In their virtual wealth panel forum on Jan. 13, “SECURE Act Update: Where Do We Go From Here?” Denise Appleby, Michael Fontanini and Bruce Steiner offered an overview of the new rules brought about by the Setting Every Community Up for Retirement Enhabcement (SECURE) Act and provided practitioners with action to take as well as suggestions on how to help clients plan for retirement given the changes made by the law. The session proved popular and the audience submitted a record number of questions. Here, our three panelists answer a few questions they deemed most interesting.
Charitable Remainder Trusts
Q: Can variable universal life insurance be used in a charitable remainder trust (CRT)?
A: Since the payments from the CRT end at the individual beneficiary’s death, it may be appropriate to have insurance on the life of the individual beneficiary.
Q: Can a CRT income beneficiary include charity or will it violate the minimum 5% payout and 10% rules? (That is, three kids and charity with each receiving 25% of the CRT income distribution.)
A: In that case, the individual retirement account owner would simply leave 25% to charity and 75% to CRTs for the children.
Required Minimum Distributions
Q: Do required minimum distributions (RMDs) commence at age 72 or 70½?
A: Anyone who reached age 70½ by Dec. 31, 2019 was required to start their RMDs for the year in which they reached age 70½.
Anyone who reached age 70½ after Dec. 31, 2019 is required to start their RMD for the year in which they reach 72.
- Participants in employer plans, who are still employed by the plan sponsor, are able to defer RMDs past age 72, if permitted under the plan.
- The RMD for the year in which the individual reaches age 72 can be deferred to as late as April 1 of the following year.
Q: Does the new RMD age mean that IRA owners must wait to age 72 to take qualified charitable distributions (QCD)?
A: No. The IRA owner can do a QCD as long as they’re at least age 70½ on the day the QCD is done. The distribution must meet certain other requirements to be treated as a nontaxable QCD, including being paid to an eligible charity. Please be sure to consult with your tax advisor to ensure that all the requirements are met.
Q: Are there ways to buy insurance inside an IRA?
Q: If a beneficiary has to distribute the IRA in 10 years, should the beneficiary wait until the end of the 10 years?
A: It depends. For a Roth IRA, waiting until the end of the 10-year period means an opportunity for the earnings to grow tax-free for 10 years. But, for a traditional IRA, consideration must be given to how the distributions would affect the amount of income tax owed, as leaving the entire balance until the end of the 10-year period could potentially put the beneficiary in a higher tax bracket, thus increasing the amount of income tax. Therefore, for a traditional IRA a tax professional should assess the potential tax impact of spreading the amount over 10 years versus lump-sum, or in-between.
Q: My client inherited an IRA from his dad in 2010 and has since died. Is his beneficiary subject to the new rules?
A: It depends. If your client dies before 2020, then the old successor beneficiary rules apply. If your client died 2020 or after, the new successor beneficiary rules apply.
Q: If a beneficiary is subject to the 10-year rule and dies, does the beneficiary that inherits the IRA from the original beneficiary get a new 10-year rule?
A: No. The successor beneficiary must take distributions over what remains of the original 10-year period.
Q: Is it true that QCDs are no longer tax-free if the IRA owner made a tax-deductible contribution to a traditional IRA?
A: It depends. The general rule is that deducted traditional IRA contributions made in the year the IRA owner reached age 70½ and older must be subtracted from QCDs to determine how much is tax-free. This would only apply to contributions made for 2020 and after. Adjustments might be required to determine the exact amount by which the tax-free portion of the QCD must be reduced.
Q: Why might an IRA owner leave IRA benefits in trust?
A: Same reasons as for other assets. Keeps it out of the beneficiary’s estate and protects against creditors and spouses.
Q: What is earliest age a minor can open IRA account?
A: There’s no minimum age. As long as the minor has eligible compensation, they may have an IRA to which contributions can be made. For example, a 1-year-old could receive compensation from being an actor or model, and contributions can be made to an IRA based on that compensation. However, some custodians don’t hold IRAs for minors; and for those that do, a legal guardian/parent would sign any agreements and handle/authorize transactions for the IRA.
Q: What’s the minimum amount the IRA value should be to name CRT as beneficiary?
A: Opinions may vary. Most likely at least a few hundred thousand dollars, or maybe more, because the tax return is more complicated than the usual form 1041.
Q: Can a charity be a beneficiary of an accumulation trust that benefits a chronically ill child?
A: Probably not.
Q: What is the difference between a conduit trust and an accumulation trust?
A: Conduit: All amounts received must be distributed.
Accumulation: Trustees may accumulate.
Q: What are the special rules for trusts for disabled and chronically ill beneficiaries?
A: Accumulation (discretionary) trust may get stretch.
Q: Isn’t it a major downside of an accumulation trust as beneficiary of an IRA, the markedly compressed/onerous tax rates? Does this even matter if a beneficiary is always at or near the highest marginal tax bracket due to their own large RMDs?
A: Yes, that’s the tradeoff. It’s less relevant if the beneficiary is in a high bracket.
Eligible Designated Beneficiary
Q: What’s the specific distribution rule/table used when the eligible designated beneficiary (EDB) isn’t less than 10 years younger than the deceased. Single life expectancy table recalculated annually?
A: Technically, it’s “not more than 10-years younger.” The single life table is used, non-recalculated for non-spouse beneficiaries and recalculated for spouse beneficiaries.
Q: EDBs: What’s the definition of a "chronically ill" person?
A: According to IRS Publication 502, Medical and Dental Expenses, an individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.
- He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
- He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Maintenance and Personal Care Services
Maintenance or personal care services is care that has as its primary purpose the providing of a chronically ill individual with needed assistance with their disabilities (including protection from threats to health and safety due to severe cognitive impairment).
See also Internal Revenue Code Section 7702B(c)(2).
Q: What’s the effect of the SECURE Act on Roth conversions?
A: Since designated beneficiaries will be required to take distributions over shorter periods, distributions could potentially put the beneficiary in a higher tax bracket—which could increase the amount of income taxes owed. It’s likely therefore that wealthier clients will perform more Roth conversions over time, so as to effectively reduce income taxes.