As an estate planning attorney, staying updated on legislative changes is critical to providing the best guidance for clients. One of the most significant developments impacting retirement planning in recent years is the passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement) and its successor, the SECURE 2.0 Act. These laws have dramatically altered how retirement accounts are treated, especially when it comes to required minimum distributions (RMDs) for beneficiaries. Most recently, on July 18, 2024, the IRS issued final regulations clarifying these changes. Below, I’ll break down the key aspects of these regulations and how they affect estate planning strategies.
Key Changes to Required Minimum Distributions (RMDs) Under the SECURE Act
- 10-Year Rule for Designated Beneficiaries
The SECURE Act implemented the "10-year rule," requiring most non-spouse beneficiaries to fully distribute inherited retirement accounts within ten years of the original account holder’s death. This change replaced the previously available "stretch IRA" strategy, where beneficiaries could stretch distributions over their lifetime, allowing for tax deferral.
The new regulations clarify that if the original account holder died on or after reaching their required beginning date (RBD) for RMDs, beneficiaries must take RMDs every year during the 10-year period, with a full distribution required by December 31 of the tenth year.
While this rule may seem straightforward, there’s an important distinction: for retirement accounts inherited after 2019, beneficiaries are not required to take RMDs for the years 2021–2024. There is no penalty for missing those distributions, but the account must still be fully distributed within 10 years of the account holder's death. This flexibility may offer some relief to beneficiaries managing larger retirement accounts during these years. - Changes for Trust Beneficiaries
For estate planning involving trusts, the new regulations bring some noteworthy changes. When a trust is named as a beneficiary of a retirement account, the treatment of RMDs can differ depending on how the trust is structured.
Specifically, for trusts that will be divided into separate trusts at the death of the account owner, each beneficiary will receive individual RMD treatment. This change eliminates the "Type I" applicable multi-beneficiary trust (AMBT) category that was originally proposed. For clients who have established trusts as beneficiaries of their retirement accounts, these changes may necessitate reviewing and updating the trust structure to ensure compliance with the new rules. - Spousal Rollovers
Another beneficial update involves spousal rollovers. Under the new rules, there is no deadline for a surviving spouse to elect to roll over their deceased spouse’s retirement account. Additionally, a surviving spouse may elect to be treated as the deceased spouse, allowing them to delay taking RMDs until the year the deceased spouse would have been required to start.
This offers significant flexibility for surviving spouses in managing their inherited retirement accounts, particularly in cases where deferring RMDs can provide tax advantages. - RMD Calculations for Annuities
For individuals holding annuities within their retirement accounts, the final regulations also allow for the aggregation of annuity and non-annuity assets when calculating RMDs. This means that annuity payments can be counted toward meeting the overall RMD requirement, providing more flexibility in how distributions are taken.
Why This Matters for Estate Planning
The new SECURE Act regulations significantly impact estate planning strategies for retirement accounts. Here are a few key takeaways for those looking to ensure their estate plans remain robust and compliant:
- Review Beneficiary Designations: Given the changes to RMD rules, it is essential for clients to review their beneficiary designations. Designating beneficiaries improperly could lead to unexpected tax liabilities or the need to take distributions sooner than anticipated.
- Revisit Trusts as Beneficiaries: Trusts are often used to protect beneficiaries, particularly in cases involving minor children, individuals with disabilities, or those with creditor issues. The changes to the rules governing trusts as beneficiaries mean that certain trust structures may no longer provide the same tax benefits. It’s crucial to review and potentially amend trusts to comply with the new RMD rules.
- Maximizing Flexibility for Spouses: The flexibility offered to surviving spouses under these new regulations allows for more strategic planning. Spouses now have more options to defer distributions, helping to manage their tax liability and ensuring that retirement assets last as long as possible.
- Plan Ahead for the 10-Year Rule: With the "stretch IRA" no longer an option for most beneficiaries, it is essential to plan for the tax consequences of the 10-year rule. In many cases, this may involve considering alternative vehicles like Roth conversions or gifting strategies to reduce the size of taxable retirement accounts.
Looking Ahead
The final SECURE Act regulations are set to take effect on September 17, 2024, and will apply to distributions starting in 2025. However, there are still opportunities to make adjustments before the regulations fully come into play. Beneficiaries who are subject to the 10-year rule must begin taking RMDs in 2025, and while they are not required to make up missed RMDs from 2021 to 2024, it is crucial to ensure that their estate plans are updated accordingly.
For estate planning attorneys, these developments underscore the need to stay informed and proactive. If you have any questions about how these regulations may affect your estate planning, don’t hesitate to reach out. As always, I am here to help you navigate these changes and develop a strategy that protects your legacy while minimizing tax liabilities.
