviving spouse of the employee
- Minor child of the employee
- Disabled person
- Chronically ill person
- Other beneficiary who is not more than ten years younger than the employee
The starting date for required minimum distributions (RMDs) is the required beginning date. When the surviving spouse is the designated beneficiary, the distributions can be delayed until the end of the calendar year in which the employee would have turned seventy-two. A minor child who is not disabled or chronically ill reaches the age of majority at twenty-one, to avoid conflicts between states with differing statutes. When the child attains the age of majority, any remaining benefits must be distributed within 10 years of that date.
Disability and Chronic Illness Determination
Certain standards are in place to determine who qualifies as disabled or chronically ill. To be considered disabled, a beneficiary over the age of eighteen must be unable to participate in “substantial gainful activity by reason of any medically determinable physical or mental impairment.” For beneficiaries under the age of eighteen, the disability standard is “a physical or mental impairment that results in marked and severe functional limitations.” For both age groups, the disabilities must be of “long-continued and indefinite duration.” A Social Security determination of disability would also qualify for an eligible designated beneficiary.
To establish a chronic illness, the beneficiary must produce certification from a licensed healthcare practitioner. This certification would state that the beneficiary is indefinitely unable to perform at least two activities of daily living, which include the following:
- Eating
- Getting dressed
- Mobility
- Using the restroom
- Personal hygiene
Documentation of disabilities and chronic illnesses must be submitted to the plan administrator by October 31 of the year after the employee’s death. A minor who is disabled will still qualify for a lifetime stretch of benefits even after reaching the age of twenty-one. If a defined benefit plan allows minor beneficiaries to qualify until age twenty-six if they remain in school, that arrangement can remain in place, though it may be edged out over time as more plans use the standardized age of majority definition, and plan administrators encounter difficulty in obtaining information about the education of an employee's child for implementation purposes.
Rules for Multiple Beneficiaries
In the case of more than one eligible designated beneficiary, the annual track and outer limit year are based on the oldest designated beneficiary. For example, in the case of an accumulation trust with all EDBs, the payout period is the life expectancy of the oldest beneficiary. The outer limit year for 100 percent distribution is 10 years after the death of the oldest beneficiary.
Rules for Applicable Multi-Beneficiary Trusts
An applicable multi-beneficiary trust (AMBT) is a see-through trust with more than one beneficiary. All of them are designated beneficiaries, and at least one is an eligible designated beneficiary who is disabled or chronically ill. These trusts can be divided into two types.
- A Type I AMBT is “to be divided immediately upon the death of the employee into separate trusts for each beneficiary.”
- A Type II AMBT identifies one or more disabled or chronically ill individuals entitled to benefits during their lifetime, and nobody else has a right to the employee’s interest in the plan until the death of all these disabled or chronically ill individuals.
What SECURE Act Regulations Mean to Your Practice
In light of the proposed SECURE Act regulations, estate planners should discuss with clients whether amendments to their documents are appropriate, including changes to the structure of subtrusts and conduit versus accumulation provisions. However, attorneys should keep in mind that these regulations have not been finalized (a public hearing has been scheduled for June 15).
Updates to Wealth Docx®
WealthCounsel has a team of attorneys who continuously monitor and update Wealth Docx—the premier drafting software for estate planning attorneys. In light of these new proposed regulations, we will be making adjustments to the language regarding retirement assets as well as including broader options regarding whether and how the measuring life for life expectancy payout purposes may be limited.
To learn more about Wealth Docx, click here. To schedule a live software demo, click here.
