Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.
Clients spend lots of time, money, and energy planning their estates. Estate Planning attorneys help them by counseling these clients and preparing various documents to meet the goals of the client, such as a Will or Trust.
An increasing part of American wealth is governed by beneficiary designations. According to Statista, Americans had over $32 trillion in retirement assets alone. That’s trillion with a “t.”
This blog series focuses on beneficiary designations. This blog examines “eligible designated beneficiaries” who are exceptions to the standard 10-yr rule of the SECURE Act. The next blog will examine how beneficiary designations done prior to the Act might not work as intended after the Act.
As examined in the prior blog in the series, under the SECURE Act a beneficiary typically must take all distributions by the end of the year which includes the 10th anniversary of the Participant’s death. However, not all beneficiaries are covered by this requirement of a more rapid distribution. Some beneficiaries are “eligible designated beneficiaries,” otherwise known as “EDBs.” An EDB could take distributions based on their own life expectancy, just like prior to the SECURE Act.
EDBs under the Act are:
- The surviving spouse of the Participant. (The surviving spouse could also do a spousal rollover and thereby consider the assets as in their own retirement plan, like under prior law.)
- The child of the Participant under the age of majority. However, once the child reaches age of majority, they fall under the general 10-year rule of the SECURE Act. It’s important to note that a minor child of someone else, such as a grandchild, niece, or nephew, is not an EDB.
- Someone less than 10 years younger than the Participant,
- Someone who is “disabled” (within the meaning of Section 72(m)(7) of the IRC), or
- Someone who is “chronically ill” (within the meaning of Section 7702B(c)(2) of the IRC)
Note that the disabled or chronically ill beneficiary must meet the definitions as of the death of the Participant in order to be an EDB.
A trust for the benefit of an EDB also qualifies as an EDB. However, with the exception of a disabled or chronically ill beneficiary, the trust share of the EDB must be named directly and that trust must be a “conduit” trust.
After the SECURE Act, planning to stretch retirement plan distributions is much more difficult. One way to do it is to have retirement assets go to an EDB, such as a disabled beneficiary, and other assets go to other beneficiaries.
However, one group of EDBs is rather illusory. The minor child of the Participant is an EDB, however, they lose their EDB status upon adulthood and fall under the 10-year rule. Therefore, if the child of the Participant is the beneficiary, they’d have all the assets typically at age 28. Often, clients would prefer not to have their retirement assets go outright to their children at an age when they may not have suitable discretion. Unfortunately, leaving the assets in a trust for the child’s benefit won’t help because, by its nature, a conduit trust would give the beneficiary control or access to the funds upon distribution from the retirement plan. Again, that means the Participant’s child would have control of the assets at age 28.
Beneficiary designations can be deceptively simple. Just beware the rest of the iceberg. The next blog in this series on beneficiary designations will examine how beneficiary designations which might have been ideal prior to the SECURE Act might now have unintended consequences.
Litherland, Kennedy & Associates, APC, Attorneys at Law are members of the American Academy of Estate Planning Attorneys. If you would like to learn more about the importance of estate planning, we invite you to attend one of our free estate planning webinars. In addition to offering free estate planning webinars, we offer Zoom and Phone Consultations.
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- IRS Confirms Grantor Trust Status Alone Does Not Cause a Step-Up in Basis - September 14, 2023