Untitled Document

March 2022

The Basic RMD Beneficiary Rules Under the SECURE Act

It is important to understand certain terms after the enactment of the SECURE Act. A designated beneficiary is a person. A trust, estate or charity is not a designated beneficiary. A designated beneficiary will either be an eligible designated beneficiary (EDB) or someone who is not an eligible designated beneficiary. A trust which meets certain rules will be treated as an EDB for purposes of certain RMD rules.

Who is an eligible designated beneficiary?
An eligible designated beneficiary is a designated beneficiary who as of the IRA owner’s death is:
1. the surviving spouse of the IRA owner;
2. a child of the IRA owner who has not reached the age of majority;
3. disabled;
4. chronically ill; or
5. not more than 10 years younger than the IRA owner; or
6. A designated beneficiary of an IRA owner who died on or before December 31, 2019 is an EDB and is required to continue using the life distribution rule appling to them before the enactment of the SECURE Act. A beneficiary generally has the right to withdraw more than the RMD.

EDB Category #1. The surviving spouse of the IRA owner regardless of age. The status of being married is determined by applying federal law and state law.

EDB Category #2. A child of the IRA owner who has not reached the age of majority;
The IRS has proposed the following additional and clarifying rules.
1. The person must be a minor at the time the IRA owner dies.
2. Although the law uses the term age of majority which in most states is age 18, the IRS has chosen to override this by defining a person’s age of majority as the day the person reaches their 21st birthday.
3. The law is that when a minor beneficiary attains the age of majority then the 10-year rule will apply. But what happens if there are multiple beneficiaries?

EDB Category #3. The beneficiary is disabled.
The IRS has proposed the following additional and clarifying rules.
1. The person must be disabled at the time the IRA owner dies.
2. The IRS is proposing to use the existing rules and procedures for defining when a person is disabled. The standard is - the individual is unable to engage in substantial gainful activity.
The IRS makes clear a person who becomes disabled after the IRA owner’s death is not disable for RMD calculation purposes.
Apparently, a person who is disabled as of the day the IRA owner dies, but later improves so he or she is no longer disabled is to be treated as disabled for purposes of the RMD rules.
3. The IRS creates a special rule if the beneficiary is under age 18. Should this now be 21? The IRS creates a comparable standard rather than the standard. A minor beneficiary will be disabled if he or she has a medically determinable physical or mental impairment that results in marked and severe functional limitations which can be expected to result in death or be of long-continued and indefinite duration.
4. The beneficiary who is disabled must meet certain documentation requirements even though the beneficiary is also a minor. __
5. The IRS creates a safe harbor. If as of the date of death the commissioner of Social Security has already determined the beneficiary is disabled within the meaning of USC 1382c(a)(3). If so, the beneficiary is deemed disabled.
6. The beneficiary must furnish the IRA custodian/trustee with documentation confirming the disability no later than October 31 of the year following the year the IRA owner died. The documentation must include a certification by a licensed health care practitioner.
Although the law uses the term age of majority which in most states is age 18, the IRS has chosen to override this by defining a person’s age of majority as the day the person reaches their 21st birthday.

The law is that when a minor beneficiary attains the age of majority then the 10-year rule will apply. There’s special rules when there are multiple beneficiaries.

EDB Category #4. The beneficiary is chronically ill.
The IRS has proposed the following additional and clarifying rules.
1. The person must be chronically ill at the time the IRA owner dies.
2. The IRS makes clear a person who becomes disabled after the IRA owner’s death is not chronically ill for RMD calculation purposes.
3. A person is chronically ill if the person is unable to perform at least two daily living for an indefinite period that is reasonable expected to be lengthy in nature.
4. The beneficiary must furnish the IRA custodian/trustee with documentation confirming the beneficiary is chronically ill no later than October 31 of the year following the year the IRA owner died. The documentation must include a certification by a licensed health care practitioner.

EDB Category #5. The beneficiary is more than 10 years younger. Note that a beneficiary who is older than the IRA owner is more than 10 years younger than the IRA owner.

EDB Category #6. A designated beneficiary of an IRA owner who died on or before December 31, 2019 is an EDB and is required to continue using the life distribution rule applying to them before the enactment of the SECURE Act. A beneficiary generally has the right to withdraw more than the RMD.

What rules apply to a traditional IRA Beneficiary if the IRA owner died before his or her required beginning date?

The 5-year rule applies if the beneficiary is not a designated beneficiary.
The 10-year rule applies if the beneficiary is a designated beneficiary or is a qualified (see-through) trust.

The life distribution rule applies if the beneficiary is an EDB, including an EDB trust. Presumably the special life distribution rule will apply when the deceased IRA owner is younger than their beneficiary.

What rules apply to a traditional IRA Beneficiary if the IRA owner died on or after his or her required beginning date?

The IRS has written its regulation in a unique manner. The IRS position is - a non-EDB beneficiary who is ineligible to use the life distribution rule when the IRA owner dies before their required beginning date is now required to use the standard life distribution rule when the IRA owner has died after their required beginning date. However, this distribution period cannot exceed 10 years and in some cases the distribution period might be less than 10 years.

The IRS approach is not clearly authorized by the SECURE Act. The IRS does not explain why they believe Code section 401(a)(9)(H((i)(I) as added by the SECURE Act authorizes or requires this two step approach:

The proposed RMD regulation set forth the following over-riding rule. An inherited IRA be closed (i.e. a full distribution) by the earliest of the following dates:
1. The end of the 10th calendar year following the calendar year the IRA owner died if the beneficiary is not an EDB;
2. The end of the 10th calendar year following the calendar year the IRA beneficiary (who was an EDB) died;
3. The end of the 10th calendar year following the calendar year a beneficiary who is a minor as of the date of the IRA owner’s death attains age 21; or
4. The end of the calendar year in which the applicable divisor (denominator) would have been less than or equal to 1.0 if the divisor was determined using the beneficiary’s remaining life expectancy. This deadline applies only if the beneficiary was an EDB and if the applicable divisor was being determined using the IRA owner’s remaining life expectancy. That is, the IRA owner had designated an older beneficiary, but that beneficiary has now died. The remaining distribution period is based on the older beneficiary and not the deceased IRA owner.

There will be substantial additional discussion of the proposed RMD regulation in the April newsletter. The proposed RMD regulation is 275 pages.