On Feb. 7, Trusts & Estates presented a webinar on SECURE Act 2.0, sponsored by the American Heart Association. The three speakers were Bruce Steiner, counsel at Kleinberg, Kaplan, Wolff & Cohen, P.C., Denise Appleby, CEO of Appleby Retirement Consulting, Inc., and Andrew Fussner, vice president of estate settlement at the American Heart Association. The speakers touched on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, including the provision that a designated beneficiary must distribute the entire inherited IRA by Dec. 31 of the 10th year after the employee’s or IRA owner’s death (the 10-year rule), thus doing away with the stretch IRA for most beneficiaries. They also discussed the planning opportunities made possible by the SECURE Act 2.0, as well as proposed IRA regulations. To listen to a replay of this webinar, click here. Here are some questions and answers that came up during the webinar.
Charitable Remainder Trusts
SECURE Act 2.0 provides that in the case of a trust for a disabled or chronically ill beneficiary, a charity that may receive qualified charitable distributions (a public charity other than a donor-advised fund) that’s a remainder beneficiary will be treated as a designated beneficiary. This allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary and still qualify for the life expectancy stretch.
Q. For a disabled beneficiary of an IRA, are CRTs and special needs trusts both eligible for stretch distributions?
A. According to Steiner, because a CRT is tax-exempt, it can take the IRA benefits all at once. It then makes annual or more frequent payments to one or more individuals, usually for the individual’s lifetime. The payments are treated as first in, first out. So they’re ordinary income until the payments are cumulatively equal to the amount of the IRA benefits received. After that, the character of the payments depends on the character of the trust’s investment income. The effect is to replicate the stretch that had previously been available. A disabled or chronically ill beneficiary, or (if there’s no current beneficiary who isn’t disabled or chronically ill) a trust for the beneficiary of a disabled or chronically ill individual, may stretch distributions over the life expectancy of the disabled or chronically ill person.
Q. Can you name the minor child as a beneficiary of the CRT to get the stretch benefit?
A. No, says Steiner. The actuarial value of the charitable remainder interest has to be at least 10% of the value of the trust, and the payments to the beneficiaries must be at least 5% of the value of the trust each year. It’s not possible to satisfy both of these requirements if the individual beneficiary is a minor. Fussner adds that you should probably run the numbers on any beneficiary under age 30 or so who might start payments (something a planned giving charitable partner is likely to be able to help you with). The solution is to do a term-of-years CRT for the maximum 20-year period. That will likely be less than the minor/young beneficiary’s life expectancy, but it’s double the 10-year stretch maximum.
Q. Can the remainder beneficiaries be charitable organizations of the trust if the first-tier individual beneficiaries aren’t disabled or chronically ill?
A. Yes, says Fussner, but you’re then limited to distributions over the 5-year rule (because a charity has no life expectancy, the trust is a non-qualified trust and must distribute over five years instead of 10) or the IRA owner’s remaining life expectancy (depending on whether the IRA owner died before or after the required beginning date (RBD)). This is because you wouldn’t have a “designated beneficiary” for the trust.
Q. CRT trusts can stretch the IRA for beneficiaries for life or 20 years. Can the life be more than 20 years or is the life capped to 20 years?
A. Yes, says Fussner, if the CRT’s non-charitable beneficiary lives for more than 20 years payments can continue until their death assuming the terms of the CRT are to pay for life. What you can’t have is a “term-of-years” CRT for more than 20 years.
Q. For testamentary CRTs what’a the ideal “funding source” typically? Is it better to name the CRT directly as the beneficiary of the IRA or to name the “estate” as the beneficiary of the IRA?
A. Both Steiner and Fussner agree that it’s better to have the CRT itself be named as the beneficiary of the IRA. That avoids having to battle the IRA holder over not withholding income taxes and then trying to get those taxes refunded on a Form 1041. Plus, the executor of the estate is just going to have to transfer the assets to the CRT—so why not eliminate the middleman and save yourself the trouble, adds Fussner.
Inherited IRAs
Q. For a non-spouse who inherited an IRA from an owner who had been taking required minimum distributions (RMDs) and the IRA owner died prior to the rule changes under the SECURE Act of 2019, does the 10-year rule now apply? If so, what would be the 10-year start date?
A. No, says Appleby. The 10-year rule doesn’t apply to that primary beneficiary. However, if that primary beneficiary was taking life expectancy distributions and dies after 2019, their beneficiary (the successor beneficiary) will be subject to the 10-year rule. Under this 10-year rule, the successor beneficiary must continue taking life expectancy distribution (using the life expectancy that the primary beneficiary was using) and must fully distribute the account no later than 10 years after the primary beneficiary’s death.
Q. What’s the time limit to convert an inherited IRA from a spouse to a spousal IRA?
A. A spouse beneficiary can roll over an inherited IRA to their own at any time, says Appleby. The rollover must not include any RMDs. If the spouse beneficiary chooses the “treat as own” option to move the inherited IRA to their own IRA, the deadline is the later of:
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- the end of the calendar year in which the surviving spouse reaches their RMD age, and
- the end of the calendar year following the calendar year of the IRA owner's death.
Q. If a child inherited an IRA in 2019 or before, can they still take the distributions over the course of their life and not be subject to the 10-year rule?
A. Yes, says Appleby. The child would be able to take distributions over their life expectancy unless the 5-year rule applies. The 5-year rule could apply if the account owner died in 2019 or earlier, and the death occurred before their RBD. The 10-year rule doesn’t apply to a beneficiary who inherited a retirement account before 2020.
Q. Can beneficiaries make qualified charitable distributions from their inherited IRA?
A. Yes, says Fussner, so long as the beneficiary themself is at least 70 and ½ years old.
Q. If an inherited IRA beneficiary is required to take distributions over the 10 years, but hasn’t the last two years, should the beneficiary "catch up" their required distributions in 2024?
A. No, says Appleby.
10-Year Rule
Q. Please clarify: Are IRA beneficiaries able to continue the decedent’s RMD? Does the account still have to be empty by Year 10?
A. It depends, says Appleby. If the IRA owner (or plan participant) dies on/after their RBD, the beneficiary must continue taking RMDs. The options are as follows:
- For a designated beneficiary: Distributions over the single life expectancy of the beneficiary. In addition, the account must be fully distributed no later than the tenth year after the owner’s/participant’s death
- For a beneficiary that isn’t a designated beneficiary (nondesignated beneficiary): Distributions over the remaining single life expectancy of the decedent, if the beneficiary isn’t a designated beneficiary.
- For a beneficiary that’s an eligible designated beneficiary: Distributions over the longer of the single life expectancy of the beneficiary, or the single life expectancy of the decedent.
Rollovers
Q. The SECURE 2.0 Act allows savers to roll unused Internal Revenue Code Section 529 funds into the 529 beneficiary’s Roth IRA without a tax penalty. Can you do the 529 rollover to Roth a ROTH IRA up until the tax filing deadline, or does it need to be done in the calendar year?
A. The deadline is the tax filing due date, same as the rule that applied to a regular IRA contribution.
Qualified Charitable Distributions
Q. Now that QCDs can be used to fund charitable gift annuities or CRTs, may they also be used to pooled income funds?
A. No, says Fussner, the only “split-interests” that are defined by the legislation are CGAs, charitable remainder annuity trusts and charitable remainder unitrusts
Q. Can outright QCDs be made to a DAF or a private foundation?
A. No, says Fussner DAFs and PFs are ineligible distributes.
Working with Charities
Q. What are some ways charities can work with professional advisors?
A. The planned giving or charitable estate planning advisor at a charity can be a resource on a variety of topics, says Fussner. They’re likely to be able to “run the numbers” on certain types of charitable gifts such as CGAs and CRTs if you lack your own specialized software. They can help brainstorm ideas to help realize a client’s charitable desires and discuss ways to successfully restrict the use of a gift. They can provide crucial beneficiary designation information such as the charity’s legal name, tax ID number, etc. (this is especially important if the charity has separately incorporated local and national chapters). They can be partners in a variety of ways at your estate or financial planning seminars and, if you’re lucky, they may even refer a donor to you who’s looking for an estate-planning attorney or financial planner.