Special Needs trust named beneficiary
I’ve encountered my first post SECURE Act inherited IRA situation
Account owner dies in 2020
Special needs trust named beneficiary – qualifies as a “look through”
Is the stretch available using the oldest beneficiaries life expectancy?
One of the exceptions to the 10-year rule is disability. However the trust is the true beneficiary?
*I thought the Bill had language to the effect – qualified trust established on behalf of a disabled beneficiary was still permitted to stretch payouts.
All help is appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2020-01-10 18:59
Secure has provisions protecting SNT beneficiaries, as long as no other trust beneficiary has any right to distributions unless the SNT beneficiary treated as an eligible beneficiary has passed. If the trust includes two such disabled beneficiaries, the RMD is based on the age of the oldest. If the trust splits into sub trusts for each disabled beneficiary, then their individual life expectancies can be used. The 10 year rule is not applicable until all eligible beneficiaries have passed. Of course, if the SNT is not properly drafted to qualify for look through, it would be treated as a non individual beneficiary and either the 5 year rule or LE of the decedent would be applicable.
Permalink Submitted by Paul Jacokes on Mon, 2020-01-13 22:29
Alan, regarding your last point: New section 401(a)(9) (H)(i)(II) clearly eliminates the LE of the decedent as a distribution option where the decedent’s RMDs have begun (“Except in the case of a beneficiary who is not a designated beneficiary…”), but apparently only for a designated beneficiary. The language in section (a)(9)(B)(i) still seems to govern the distribution rules for a person who is not a designated beneficiary. Therefore depending on the age of the participant at death, a nonqualified trust that inherits the IRA could get a longer distribution period than a see-through trust or other qualified beneficiary, albeit with required annual distributions. Does this make sense or was it a drafting error?
Permalink Submitted by Alan - IRA critic on Mon, 2020-01-13 22:59
I think you may have meant “designated beneficiary” in your question rather than “qualified” (or eligible) beneficiary. If so, a NQ trust or trust that fails to be qualified because the trustee refused trust info to the IRA custodian will get a longer stretch than the 10 year rule would produce when the IRA owner passes between ages 73 and 80 when the 10 year rule again is longer. That would expand to age 82 when the new tables are approved. If this was intended or not is not clear, but if unchanged could lead to otherwise qualified trusts seeking non qualification.
Permalink Submitted by Paul Jacokes on Tue, 2020-01-14 19:43
Thanks, Alan. Yes, I did mean to say “designated” rather than “qualified” in my question. And just to be clear, in referring to persons “who are not designated beneficiaries” I do not mean to include “eligible designated beneficiaries,” who of course continue to get RMD-over-LE treatment. You may have identified an interesting planning tool for the trustee of a see-through trust set up by a person who dies post-2019 after beginning RMDs who failed to revise his/her will to take into account the SECURE Act changes. If the trust permits only RMDs to be distributed (arguably meaning nothing until the end of the 10th year), the trustee could fail to turn over the trust documents to the custodian and “secure” (pun intended) a needed income stream for the beneficiary. (Query whether the courts and the IRS will allow trustees to amend the trust in this situation.) Even if an IRA trust’s terms take into account the SECURE Act, the trustee might want to fail qualification as a qualified trust if that gives a longer stretch, though of course the trustee must consider whether, say, a 15 year stretch with RMDs is more advantageous taxwise than 10-year deferral with a lump sum inclusion.
Permalink Submitted by Alan - IRA critic on Tue, 2020-01-14 20:27
Permalink Submitted by Paul Jacokes on Tue, 2020-01-14 21:37
In other words, we think the RMD over IRA owner’s (theoretical) remaining life expectancy option is available as an alternative to distribution over up to 10 years in the case of a designated beneficiary if the owner had begun taking RMDs? Obviously, the longer of the two periods is not necessarily the more desirable, since one option requires annual distributions. FYI, I have asked an attorney on Joint Committee on Taxation staff (with whom I worked many years ago as a young lawyer) what they intended the rule to be and will post here when I get a response.
Permalink Submitted by Alan - IRA critic on Tue, 2020-01-14 23:23
No, as written it would be available for longer than 10 years if the IRA owner passes between 73 and 80, subject to annual RMDs. In that situation a NQ trust would create a longer stretch than a qualified trust subject to the 10 year rule.
Permalink Submitted by Paul Jacokes on Wed, 2020-01-15 03:07
I was suggesting that there would be an option to use either the 10 year deferral (with no interim RMD) or the remaining life expectancy with RMDs. Again, the longer stretch may not be desirable since there are RMDs over the entire period. Contrary to all of the descriptions of the new law I’ve seen, I’m starting to think that for the situation where the IRA owner passes after the required beginning date, the 10 year deferral rule is only an option, not a requirement, in the case of a designated beneficiary.