Take-Away: While we are only now beginning to work with the SECURE Act’s changes and its new concept of the eligible designated beneficiary, there remains a lot of confusion which hopefully will be addressed in anticipated IRS Regulations. The confusion stems from the fact that under the pre-SECURE Act distribution rules there was never a situation where multiple beneficiaries could qualify for the ‘special’ life-expectancy distribution rule.

Background: Prior to the SECURE Act, the designated beneficiary of an inherited IRA could take distributions from that inherited IRA using their own life expectancy to calculate their required minimum distribution (RMD.) If that designed beneficiary died while taking his or her RMD, then their successor beneficiary, if named, could continue to take RMD’s using the deceased designated beneficiary’s ghost life expectancy.

SECURE Act: The SECURE Act provides as a general rule that an inherited IRA must be completely emptied within ten years of the IRA owner’s death. An exception to that 10-year mandatory distribution rule is for eligible designated beneficiaries, who are the IRA owner’s spouse, the IRA owner’s minor children, disabled and chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the IRA owner. All of these eligible designated beneficiaries can continue to use their life expectancy to calculate and take their required minimum distributions from their inherited IRA.

However, confusion arises when the eligible designate beneficiary dies or there is more than one eligible designated beneficiary under the SECURE Act’s new rules.

Eligible Designated Beneficiaries: Several questions with regard to eligible designated beneficiaries will need to be answered in anticipated IRS Regulations:

Beneficiary’s Beneficiary: When an eligible designated beneficiary dies, the life expectancy payout to which that eligible designated beneficiary was entitled ends, after which the payout period from the inherited IRA automatically converts to the 10-year payout rule, i.e. no more phantom life expectancy to calculate the successor beneficiary’s required minimum distribution.

The Tax Code provides that “the exception under clause (ii) [which authorizes the life expectancy payout to the eligible designated beneficiary] shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.”

Does the phrase any beneficiary of such eligible designated beneficiary simply mean a successor beneficiary of the original eligible designated beneficiary, who becomes entitled to the ownership of the inherited IRA at that time? It sounds like the legislative intent is to identify the beneficiary who was named by the eligible designated beneficiary himself or herself, to succeed to the benefits after the eligible beneficiary’s death.

However, if the eligible designated beneficiary’s benefits are paid to an irrevocable trust, the eligible designated beneficiary would never possess the option to actually name a successor beneficiary; rather, the IRA benefits just pass to the remainder beneficiary of the trust. In short, the eligible designated beneficiary never had or named his or her own beneficiary. What happens in that situation? What happens if the remainder beneficiary also fits the definition of eligible designated beneficiary?

Trust with Multiple Eligible Designated Beneficiaries: This question is best explained through some examples.

Example #1: Fred, leaves his IRA to a conduit trust for the benefit of his minor daughter, Debbie. Debbie’s life expectancy is the applicable distribution period but only until she attains the age of majority. Under the conduit trust, the conduit beneficiary, i.e. Debbie, is considered the sole beneficiary of the trust and the sole beneficiary of the IRA that is payable to the trust. Accordingly, the eligible designated beneficiary status applies to Debbie. When Debbie reaches her age of majority, the 10-year payout of the IRA commences. [See Regulation 1.401(a)(9)-5, A-7(c)(3), Example 2.] That is a clear result when there is only one eligible designated beneficiary.

Example #2: Less clear is if Fred leaves his IRA to a conduit trust where he names his three minor children as the trust beneficiaries: Debbie, the oldest, next Claudia, and Barbara who is the youngest. This conduit trust also qualifies for the life expectancy payout, as all named beneficiaries are minor children of the IRA owner, and thus all of whom will qualify as eligible designated beneficiaries. Until when, though? Until all of Fred’s daughters attain the age of majority? Or until the oldest daughter, Debbie, attains the age of majority? We do not know the answer to this question. Hopefully, each daughter will be treated as the sole beneficiary of her own share of the inherited IRA paid to the conduit trust, so that each daughter can fully utilize her own applicable distribution period, i.e. her own life expectancy.

Example #3: Fred leaves his IRA to an accumulation trust for the benefit of his wife, Wilma, if she survives him, paying Wilma the income from the trust for her life in the trustee’s discretion, and upon Wilma’s death, the remainder of the trust is distributed to Fred’s 3 brothers, Tom, Dick and Harry, all of whom are less than 10 years younger than Fred. All the named trust beneficiaries are eligible designated beneficiaries: either Fred’s surviving spouse, or the three named remainder beneficiaries are of whom  all less than ten years younger than Fred. The trust for Wilma is not a conduit trust, so she is not considered the sole beneficiary of the accumulation trust. Yet the other beneficiaries, Tom, Dick and Harry who need to be ‘counted’ as beneficiaries of the accumulation trust are also eligible designated beneficiaries. Does the trustee switch from using Wilma’s applicable distribution period, after her death? If so, whose life expectancy is used, Tom, Dick, or Harry’s, since all three beneficiaries continue as eligible designated beneficiaries?

Example #4: Suppose that Fred’s trust for Wilma’s lifetime, remainder to his three brothers is the same, but Harry is more than 10 years younger than Fred. Since it is an accumulation trust, all beneficiaries are ‘counted’, and one of the beneficiaries, Harry, is not an eligible designated beneficiary. Is the trustee stuck taking distributions from the IRA over 10 years after Fred’s death, despite three of the four trust beneficiaries being eligible designated beneficiaries, just because one remainder beneficiary is subject to the 10-year payout rule?

Disabled or Chronically Ill Beneficiaries: The SECURE Act allows an applicable multi-beneficiary trust to use the life expectancy payout if the sole life beneficiary of the trust is a disabled or chronically ill beneficiary. [IRC401(a)(9)(H)(iv).] However, this provision does not identify whose life expectancy is the applicable distribution period for this type of trust. Presumably the disabled/chronically ill beneficiary’s life expectancy is the applicable distribution period for the trust. However, under existing Regulations, the applicable distribution period for an accumulation trust is the life expectancy of the oldest countable trust beneficiary. [Regulation 1.409(a)(9)-4, A-5(c).] The disabled/chronically ill beneficiary may not be the oldest countable trust beneficiary. This implies that a separate trust should be used for the disabled/chronically ill beneficiary to avoid having older trust beneficiaries in the same accumulation trust.

Conclusion: This is just a sampling of the types of questions that we now have to deal with in light of the SECURE Act’s eligible designated beneficiary exception to the 10-year distribution rule. I sometimes think that one idea that floated around prior to the adoption of the SECURE Act to use a mandatory 20-year payout for all designated beneficiaries, with no exceptions, might have been a more workable concept for families and advisors to work with. For those disabled or chronically ill designated beneficiaries, they could contribute their IRA distributions to a Medicaid payback [a (d)(4)] trust to preserve their governmental benefits. There is just a lot of confusion surrounding the SECURE Act’s new exceptions that hopefully will be addressed in IRS Regulations.