Take-Away: While the SECURE Act made the 10-year payout for inherited IRAs of owners who died after 2019, there is still some confusion over the distribution rules if the IRA owner died prior to 2019 leaving their IRA to a see-through trust.

Background: We know that that SECURE Act created the 10-year distribution rule for most designated beneficiaries, unless the beneficiary fit into one of the 5 the categories of an eligible designated beneficiary, when the designated eligible beneficiary’s life expectancy payout rule still applies. If the IRA owner died prior to 2019, then his/her designated beneficiary could continue to take required minimum distributions (RMDs) using that designated beneficiary’s life expectancy, thus stretching taxable distributions from the inherited IRA to the designated beneficiary over a much longer period of time.

Example #1: Charlie died in 2018 at age 91, prior to the effective date of the SECURE Act. Charlie named his son Ken as the sole designated beneficiary of Charlies’ IRA. Ken turned age 67 in the year of Charlies’ death. Therefore,  Ken’s birthday in 2019 is 68 year, i.e. the year after Charlie’s death. Ken’s life expectancy at age 68 is 18.6 years. To calculate Ken’s first RMD from the inherited IRA,  the December 31, 2018 IRA account balance is divided by 18.6 years. If Charlie had died in 2019, Ken would have to withdraw the entire inherited IRA balance no later than December 31 of the 10th year of Charlie’s death. Ken can continue to withdraw RMD’s based on his single life expectancy, reduced by one each year until the inherited IRA account balance is reduced to zero, as if the SECURE Act never happened.

[Note that if Charlie had not taken his RMD in 2018 prior to his death, Ken still would have to take Charlie’s 2018 RMD if it was not fully withdrawn by Charlie prior to his death.]

[Note that beginning in 2022, Ken will have to switch to the new IRS life expectancy tables.]

Successor Beneficiary– No More ‘Step into the Shoes’ Rule:  One subtle change created by the SECURE Act is when the designated beneficiary dies after the SECURE Act’s effective date. Prior to the SECURE Act a successor beneficiary to the designated beneficiary got to ‘step into the shoes’ of the designated beneficiary for purposes of determining the successor beneficiary’s RMD for the calendar year. That rule changed with the SECURE Act. Now, the successors beneficiary to the designated beneficiary does not get to ‘step into the shoes’ of the original designated beneficiary and withdraw the balance of the inherited IRA over what is left of the original designated beneficiary’s life expectancy. In short, the successor beneficiary’s payout from the inherited IRA flips to the 10-year payout rule upon the post-SECURE Act death of the original designated beneficiary. This is comparable what happens on the death of an eligible designated beneficiary- the life expectancy RMD payout ends on the death of the eligible designated beneficiary, and the payout to the successor beneficiary shifts to the 10-year payout rule at that time.

Example: #2: Same facts as in Example #1, except that Ken dies in 2021 after the effective date of the SECURE Act. Charlies’ IRA that Ken inherited now passes to Ken’s daughter Sandra, who is the successor beneficiary to Charlie’s IRA. On Ken’s death, the annual RMDs will end, and Sandra, the successor beneficiary must withdraw 100% of the balance of the inherited IRA under the 10-year distribution rule by December 31 of 2031 (the year that includes the 10th anniversary of Ken’s death.)

[Note that because Ken was required to take RMDs, albeit using his life expectancy, if Ken died without taking his RMD for 2021, Sandra must take the RMD to the extent that Ken did not take it prior to his death.]

Legacy Rule: From the language used in the SECURE Act it appears that the life expectancy payout of a pre-2020 deceased IRA owner and the designated beneficiary are legacied, forever, if both the IRA owner and the designated beneficiary died prior to 2020.

Example #3: Charlie died in 2013. Charlie left his IRA to his son Ken as the sole designated beneficiary. Ken had a 23-year life expectancy at the time of the death of his father. In 2018, prior to the SECURE Act, Ken died. On Ken’s death, the inherited IRA then passed to Ken’s successor beneficiary, Sandra. Under the pre-SECURE Act law, Sandra was entitled to continue to withdraw from the inherited IRA over what was left using Ken’s life expectancy (about 18 years.) As noted in Example 2, if Ken had died after 2019, Sandra (the successor beneficiary) would have to take distributions from the inherited IRA following the 10-year payout rule. However, since Ken died in 2018, prior to the SECURE Act,  Sandra can continue to take RMDs as the successor beneficiary to Ken using Ken’s life expectancy,  because Ken did not die “after such date”, that is after 2019, per the language used in the SECURE Act. In short, Sandra will never have to flip to the 10-year distribution rule because both Charlie and Ken died prior to the SECURE Act’s effective date.

[Hopefully the IRS’s Regulations to implement the SECURE Act, which have yet to be issued, will support this interpretation.]

See-Through Trust Question: What if a see-through trust  is the designated beneficiary of an inherited IRA when the IRA owner dies prior to the SECURE Act, i.e. a trust with multiple beneficiaries rather than a single individual? Things then start to get complicated (if they were not already complicated enough! This is where the IRS’ mere potential successor rule comes into play, where trust beneficiaries are ‘counted’ but mere potential successor beneficiaries of the see-through trust are ignored when identifying the oldest trust beneficiary with the shortest life expectancy that is used to determine the RMD paid to the trust. An example helps to explain the confusion of the SECURE Act’s legacy rule when a see-through trust is treated as the designated beneficiary of the inherited IRA.

Example #4:  Charlie died in 2010. Charlie left his $1.0 million IRA payable to a trust for the benefit of his 4 grandchildren. Charlie’s trust provides that the trustee is to make discretionary distributions for the health, education and support of Charlies’ grandchildren until there is no living grandchild who is under the age of 35, or there is only one living grandchild, whichever event comes first. The death of all grandchildren the results in the distribution of the trust’s assets to the grandchildren’s descendants, per stirpes. Since there are no non-person beneficiaries, e.g. a charity,  the trust qualifies as a see-through trust under the IRS’s minimum distribution trust Regulations; thus, the trust qualifies as Charlie’s designated beneficiary. The trustee has been taking annual RMDs from Charlie’s IRA based on the 53-year life expectancy of Charlie’s oldest grandchild. In 2021, one of Charlie’s grandchildren dies; the other three grandchildren are still living. Because Charlie died prior to the SECURE Act’s effective date (2020) the trust is entitled to continue the life expectancy payout under the SECURE Act’s legacy exemption rule. Yet we know from Example #2 that a life expectancy payout must flip to the SECURE Act’s 10-year payout rule upon the post-2019 death of a ‘designated beneficiary.’ However, in this example, there are multiple designated beneficiaries and only one of them has died. It is unclear if the see-through trust must now flip to the 10-year payout on the first death of the trust beneficiaries ? Or, not until all 4 grandchildren have died? Or, only upon the death of the oldest grandchild whose life expectancy is/was the measuring period to determine RMDs from the Trust.

Conclusion: Until the IRS gets around to publishing Regulations with regard to the SECURE Act’s the 10-year payout rule, and the scope of the pre-SECURE Act RMD legacy rule, trustees are left guessing whether to continue to take RMDs from the inherited IRA payable to the trust using the oldest trust beneficiary’s life expectancy, or promptly shift to the SECURE Act’s 10-year payout rule. Let’s hope those Regulations soon appear.