Ushering in the new 10 Year Rule, the SECURE Act has changed the way inherited retirement accounts are now distributed. That is, to everyone but a select group. The Act has created a new type of beneficiary, known as an Eligible Designated Beneficiary, who is exempt from the provisions that eliminate the “stretch” of inherited accounts. Essentially, they still fall under pre-SECURE act rules.
Wondering if any of your beneficiaries qualify for this special group? Following are five categories of individuals who fall within the requirements and what qualifies them to remain there.
This category includes any individual who was legally married to the decedent. Same-sex marriages only count if the ceremony was performed in a state that recognizes these marriages. Domestic partnerships are not included.
Keep in mind that spouses still have the option to either remain a beneficiary of a deceased spouse’s retirement account or roll the funds into their own retirement account. If they do choose to remain a beneficiary, they aren’t required to take RMDs until the year the decedent would have reached age 72.
This group consists only of children of the decedent, not grandchildren. State laws determine who is and who is not a minor, and these laws vary from state to state – anywhere from age 18 to age 21. State law will likely determine when the age of majority is reached for SECURE Act provisions to take effect.
It’s also important to note that Treasury Regulation Section 1.4.01(a)(9) has addressed a surviving child receiving distributions of a defined benefit plan as not reaching the age of majority until age 26 “if the child hasn’t completed a specified course of education.” Essentially, those children continuing their education could potentially receive distributions up until age 36.
However, this begs the question: what is a specified course of education? No doubt those attending school full-time would meet this requirement. But it becomes a highly subjective matter when considering students who take classes part-time and work part-time or decide to pursue an apprenticeship rather than attend a vocational school. Likely, this is an area the IRA will have to provide further guidance.
These eligible designated beneficiaries could include siblings, cousins or an unmarried partner of the decedent as long as they’re 10 years younger than the decedent.
However, the “10 years younger” will have to be further clarified since a beneficiary’s eligibility for exemption could hinge on a matter of a few months. Is this exactly 10 years or is it more than 10 calendar years?
For instance, if a beneficiary is a sibling who is 10 years and 2 months younger than the decedent, a literal translation would determine they’re not exempt. However, if the IRS interprets the intent of the provision to be consistent with other required minimum distribution rules, it would define this as “not more than 10 calendar years younger,” and thus the beneficiary could claim exemption.
IRS rules that determine whether an individual meets the requirements of disability are fairly restrictive as outlined in IRC Section 72(m)7. According to this definition, individuals who are only partially disabled or who can still engage in “substantial gainful activity” despite having a disability that prevents employment will not qualify.
IRS rules under IRC Section 7702B(c)(2) outline the requirements of chronic illness which includes the inability to perform at least two of the six daily living activities: eating, toileting, transferring, bathing, dressing, and continence. The IRS code places this time period for “at least 90 days.” However, the SECURE Act appears to place more restrictive measures on this timeline – and with it, uncertainty – by defining it as “an indefinite one which is reasonably expected to be lengthy in nature.”
In regard to disability and chronic illness, it’s important to carefully consider whether your intended beneficiary will continue to meet these requirements so you can account for their future care. However, regardless of whether your beneficiaries are considered eligible or ineligible, it’s always best to meet with us to make sure your estate plan aligns with both your goals and the new law.