RIP Stretch Inherited IRA?

October 24, 2019

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While the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) has not yet been enacted, there are many who anticipate that it will be enacted by year end, primarily because it passed the House 413 to 3 and was on the fast track in the Senate to enactment until Senator Ted Cruz took it off the consent calendar (purportedly because it did not contain the prior version’s provision that would have authorized the use of 529 accounts for home schooling and not because he disagreed with the contents of the SECURE ACT remaining).  In addition, as pointed out in an October 15, 2019 letter from 7 Senators to Mitch McConnell, there are provisions in this Act that would “expand access to retirement plans for millions of Americans.”  Most of the provisions of the SECURE ACT do not have a direct impact on estate planning.  However there is one section of the SECURE ACT that is very important for planners to understand and anticipate.  This is the provision that is said to pay for all of the other good things this Act does for retirees, the elimination of the “stretch” inherited IRA.

A new Section (H) would be added to Section 401(a)(9) of the Act, which would leave in place the provisions of § 401(a)(9) for beneficiaries that do not qualify as “designated beneficiaries” and are not “see through” trusts.  For those entities that are neither designated beneficiaries nor “see through” trusts, the 5 year rule will still apply to inherited IRAs that are received from decedents who die prior to their required beginning date and the life expectancy of the decedent will apply to those who have reached their required beginning date at the time of death.  For all other beneficiaries the new rules contained in the new Section (H) will apply.

(As a reminder, estates, charities and most trusts do not qualify as “designated beneficiaries” and “see through” trusts are those that meet the four requirements of Reg. §1.401(a)(9)-4, Q&A-5, and for which the beneficiaries (and not the trust itself) will be the designated beneficiaries for purposes of determining the post death distributions from the decedent’s IRA.)

This new Section (H) effectively eliminates the stretch distribution period over the beneficiary’s life expectancy for all who are not “eligible designated beneficiaries”.  For all other beneficiaries who are not eligible designated beneficiaries, the distribution period will be 10 years whether or not the decedent had reached his required beginning date.  The new term “eligible designated beneficiary” is limited to:

  • the decedent’s surviving spouse;
  • the decedent’s minor child (but only until the child reaches the age of majority);
    • The 10 year period for a minor child will begin when the minor child reaches 18.
  • a disabled person;
  • a chronically ill person; or
  • an individual who is not more than 10 years younger than the decedent.

While eliminating tax benefits for the beneficiaries of the inherited IRA, in some ways this change could simplify the life of planners, as the complexity involved in making a trust qualify as a “see through” trust from a distribution period point of view may be substantially reduced because the tax benefits will not be as great as under current law.

The distribution of the assets of an inherited IRA to a “see through” trust would have to be completed by the end of the year containing the 10th anniversary of the decedent’s death, whether or not the decedent died prior to his required beginning date.

The distribution of the assets of an inherited IRA to an estate or to a trust that is not a “see through” trust would have to be completed by the end of the year containing the 5th anniversary of the decedent’s death (the 5 year rule) if the decedent dies prior to reaching the required beginning date and would be over the decedent’s life expectancy determined in the year of death if the decedent died after his required beginning date.