• Internal Revenue Service updates qualified domestic trusts (QDOT) regulations—On Aug. 21, 2024, the IRS published proposed amendments, REG-119683-22, to the regulations under Internal Revenue Code Section 2056A that relate to QDOTs.
In general, there’s no marital deduction for property passing to a non-citizen spouse. However, IRC Section 2056A provides that a QDOT (a certain type of marital trust) will qualify for the marital deduction if it meets certain administrative requirements and the proper election is made on the estate tax return. The administrative requirements include, among others, maintaining a U.S. citizen trustee, in some cases having an institution or bank as trustee and withholding estate taxes on distributions of principal. A QDOT is necessary when property passes from a decedent to a non-citizen spouse to qualify for the marital deduction that would otherwise be denied to such spouses.
The primary purpose of these amendments is to refresh outdated terminology, references, responsible parties and procedures. The amendments detail the following changes:
Updating references to 1995 temporary regulations. The amendments propose updating references throughout the 1995 temporary regulations to the currently effective version.
Updating definitions. The definition of “finally determined” for establishing the value of assets within a QDOT is updated to align with current IRS practices. Specifically, the new definition excludes references to an “estate tax closing letter,” which the IRS no longer requires.
Updating IRS offices, officials and filing locations. The amendments correct outdated references to IRS officials, offices and specific filing locations. For example, the term “District Director” and references to the “Assistant Commissioner (International)” are replaced with current titles such as the “Chief Tax Compliance Officer, IRS.”
Updating procedures for filing security instruments. The amendments revise the procedures for filing security instruments required under QDOT provisions, such as bonds. These documents must now be submitted directly to the Estate Tax Advisory Group rather than being attached to the decedent’s estate tax return.
Updating references to the Uniform Customs and Practice for Documentary Credits. The references to the Uniform Customs and Practice for Documentary Credits have been updated from the 1993 revision to the most recent version.
Filing locations and methods. The amendments provide updated instructions for where and how to file essential documents with the IRS, directing practitioners to IRS Publication 4235 or the IRS website for the correct filing locations.
These proposed changes seek to refresh and clarify the regulations to better serve current practitioners and ensure proper QDOT administration.
• Final regulations (final regs) implement SECURE Act rules for retirement plan withdrawals—On July 19, 2024, the IRS released final regs, 89 Fed. Reg. 58644, updating the rules for required minimum distributions (RMDs) from retirement accounts, implementing the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
In the past, individuals were required to start taking distributions from their individual retirement accounts at age 70½. The final regs provide that individuals born before July 1, 1949 must begin RMDs at age 70½. Those born after July 1, 1949 and before Jan. 1, 1951 must start at age 72. Those born after Jan. 1, 1951 but before Jan. 1, 1959 must start at age 73. Those born after Jan. 1, 1960 must start at age 75.
Under the SECURE Act, only “eligible designated beneficiaries” (EDBs) can spread the distribution of inherited retirement funds over their life expectancy. The surviving spouse, minor children, disabled or chronically ill individuals and beneficiaries who aren’t more than 10 years younger than the decedent may qualify as EDBs. All other beneficiaries must distribute the entire account balance within 10 years of the employee’s death. The final regs provide that children are minors if under age 21, and a child includes a stepchild and certain foster children. It’s now confirmed that payments to a custodian for a minor child qualify as distributions to the child.
When the SECURE Act was first enacted, there was confusion regarding what RMD schedule applied during the 10-year period for non-EDBs. The final regs clarify this for taxpayers, which is helpful, as retirement plans are often left to non-EDBs, such as adult children and trusts.
If the owner dies after their required beginning date (RBD), a non-EDB who inherits the retirement plan must continue to take out RMDs. The RMDs are based on the beneficiary’s life expectancy in Year 1 to Year 9 and then the balance in Year 10. This is known as the “at least as rapidly” rule, which states that a beneficiary of a retirement plan must continue RMDs at the same frequency set by the decedent during life, even if the amount calculated is different because it’s based on the beneficiary’s life expectancy rather than the participant owner’s life expectancy. While many in the field hoped that the IRS would abolish this requirement from the proposed regulations (proposed regs), it remains.
If the owner dies after their RBD, an EDB must take RMDs based on either their own life expectancy or the participant owner’s life expectancy and is now free to select the longer payout schedule. This is a change from the proposed regs, which had a “shorter of” rule requiring the EDB to take the final distribution by the earlier of the final year of their or the participant’s life expectancy.
The final regs also provide a few helpful clarifications when trusts inherit IRAs.
If a decedent has multiple minor children, it’s common in estate planning to create a single fund for the benefit of all the minor children, usually until the youngest reaches a certain age. In the proposed regs, if retirement plans are payable to this fund, 100% of the account had to be withdrawn by the date 10 years after the oldest minor child reached age 21. Unfortunately, that accelerated the withdrawal without consideration for the youngest child, who, if they had been the trust’s sole beneficiary, would otherwise have had until the 10th anniversary of their 21st birthday. The final regs correct this and now only require the 100% withdrawal by the 10th anniversary of the youngest child’s 21st birthday.
The final regs update the rule governing RMDs when a retirement plan is payable to an administrative trust that ultimately divides into separate trusts for different beneficiaries. The proposed regs provided that all the beneficiaries had to be considered, and the eldest beneficiary’s life expectancy was used to determine all RMDs, even if the retirement account was ultimately split into separate shares for separate trusts of which there were different beneficiaries. The only option under the proposed regs to use the RMD schedule based on the life expectancy of each separate beneficiary (known as obtaining “separate account treatment”) was to name each subtrust specifically on the beneficiary designation form. Now, an EDB beneficiary of a separate trust can use their life expectancy for the RMD schedule, even if only the single administrative trust is named as the beneficiary, if the administrative trust is required by its terms to divide the retirement account among specified subtrusts. The trust instrument can’t give the trustee the choice to pick and choose trust funding assets—the division of the retirement assets must be clear and mandatory.
Retirement plan withdrawals continue to be complicated and administratively time-consuming, so the rules for beneficiary designations must be carefully considered.
