SECURE ACT Update – Disabled and Chronically Ill Beneficiaries

Take-Away: Several weeks ago (actually it now seems like several years ago in light of the coronavirus) a short summary was provided on how the SECURE Act permits stretch distributions from a retirement account taken by a disabled or chronically ill beneficiary. If disabled or chronically ill individual is the named beneficiary of an accumulation see-through trust, that beneficiary’s life expectancy can still be used to determine the required minimum distribution to be taken from the inherited retirement account and paid to the see-through trust. However, there was a big catch.

Big Catch: The carve-out’ of disabled and chronically ill individuals from the SECURE Act’s mandatory 10-year distribution rule is intended to permit those select beneficiaries to continue to take distributions from an inherited retirement account over their life expectancy in recognition of their vulnerable status. However, this stretch distribution rule applied only if the disability or chronic illness existed at the time of the retirement account owner’s death.

If the designated beneficiary was relatively healthy at the time of the account owner’s death, but later that beneficiary became disabled or chronically ill, they would still face the 10-year mandatory distribution period despite their disabled or chronically ill condition, thus possibly jeopardizing that beneficiary’s entitlement to other means based governmental benefits. Consequently,  a ‘snapshot’ date is used to determine disability or chronic illness condition- the account holder’s date of death.

Approach to the Department of Treasury: The American College of Trust and Estates Counsel (ACTEC) has formally requested the Department of Treasury, in its final Regulations to implement the SECURE Act, to reject this ‘snapshot’ date approach to the ability to use the disabled/chronically ill beneficiary’s life expectancy when taking required minimum distributions from an inherited retirement account. A lot of time, study, and excellent arguments are presented in ACTEC’s proposed change to the Temporary Regulations that implement the SECURE Act.

Conclusion: If there is a change of heart in the Department of Treasury in light of ACTEC’s proposal, that change will be reported as soon as it occurs. In the meantime, if their is a concern that a potential retirement account beneficiary’s health condition could worsen, it would be wise to seek a determination of that beneficiary’s entitlement to social security disability benefits (the test used to determine disability) or chronic illness now,  prior to the account owner’s death, so that there is at least a pending determination of disability/chronic illness that exists at the time of the retirement account owner’s death.