Secure Act Proposed Regulations: Good News and...Other News
Natalie Choate shares how new proposed regulations will make leaving benefits to a trust easier.
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In February 2022, the U.S. Treasury issued proposed regulations for the Secure Act's changes to the minimum distribution rules for retirement plans. In 275 pages, the IRS took this opportunity to also update and streamline its “required minimum distribution trust rules.”
Looking back at Secure from a distance of two years, while practitioners and their IRA-owning clients were unhappy about the loss of the life expectancy payout for most beneficiaries, it seemed like there was one silver lining: At least things would be simpler now, with a 10-year rule for almost everybody...right?
Wrong. The proposed regulations do not opt for simplicity. For example, where Secure leaned toward eliminating the differences between payout rules for “death before the required beginning date” versus “death after” that date, the proposed regulations reinstate that difference with a vengeance:
Despite these “bad news” examples, the proposed regulations do have some good news: Leaving benefits to a trust will be easier.
Under current regulations (finalized in 2002), the “RMD trust rules” are brief: All beneficiaries of the trust would be considered beneficiaries named by the participant, except that beneficiaries who were “mere potential successors” to other beneficiaries could be ignored. Since “mere potential successor” was not further defined, practitioners had to piece together its intended meaning from a handful of private letter rulings issued over the next dozen years.
One example in the 2002 regulations gave clear approval to what has become known as a “conduit trust,” but the limits for nonconduit trusts were sketchy. Practitioners had strong opinions--but no authority--regarding how a power of appointment affected the “mere potential successor” concept. And the 2002 regulations seemed to prohibit any postdeath trust changes to trust terms through reformation or decanting, even as these practices became increasingly popular ways to fix trust problems.
The Proposed Regulations tackle all of these issues and (in my opinion) provide a sensible and helpful framework for determining the “designated beneficiary” status of a trust named as beneficiary of a retirement account. Here are some new RMD trust rules and concepts offered by the Proposed Regulations:
This distribute-by-31 “disregard” rule can be a great help to anyone trying to leave retirement benefits to a trust for a very young beneficiary. For example, a grandparent wants to leave an IRA in trust for a grandchild, age 13. The trust will provide that the trustee will take distributions from the IRA and then either use the distributions for the benefit of the grandchild or hold them in trust for later distribution to or for the benefit of the grandchild. The trust will terminate and distribute all remaining assets to the grandchild at age 31. If the grandchild dies before 31, the trust will pass to Charity X. Charity X is a nonindividual beneficiary. Normally an accumulation trust with a charity as its remainder beneficiary would not qualify as a see-through trust and therefore would not get “designated beneficiary” status. But with this trust, the grandchild is deemed to be the sole beneficiary, and the charity is disregarded. The trust will qualify as a see-through trust and be subject to the 10-year rule.
The 13-year-old grandchild is not an eligible designated beneficiary because he is not the “child of the IRA owner.” So this trust for the grandchild will not qualify for the life expectancy payout. But it will be a see-through trust (designated beneficiary) and qualify for the 10-year rule because the charity is disregarded.
The above summaries are based on a “first look” at the proposed regulations, but (so far) the new trust rules look like a big improvement over the old ones.
Natalie Choate is a lawyer in Wellesley, Massachusetts, who concentrates in estate planning for retirement benefits. The 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is available through her website, www.ataxplan.com, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article do not necessarily reflect the views of Morningstar.