- DENNIS FORDHAM
- Posted On
Estate Planning: Required minimum distributions under SECURE Act IRS regulations
Two years into the 2020 SECURE Act, the Internal Revenue Service has issued its proposed regulations.
These regulations contain important changes to the required minimum distributions rules for beneficiaries of retirement plans. Distributions received from a retirement plan are taxed as ordinary income.
Under SECURE, a plan participant, or owner, must receive required minimum distributions starting April 1 of the year following his or her 72nd birthday, i.e., the “required beginning date,” an important concept.
Death beneficiaries generally want to delay how long they have to receive plan required minimum distributions after the owner’s death.
Delay means smaller annual required minimum distributions which lowers the recipient’s taxable income and allows undistributed assets to grow tax free.
Generally, under SECURE, a designated beneficiary — i.e., a natural person or certain trusts that meet special IRS rules — has 10 years to receive all plan assets.
Important exceptions, however, exist for five categories of special “eligible designated beneficiaries,” 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 eligible designated beneficiaries also qualify for the same treatment.
Before the new regulations, it was understood that a designated beneficiary did not have to receive any annual required minimum distributions from a decedent’s plan. Under the regulations that is no longer true.
Different required minimum distributions rules exist for different types of beneficiaries regarding both the annual distributions 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 required minimum distributions and whether or not a death beneficiary qualifies as either a designated beneficiary or an eligible designated beneficiary.
For a designated beneficiary, it was understood that he or she had until the 10th year after the decedent’s death, when all assets had to be withdrawn.
Now, however, if the deceased plan owner died after their required beginning date, the regulations require a designated beneficiary to receive annual required minimum distributions during years one to nine after the participant’s death.
Similarly, an eligible designated beneficiary must also take annual required minimum distributions that are often computed based on the beneficiary’s own actuarial lifetime and sometimes are computed based on the remaining hypothetical actuarial life expectancy of the deceased plan owner at death.
Eligible designated beneficiaries generally have up to their lifetime to completely withdraw all plan assets. A minor child of the deceased owner, however, has only 10 years from when the minor child attains age 21.
Annual required minimum distributions alone, however, can sometimes mean that the retirement plan assets are completely withdrawn sooner than the eligible designated beneficiary’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 designated beneficiary or as an eligible designated beneficiary. Such trusts are either “conduit trusts” or “accumulation trusts.”
Conduit trusts require all retirement plan distributions, including required minimum distributions, 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 required minimum distributions.
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 eligible designated beneficiary, 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 required minimum distribution rules apply.
The foregoing brief discussion of a complex and broad subject is not legal advice. Consult a qualified attorney or financial adviser 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 This email address is being protected from spambots. You need JavaScript enabled to view it. and 707-263-3235.