Historically, many people’s largest asset was their home. Nowadays, many people’s largest asset is their retirement account. As a result, retirement account planning has become increasingly important to consider when you start on your estate planning journey.
The relevant code that regulates qualified pension, profit-sharing and stock bonus plans is 26 U.S.C. 401. This was modified in part by the SECURE Act. The sequel to the SECURE Act is “SECURE 2.0.” SECURE 2.0 has not yet made it into law, but it could be soon. The House passed its version nearly unanimously in March. Recent committee approval of proposals in the Senate has made some hopeful that a slew of additional modifications could be on its way.
The statute and the SECURE Act state that the account owner must start taking required minimum distributions (“RMD”) at the required beginning date (“RBD”). The RBD is April 1 of the year after the owner turns 72. SECURE 2.0 proposes bumping up the age to 75, but as noted previously, this has not yet become law.
The SECURE Act has altered post-death distributions greatly.
To understand the statute, there are some terms that must be defined first. A “Designated Beneficiary” is an individual, or a specific Trust, if the Trust is created the right way. Any other beneficiary is a Non-Designated Beneficiary. This includes charities, an estate, or a company.
Within the Designated Beneficiary designation, there is a special category of Eligible Designated Beneficiaries (“EDB”). EDBs can take advantage of special life-expectancy treatment. Five types of individuals qualify as an EDB: (1) surviving spouse; (2) minor child; (3) a disabled individual; (4) a chronically ill individual; and (5) an individual that is not more than 10 years younger than the employee. The determination is made as of the date of death of the account owner.
The SECURE Act did not change the rule for distributions for Non-Designated Beneficiaries. If the account owner dies before the RBD (remember, that’s April 1 of the year after the owner turns 72), and the beneficiary is a Non-Designated Beneficiary, the assets must be paid out within five years. If the account owner dies after the RBD and the beneficiary is a Non-Designated Beneficiary, then the assets are to be paid out based on the owner’s life expectancy.
The SECURE Act did change the rules as to how Designated Beneficiaries will inherit.
Eligible Designated Beneficiaries get the old life-expectancy rule, regardless of whether the owner’s death was before or after the RBD. This means that the entire account must be distributed by the end of the EDB’s remaining life expectancy.
For Designated Beneficiaries (not EDBs), they are subject to the ten-year rule. This means that the entire account must be distributed by the end of the 10th year after the owner’s death. And, there are required minimum distributions each year.
Other rules may apply in other situations, such as when there are more than one beneficiary, when a beneficiary is a chronically ill or disabled individual, when the beneficiary is a Trust.
A targeted plan for these legacy assets in your estate should not be overlooked. Coordinating all of your resources in meeting retirement spending needs, while managing them effectively to control the tax consequences, can ultimately enhance both retirement and estate outcomes. Contact us today to schedule a free consultation where we can discuss how your retirement plans fit in to your estate plan.