Required Minimum Distributions Under SECURE Act IRS Regulations.

Two years into the 2020 SECURE Act (“SECURE”), the IRS has issued its proposed regulations.  These regulations contain important changes to the Required Minimum Distributions (“RMD”) rules for beneficiaries of retirement plans.   Distributions received from a retirement plan are taxed as ordinary income. 

Under SECURE, a plan participant (owner) must receive RMD’s starting April 1 of the year following his or her 72^nd birthday, i.e., the “Required Beginning Date” (“RBD”), an important concept.   Death beneficiaries generally want to delay how long they have to receive plan RMD’s after the owner’s death.  Delay means smaller annual RMD’s which lowers the recipient’s taxable income and allows undistributed assets to grow tax free.

Generally, under SECURE, a Designated Beneficiary (“DB”) – i.e., a natural person or certain trusts that meet special IRS rules — has ten years to receive all plan assets.  Important exceptions, however, exist for five categories of special “Eligible Designated Beneficiaries” (“EDB”), including the deceased owner’s surviving spouse, the deceased owner’s minor child (under age 21), and a chronically ill or disabled beneficiary.  Certain trusts where all the beneficiaries are EDB’s also qualify for the same EDB treatment.

Prior to the new regulations, it was understood that a DB did not have to receive any annual RMD distributions from a decedent’s plan.   Under the regulations that is no longer true.  Different RMD rules exist for different types of beneficiaries regarding both the annual RMD’s and the outer limit at which time the plan must be fully distributed. Which rules apply generally depends on whether the plan owner died before he or she had to begin to receive RMD’s (i.e., the owner’s RBD) and whether or not a death beneficiary qualifies as either a DB or an EDB.   

For a DB, it was understood that he or she had until the tenth (10) year after the decedent’s death, when all assets had to be withdrawn.  Now, however, if the deceased plan owner died after their RBD, the regulations require a DB to receive annual RMD’s during years 1-9 after the participant’s death.    

Similarly, an EDB must also take annual RMDs that are often computed based on the EDB’s own actuarial lifetime and sometimes are computed based on the remaining hypothetical actuarial life expectancy of the deceased plan owner at death.  EDBs generally have up to their lifetime to completely withdraw all plan assets.  A minor child of the deceased owner, however, has only ten years from when the minor child attains age 21.  Annual RMD’s alone, however, can sometimes mean that the retirement plan assets are completely withdrawn sooner than the EDB’s actuarial lifetime. 

Conceptually the foregoing approach has a certain similarity to installment note payments.  That is, the amount of annual payments are often amortized (computed) based on distribution over a much longer term of years (e.g., a 30 year amortization) with a final balloon payment at end of the installment note’s term (e.g., a 15 year note).   

Lastly, important new rules exist regarding trusts as designated beneficiaries.  Trusts have primary and alternative beneficiaries and are used to control distributions. Certain trusts can qualify as either a DB or as an EDB.  Such trusts are either “Conduit Trusts” or “Accumulation Trusts”.    Conduit Trusts require all retirement plan distributions, including RMD’s, to be distributed by the Trustee to or for the benefit of the conduit trust beneficiaries.   Accumulation Trusts allow the Trustee to accumulate some or all plan distributions received by the Trustee, including RMD’s.  

How a trust is drafted depends on the goals and circumstances.  That said, where possible the Conduit Trust is usually preferred when the primary beneficiary is an EDB, such as the surviving spouse.  Planning with an accumulation trust is more complicated because both the primary and the secondary beneficiaries have an impact on which RMD rules apply.

The foregoing brief discussion of a complex and broad subject is not legal advice.  Consult a qualified attorney or financial advisor for guidance.

Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.