February 1, 2022In the News

Leon quoted in Law360's "3 Areas Tax Pros Hope Are Clarified In IRA Post-Death Regs"


As the Internal Revenue Service develops proposed regulations in response to a 2019 law that changed rules about post-death distributions from
retirement accounts, practitioners are hoping for clarity on key issues, including defining the age of majority.

The Setting Every Community Up for Retirement Enhancement Act modified the rules for the timing of distributions from defined contribution accounts for many beneficiaries of account owners who died starting in 2020, according to the Congressional Research Service. Before the law, some
beneficiaries got tax preferences by deferring tax on individual retirement account assets for some years after the original owner's death, a strategy sometimes called a "stretch IRA," a report from the research service said.

For deaths starting in 2020, the law makes a distinction between eligible designated beneficiaries and others who inherit retirement accounts, according to the IRS. Eligible designated beneficiaries include surviving spouses; disabled or chronically ill people, or some trusts for their exclusive benefit; and
minor children, according to the agency. Eligible designated beneficiaries can generally take distributions over their life expectancies, while other designated beneficiaries have to take them over 10 years, according to the agency.

The regulatory project is on the agency's priority guidance plan for this year, which runs through June. Practitioners told Law360 they hope the rules will set a national standard for the age of majority, allow them to rely on good-faith interpretations of the statute and address the use of seethrough

Here, Law360 examines three areas that practitioners want the rules to sort out.



The SECURE Act's definition of eligible designated beneficiaries includes some trusts created for the sole benefit of chronically ill or disabled people, according to the IRS.

Welber said clarity is needed on what evidence is required to demonstrate disability or chronic illness for purposes of the provision.

"We just don't know how rigorous that's going to be, that process and how much paperwork there is," she said.

Evidence can easily be provided for someone who is disabled or chronically ill getting government benefits, Welber said. However, there are beneficiaries who don't qualify for or who don't need government assistance but would still be helped by lifetime IRA payouts, she said.

"You might be disabled, but if you haven't worked for 40 quarters — let's say you're a stay-at-home mom — you're not going to have enough of a work record to get Social Security disability income," she said.

Evidence needed to demonstrate disability or chronic illness isn't the only trust-related question practitioners hope the agency will address.

Jorge Leon of Michael Best & Friedrich LLP said it's unclear how a trust combining eligible designated beneficiaries and other beneficiaries will be handled.

"We need clarity on how that's going to operate and how the rules are going to apply to those scenarios," he said.

For her part, Denise Appleby, CEO of Appleby Retirement Consulting Inc., offered advice to estate planning attorneys responsible for multibeneficiary trusts designed to use an eligible designated beneficiary's age for calculating required minimum distributions. They may want to create a separate
trust for the eligible designated beneficiary and another for everyone else, she said. Following the SECURE Act, it appears the 10-year rule would apply to trusts with both eligible designated beneficiaries and designated beneficiaries, she said.

There has been a hope, Tackney said, that the regulatory project will address issues related to the use of see-through trusts, in particular. Those are trusts that meet requirements in regulations under Section 401(a)(9) , according to the IRS.

The concept of a see-through trust isn't currently in the Internal Revenue Code, Hadley said. The agency just put the idea into regulations to allow the use of trusts that essentially just pay directly through to a person, he said.

"The largest goal in looking at that issue would be to, again, make the regulations a little bit more robust so that they can address various situations that have come up that are currently only addressed through private letter rulings, if at all, which is not a great place for something that is as
ubiquitous as IRAs," he said.

The SECURE Act didn't change rules for nonhuman beneficiaries such as charities, estates and trusts other than see-through trusts, Hadley said. If the account owner dies before payments have started, the entire account must be distributed within five years, he said. However, if the owner dies on or
after the date when payments have to start, payments to beneficiaries have to be made under the "at least as rapidly" rule, in this case based on the owner's life expectancy at death, he said.

Hadley floated a hypothetical scenario of setting up a see-through trust covering his wife, 14-yearold son and nephew equally. Under the SECURE Act, his wife and son would be eligible designated beneficiaries, with his son being an eligible designated beneficiary until reaching the age of majority,
he said. However, his nephew would be subject to the 10-year rule.

"So does that mean the entire trust is subject to the 10-year rule because a single of the trust beneficiaries is not an eligible designated beneficiary?" he said. "One way or the other, the new regulations have to deal with this."

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