• Dramatic changes to retirement plan payouts—A new law, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, dramatically changes the rules determining the schedule for required withdrawals from retirement plans. This will significantly affect all taxpayers with retirement plans.
Under prior law, taxpayers could leave their retirement plans to family members and certain trusts that qualified as “designated beneficiaries,” which allowed those individuals and trusts to withdraw the required minimum distribution (RMD) over a time period based on the individual or trust beneficiary’s life expectancy. Under the tables, this could allow a stretch payout schedule of withdrawals over quite a long period of time, thereby delaying the distribution and taxation of the plan assets. Beneficiaries who didn’t qualify as “designated beneficiaries” had to withdraw the account within five years or on a schedule based on the participant’s remaining life expectancy, depending on the participant’s date of death (this is known as the “5-year rule”).
However, the new law changes the payout period so that only five categories of “eligible designated beneficiaries” qualify for this stretch payout. All other designated beneficiaries must withdraw the entire IRA within 10 years (there’s no requirement of any particular payment schedule, but all funds must be withdrawn by the 10th anniversary of the date of death). The 5-year rule still applies for non-designated beneficiaries.
The following qualify as an “eligible designated beneficiary”:
• a surviving spouse of the participant
• a minor child of the participant (but only until the age of majority, after which the 10-year rule applies)
• a disabled beneficiary
• a chronically ill beneficiary
• a beneficiary who’s less than 10 years younger than the participant
One interesting aspect of the rules governing minor children is that they may be considered minors until age 26 if they haven’t completed a specified course of education.
These rules significantly change the landscape for estate planning with retirement assets. While the rules for a surviving spouse generally are left intact (rollovers and other special deferrals are still permitted), taxpayers can no longer leave retirement plans to their children or to trusts for their children with lifetime stretch payouts. Clients who’ve used conduit trusts may wish to reconsider whether they’re still appropriate. Under the new rules, conduit trusts will force out the retirement plan assets to the non-spouse beneficiary within 10 years, which in most cases is much faster than prior law. Without the flexibility of the stretch payout through a conduit trust, the choice is protecting the assets in a non-conduit trust with an accelerated income tax cost or foregoing the protections of a trust and distributing retirement plan assets to the non-spouse beneficiary within the 10-year period.
• Final regulations confirm no estate tax clawback—Treasury published final regulations (final regs) under Internal Revenue Code Section 2010 (T.D. 9884) on Nov. 26, 2019. They confirm that taxpayers who make gifts using the increased gift and estate tax exemption that’s in effect until 2025 (or die before it expires) won’t be adversely affected if the exclusion amount decreases in 2026, as is expected under current law.
The final regs provide computational rules to determine the amount of unified credit available to a decedent’s estate when the decedent died in a year when the unified credit is less than prior years when the decedent made taxable gifts. Generally, the rule is that the taxpayer’s estate is able to take advantage of the greater unified credit amount that was in effect during the date of the gift. This means that there’s no so-called “clawback,” so that the estate isn’t taxed with respect to gifts that were sheltered from gift tax on the date of the gift.
The final regs also provide that the portability elections made prior to 2026 with respect to the increased unified credit of a deceased spouse (DSUE) will stand and that the available DSUE is deemed to be applied first to gifts made by the decedent, prior to the decedent’s own unified credit. Useful examples illustrate the application of the rules.
The final regs didn’t address generation-skipping transfer (GST) tax allocations using the increased GST tax exemption prior to the sunset.
Interestingly, the comments to the final regs include a section titled “Anti-Abuse Rule,” which states that Treasury is further considering whether to enact special provisions applicable to transfers subject to retained life estates, other retained powers or interests and/or transfers subject to the special valuation rules of Chapter 14.
• Ruling confirms trustee’s severance and spouse’s disclaimer of interest in marital trust—In Private Letter Ruling 201946009 (Nov. 15, 2019), the Internal Revenue Service approved several transactions relating to a marital trust. The decedent’s surviving spouse was the beneficiary of a marital share under the decedent’s revocable trust. The trustee planned to sever the marital share into a GST exempt share and a GST non-exempt share. Then, the surviving spouse proposed to make a non-qualified disclaimer of her entire interest in the GST exempt share.
The IRS confirmed that because the severance of the trust into two shares for GST purposes was permitted by state law, the trusts’ qualification as qualified terminable interest property (QTIP) trusts under IRC Section 2056(b)(7) was unaffected. It confirmed that the surviving spouse’s disclaimer of the GST exempt share wouldn’t have any gift or estate tax consequences for the non-exempt share; she wouldn’t be deemed to be making any transfer with respect to the non-exempt share because it was separate and distinct.
Further, as a result of the disclaimer, the exempt share’s property wouldn’t be includible in the spouse’s taxable estate under the rules provided in IRC Sections 2519 and 2044.
This ruling illustrates an estate-planning strategy for those clients who wish to make taxable gifts of property held in QTIP trusts for their benefit, to take advantage of the increased unified credit.