On February 23, the Internal Revenue Service issued the proposed rules for each community setting under the Retirement Enhancement (SAFE) Act. Here’s a first look at some of the key changes to the proposed rules.
EDB gets more time to take RMD
The proposed regs benefit a new class of beneficiaries created under the SECURE Act: Eligible Designated Beneficiaries (EDBs). EDBs include the spouse of the individual retirement account owner, a person less than 10 years old from the IRA owner, a minor child of the IRA owner, or a disabled or chronically ill beneficiary. (In the case of a minor child of an IRA owner, only during the minority. The age of majority is set at 21.) While the SECURE Act requires other beneficiaries to take their required minimum distributions (RMDs) over a 10-year period. That is, EDBs may continue to take their RMDs over the life expectancy of the “designated beneficiary” of the trust. This gives EDBs more time to collect their RMDs (thus increasing the IRA’s tax advantage).
If the IRA is a trust, you determine the designated beneficiary by looking at the trust beneficiaries. If the beneficiaries are all individuals, the oldest beneficiary is considered the designated beneficiary, so EDBs can increase the RMD over the life expectancy of the oldest beneficiary.
In an accrual trust (one in which the trustee can deposit some or all of the amount received from the IRA), the life expectancy of the remaining beneficiaries is taken into account. If the remaining beneficiary is a charitable, the IRA owner is not considered a designated beneficiary, because IRA benefits can be accumulated during the previous beneficiary’s lifetime to be paid out to charity later. This usually results in a shorter time taken to take RMD.
In a conduit trust (one in which the trustees received from the IRA must be paid to the current beneficiary), all subsequent beneficiaries may be disregarded in calculating the designated beneficiary’s lifetime,
The proposed regs allow IRA owners to disregard certain beneficiaries of accumulation trusts when setting RMD periods. A beneficiary whose interest is contingent on the death of the former beneficiary, who has only residual interest, can be disregarded. For example, suppose a trust with an IRA provides income to A, the remainder to B if B survives A, but if B doesn’t survive A, the remainder goes to charity. Under the proposed rules, if B is survived by the owner of the IRA and has no interest in the trust during A’s lifetime, the donation is disregarded. This will usually result in the ability to take RMDs over a 10-year period.
To take advantage of this, the trust must have a remaining beneficiary who takes a lump sum, as in the example in the previous paragraph. However, as in that example, if the remainder is payable in a lump sum to B upon A’s death, B will lose the creditor protection and tax savings of holding the assets in the trust. The trust assets would be dumped into B’s estate for estate tax purposes and would become subject to B’s creditors, spouse, and Medicaid. Before designating a charity as a contingent remaining beneficiary, IRA owners should consider whether they are willing to give up this protection by taking the first named remaining beneficiary as a lump sum rather than a further trust.
Similarly, if the beneficiary of a trust must receive all trust assets by the end of the year following the death of the IRA owner or by the end of the year when he reaches age 31, the subsequent beneficiary who is the primary beneficiary would take over. dies before that point is disregarded. For example, suppose that a trust mandates full distributions to A until the end of the year following the IRA owner’s death, or at the end of the year when A reaches age 31, but not if A reaches that point before that point. dies, then in B. In that case, b is disregarded.
IRA owners do not want to set up a trust this way because the trust protection will expire by the end of the year in which the primary beneficiary reaches age 31 or by the end of the year following the IRA owner’s death.
broad definition of handicapped
A disabled beneficiary is an EDB and can use the life expectancy stretch. A trust may also use the life expectancy stretch to benefit a disabled beneficiary if, during the disabled beneficiary’s lifetime, no distributions can be made to someone other than a disabled or chronically ill person.
The SAFE Act defines “disabled” the same way it is defined for Social Security purposes. That is, a person is considered disabled if they are unable to engage in any significant gainful activity because of any medically determined physical or mental impairment that is expected to result in death or be of prolonged and indefinite duration. can be done.
Because it can be difficult to apply that test to younger individuals, the proposed regs provide that a person under the age of 18 is considered disabled if they have a medically determined physical or mental impairment that results in marked and severe functional limitations occur and can be expected to result in death or prolonged and indefinite duration.
The proposed reg also provides a safe harbor. If, as of the death of the IRA owner, the Social Security Administration has determined that someone is disabled, they will be considered disabled for this purpose.
Class additions do not affect identifiable requirements
There is a need to identify the beneficiaries of a trust. The proposed regs clarify that the addition of a class of beneficiaries, such as the birth of an additional grandchild, will not cause the trust to fail the identification requirements in the case of a trust for the benefit of the IRA owner’s grandchildren. This will allow considerable flexibility in formatting.
Treatment of appointments under the power of appointment
Under the original 1987 proposed rules under the Internal Revenue Code section 401(a)(9), Regarding essential delivery, there was some uncertainty as to how the appointments permissible under the Power of Appointment (PoA) would be dealt with. In 2002, the IRS allowed a POA that can be used in favor of the beneficiary, their creditors, their estate, creditors of their estate, or anyone born in the calendar year prior to the year of birth of the IRA owner’s oldest Is. Surviving issue at the time of death of the IRA owner. Since that decision allowed a wider class of permissible appointments, planners generally followed suit and limited their POA in the same way.
Under the proposed rules, if the POA is exercised by September 30 of the year following the death of the IRA owner in favor of one or more identifiable beneficiaries, those individuals will be deemed to be named.
Beneficiaries terminated by September 30 of the year following the IRA owner’s death are disregarded. The proposed rules allow limiting the class of appointments permissible till that date to identifiable beneficiaries. This will allow a beneficiary with a POA to eliminate the unwanted beneficiary from the class of permissible appointments to reduce the class of appointments permissible. The IRS previously allowed this in Private Letter Rulings 201203003 (January 20, 2012) and 201840007 (October 5, 2018).
Beneficiaries added after September 30 of the year following the IRA owner’s death are counted. This suggests the possibility that unless the POA is exercised, the permissible appointments may not be counted so as to make them beneficiary.
Changes will not affect the identity requirement
The proposed regs provide that a see-through trust will not fail the identification requirement simply because state law allows the trust to be modified, such as by rectification or decanting. The removed beneficiary is disregarded by September 30 of the calendar year following the IRA owner’s death, and the one who is added is considered. If the additional beneficiary is added after September 30 of the calendar year following the death of the IRA owner, the rules governing the added beneficiaries according to the POA will apply.
More than half of the states have substandard laws. Furthermore, while common law is sparse, a trustee with absolute discretion to distribute the principal may be able to terminate the trust under common law in favor of one or more beneficiaries. It should also be possible to rescind a trust to the extent authorized in the will or the trust instrument.
While the trust instrument referred to the action as a disclaimer rather than decanting, the IRS permitted decanting in accordance with the terms of the instrument in PLR 200537004 (September 16, 2005).
The IRS originally permitted corrections to PLR 200620026 (May 19, 2006) and 200235038 to 200235041 (August 30, 2002). However, following those rulings, the IRS did not allow corrections to PLRs 201628004 (8 July 2016) and 201021038 (28 May 2010). The proposed rules will provide additional flexibility in this regard.
Annual Distribution to Designated Beneficiaries
Under the SECURE Act, a designated beneficiary other than the EDB must make full distributions by the end of the tenth calendar year following the IRA owner’s death.
Commentators assumed that no distribution would be needed until that year. However, the proposed regs require that, if the IRA owner dies on or after the required starting date (April 1 of the year the IRA owner attains age 72), beneficiaries (other than the spouse) take annual distributions. Must be interim based on the life expectancy of the named beneficiary in the year following the IRA owner’s death, minus one for each subsequent year.
Similarly, the proposed regs require annual distributions during the 10-year period following the death of an EDB, as well as annual distributions during the 10-year period after an IRA owner’s minor child becomes an adult. Is.
Its basis is Internal Revenue Code Section 401(a)(9)(b)(i), which provides that, when the IRA owner reaches its required start date, distributions to the beneficiary “at least as soon as possible.” possible” should be done. As on the date of being used under the method of delivery … [the IRA owner’s] Death.”
The IRS first included it in draft Publication 590-B but then removed it. Some people think that it was involved in mistake.
Beneficiaries of a traditional IRA may want to spread distributions over several years in any event to avoid bunching up the income. However, a beneficiary of a Roth IRA who previously did not need the money will have to wait until the final year before taking distributions in order to maximize the period when the Roth IRA can grow tax-free. If this requirement remains in the final rules, it will result in a higher burden on Roth IRA beneficiaries.
If this provision persists in the final regulations, the determination of the oldest beneficiary will have significance, as it will determine the amount of RMD until full distribution is required during the 10-year period.
subject to change
Keep in mind that these are only proposed regs and may change when the IRS issues the final reg. The IRS will continue to issue PLRs, which are not binding on the IRS, only in respect of taxpayers to whom they are issued. can provide is an indicator of their thinking.