10 Recommendations for Planning Retirement Benefits

Take-Away: Ten recommendations to follow for planning distributions for retirement benefits under the SECURE Act were recently identified by an expert.

Background: I recently read a helpful article written by an ACTEC Fellow that summarized her ten recommendations when planning for retirement benefits under the bewildering SECURE Act. Those 10 recommendations from Kathy Sherby follow:

[Note: As a generalization, I will refrain from providing some definitions that have previously been provided with regard to retirement plan distributions to trusts.]

1. There is no life expectancy used for normal designated beneficiaries of a decedent’s retirement account. Only eligible designated beneficiaries get to use their life expectancy to calculate their annual required minimum distribution.
2. Even with the SECURE Act’s required 10-year distribution rule, the account owner must comply with the see-through trust rules, even to get a 10-year distribution. If the trust does not qualify as a see-through trust, then a much shorter distribution of the retirement account will be required. This is especially the case if there is a rollover from a qualified plan account to an inherited IRA.

   Recall that the see-through trust rules include: (i) the trust must be valid and must be irrevocable; (ii) all the accountable trust beneficiaries must be individuals; and (iii) the estate or trust must provide certain documentation to the plan administrator by October 31 of the year that follows the account owner’s death. The issue of accountable beneficiaries is a challenging rule to deal with when dealing with a see-through trust. Fortunately with the SECURE Act’s Proposed Regulations, there are now rules where some trust beneficiaries can be disregarded in meeting the see-through trust rules.

   If the account owner was married, then their surviving spouse is still the best beneficiary to be named outright as the designated beneficiary of the retirement account. This is so because the surviving spouse can roll the distribution directly to their own IRA and use the Uniform Table, which is about twice the length of the Single Life Table, to calculate their distributions. If the surviving spouse remains as the designated beneficiary of the deceased spouse’s account then he/she must use the less favorable Single Life Table to calculate distributions.

3. If the account owner was married, he/she should consider a conduit see-through trust, if the account owner is primarily concerned about the well-being of their surviving spouse, or creditors of the surviving spouse.
4. If the account owner was married, and the owner is more concerned about making sure that as much as possible remains in the trust for the benefit of other family members, then an accumulation see-through trust should be used.

   Note, though, that with either a conduit see-through trust or an accumulation see-through trust, either form  will still have to qualify for the marital deduction.

5. With the SECURE Act, we no longer have to consider who is the oldest beneficiary of the trust. If there is no eligible designated beneficiary, then the 10-year distribution rule will apply. However, if the retirement account owner was past his/her required beginning date (RBD) when they died,  that will then have an impact on the distribution period because the distribution period is the longer of the designated beneficiary’s life expectancy or the deceased account owner’s life expectancy. But in either case, it is still limited to 10 years. The difference is that if the account owner was beyond their RBD, then the designated beneficiary must take annual RMDs, using their own life expectancy, for years 1-9, before the balance must be distributed.
6. A power of appointment held by an individual over the trust will now be ignored, unless it is actually exercised by the power holder. Similarly, trust modifications are now a useful tool under the Proposed Regulations because the IRS will honor the trust’s modification if it occurs before September 30 of the year that follows the year of the account owner’s death. Consequently, a fiduciary can use a trust modification to qualify a trust as a see-through trust or change the accountable beneficiaries to make sure that all the trust beneficiaries are individuals.
7. If an accumulation see-through trust is used for a minor child, there is no need to make the distribution go outright to the minor child. The Proposed Regulations create a special minor child rule that allows the fiduciary to disregard all of the other trust beneficiaries if the minor child is the sole income beneficiary of the trust. In addition, the required minimum distribution from the retirement account  is calculated using the minor child’s life expectancy.
8. If the trust has a young beneficiary who is not a minor child, e.g. a nephew or niece of the decedent, the settlor can use an age-31 trust, which requires a distribution to that young beneficiary by age 31. In that case, all other trust beneficiaries can be disregarded. Note, though,  that the life expectancy of the young beneficiary cannot be used. This is a situation where the goal is to disregard a charity as a trust beneficiary.
9. If there is a beneficiary who possibly would be disabled or chronically ill at the time of the account owner’s death, the goal will be to use what is called an Applicable Multiple Beneficiary Trust, or AMBIT. This would be a revocable trust that immediately divides on the death of the account owner into separate trusts, one of which is a separate trust solely for the benefit of the disabled or chronically ill beneficiary. The benefit of using the AMBIT is that all of the trusts then qualify for the separate account rule, which is a big benefit.
10. Finally, if the beneficiaries of the trust are not eligible designated beneficiaries, i.e. a garden-variety designated beneficiary, then an accumulation see-through trust should be used, not a conduit see-through trust. That is because you cannot use the designated beneficiaries’ life expectancies anyway. The only time a conduit see-through trust would be used is if the settlor (or trustee) wanted to disregard a charity that was the remainder beneficiary of the trust.

Conclusion: These retirement plan distribution rules are bewildering. The SECURE Act claimed to simplify them with its fixed 10-year distribution rule, but you be the judge if you think the SECURE Act simplified anything. Add to that layer of complexity the ‘surprises’ contained in the SECURE Act’s Proposed Regulations earlier this year, and retirement plan distribution decisions got even more complicated. And finally, Congress is now considering the bipartisan (I smile when I type that) SECURE Act 2.0, which would change the distribution rules even more, e.g.  slowly increasing required beginning date up to age 75 over the next several year. While I appreciate Ms. Sherby’s recommendations, we can only assume that they will soon change as Congress and the IRS continue with their surprises.