The Secure Act (enacted Decemeber 20, 2019 and effective January 1, 2020) made several changes to the minimum distribution rules from qualified retirement plans (including IRAs). The age for beginning required minimum distributions is raised to 72 (from 70 ½), but only for those persons born after June 30, 1949. In addition, there is no longer an age cap to contributions to a traditional IRA. However, under the Secure Act, for persons dying on or after January 1, 2020, beneficiaries (with a few exceptions for “eligible” beneficiaries, noted below) will no longer be able to take distributions over their lifetimes, based on their life expectancies. Rather, benefits must be withdrawn within ten (10) years of death (by December 31st of the year containing the 10th anniversary of the death of the account owner or “participant”). For plan beneficiaries, there is no longer a requirement of minimum, annual distributions. They can be taken at any particular time within the 10 year period: all at once, at any time over the 10 year period, or all at the end of the 10 year period.
The exceptions to the 10-year rule are called “eligible” beneficiaries. They include the following:
- Surviving spouse. The rollover rules still apply;
- Minor children of the participant (grandchildren, nieces and nephews do not qualify under this exception, even if they are minors). The 10-year rule is suspended during minority. Upon reaching the age of majority, the 10-year rule is imposed.
- Disabled and Chronically Ill beneficiaries (as defined in other sections of the Internal Revenue Code); and
- Beneficiaries less than 10 years younger than the participant.
Under prior rules, trusts were often drafted as “conduit” trusts, in order for the trusts to qualify for payment over the life expectancy of a beneficiary. This required that the Trustee distribute the amount of the required minimum distribution from any qualified retirement plans received by the Trustee immediately to the beneficiary. Now that a 10-year rule applies (subject to the exceptions noted above), an accumulation trust might be a better choice, since tax will be paid on the distributions in any event. The Trustee can then accumulate the retirement plan distributions (net of tax) in the trust to be distributed to the beneficiary in the Trustee’s discretion or as set out in the trust document.
Another way to “stretch” qualified plan benefits over the lifetime of a beneficiary might be to create a charitable remainder trust. The life beneficiary could receive distributions of 5% or more per year, and upon his/her death, a qualified charity would receive the amount remaining in the trust. Of course, this would only be appropriate for persons who otherwise have charitable intentions.
The CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27, 2020. In addition to providing aid to individuals, businesses and charities, the Act makes changes to retirement benefit distributions from qualified retirement plans (with some exceptions for certain types of plans) and individual retirement accounts. The Act suspends all required distributions for 2020. This includes minimum required distributions for both plan participants and beneficiaries.
In addition, the Act provides relief from withdrawals made by persons diagnosed with COVID-19 or whose spouse or dependent is diagnosed, or who have had adverse financial consequences due to quarantine, being laid off, or the closing of a business owned by the person. Up to $100,000 may be withdrawn from a retirement plan free of the 10% penalty on early distributions, with the income tax on the distribution spread over a three-year period. The legislation also provides that the person may re-contribute the withdrawn amount within three years of receipt of the funds. This may provide welcome relief for persons affected by COVID-19.
If you have questions as to how these new laws may impact you or your estate plan, please feel free to contact Attorney Vincenti.