Finally Final SECURE Regulations
By InterActive Legal Content Team On Jul 22, 2024
Last week, the IRS issued the long-awaited final regulations implementing the changes made by the SECURE Act. The regulations take effect 60 days from the date on which they were published (the publication date is July 19, 2024) and certain provisions apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2025. These final regulations largely follow the same structure as the proposed regulations issued in 2022, but include some changes, a few of which are (maybe pleasantly) surprising. This post covers some of the more notable changes in the final regulations as they relate to post-death planning for retirement benefits.
Note: This discussion assumes a basic understanding of the rules relating to the post-death distribution of retirement benefits, and a familiarity with the proposed regulations previously published. For a review of those proposed regulations, please see this prior article by the InterActive Legal Content Team.
An Unsurprising Change: Certain Charities as Designated Beneficiaries of AMBTs
First, let’s start with a change that is no surprise: the treatment of certain charitable organizations, described in Section 408(d)(8)(B)(i) of the Internal Revenue Code, as “designated beneficiaries” of an “applicable multi-beneficiary trust” (AMBT). The classification of these charitable organizations as designated beneficiaries means that such an organization can be named as a remainder beneficiary of an AMBT without causing the trust to fail as a “see-through trust” under the regulations.
This is an important change, because it aligns with many estate plans involving special needs trusts. An AMBT is a special kind of see-through trust for a beneficiary who is disabled or chronically ill within the meaning of the regulations. The disabled or chronically ill beneficiary will be treated as the sole beneficiary of the trust with respect to retirement benefits if all trust beneficiaries are designated beneficiaries, and the trust provides that no portion of the retirements may be distributed to anyone other than the disabled or chronically ill beneficiary during that beneficiary’s life. This allows the retirement benefits to be stretched over the life expectancy of the disabled or chronically ill beneficiary because of that individual’s status as an “eligible designated beneficiary.”
Often, a trust that qualifies as an AMBT is drafted as a special needs trust for a beneficiary who needs to qualify for Medicaid or other government benefits. It is not uncommon for a special needs trust to name a charitable organization as the remainder beneficiary, such as a charity that has helped the family find treatment and resources. The inclusion of a charity as a remainder beneficiary of the trust would preclude the trust from meeting the requirement that all trust beneficiaries be designated beneficiaries, if not for this special exception relating to AMBTs.
Although this is a valuable change, brought about by devoted lobbying efforts of the elder law and special needs planning community, it is not a surprise. This special exception was actually included in the legislation commonly referred to as SECURE 2.0, enacted at the end of 2022. Accordingly, this change to the final regulations is simply a conforming change adopted by the IRS.
A Big (and Welcome) Surprise: Separate Share Treatment for See-Through Trusts
In contrast, the final regulations also bring about a welcome yet surprising change which has long been sought by estate planning attorneys. The “separate account” rule under Section 1.401(a)(9)-8 of the regulations now applies to separate see-through trusts created under the same trust instrument, as long as the terms of the trust instrument require that the trust be “immediately divided” upon the death of the retirement plan participant. The separate account rule applies where a retirement account is divided into separate accounts, as long as the beneficiaries of each separate account are different. This permits the rules regarding post-death distributions to apply separately to each separate account, meaning that the determination of whether there is a designated beneficiary or eligible designated beneficiary is made separately with respect to each separate account. This can provide an advantage in terms of stretching required distributions over the longest period possible, and in terms of determining the amount of required distributions.
Under the prior regulations, the separate account rule expressly did not apply to trusts. This often presented a challenge for estate planners advising clients regarding beneficiary designations, because it was advisable to name each trust specifically designated to receive a portion of the retirement benefits, rather than simply naming the “funding trust.” For example, under the prior regulations, if a client, Harmony Jenkins, created the “Harmony Jenkins Revocable Trust,” which provided for the division of the trust into three separate trusts for Harmony’s children at Harmony’s death, it was advisable for Harmony to complete the beneficiary designation by stating something like the following:
“My retirement account shall be divided into separate shares, one for each child of mine living at the time of my death, with each share passing to the separate trust of which the child for whom it is set aside is a beneficiary under the Harmony Jenkins Revocable Trust.”
This type of designation is understandably difficult for most clients to comprehend, and clients often receive pushback or outright rejection of the designation when it is presented to the plan administrator. Now that the separate account rule applies to trusts, it is possible to name the general funding trust (e.g., the “Harmony Jenkins Revocable Trust”) and allow the terms of the trust to provide for the desired division into separate trusts. Accordingly, the IRS has helped to create a smoother estate planning process by allowing the application of the separate account rule to trusts.
In order to qualify for separate share treatment, the trustee cannot have any discretion as to how post-death distributions from the retirement account are divided among the separate trusts (nor can anyone else have such discretionary authority). An administrative delay following the participant’s death will not prevent the application of the separate account rule under the new regulations, provided that amounts received by the trust during the administration period are allocated as if the trust had been divided on the date of the participant’s death. Attorneys should take care when drafting trusts that will receive retirement benefits in order to ensure that the trust meets the necessary requirements for the separate account rule to apply.
Some More Minor (Pun Intended) but Also Welcome Changes
A couple of additional changes added to the final version of the regulations are worth noting. These changes relate to the treatment of a minor child of the participant as an eligible designated beneficiary. First, the final regulations clarify that the definition of “child” for this purpose is the definition in Section 152(f)(1) of the Internal Revenue Code. This broadens the rule so that a minor child of the participant now includes a stepchild, an adopted child, and an eligible foster child.
Second, the final regulations expand on a provision in the proposed regulations permitting eligible designated beneficiary treatment in the event that a beneficiary of a trust is a minor child of the participant. Under the proposed regulations, if retirement benefits are paid to an accumulation trust (meaning that all countable beneficiaries must qualify as designated beneficiaries), the trust will achieve eligible designated beneficiary status if at least one beneficiary of the trust is a minor child of the participant, even if other beneficiaries are not eligible designated beneficiaries. This results in a longer period for distribution of the retirement benefits (as long as the plan so permits). Under the proposed regulations, this distribution period was the tenth anniversary of the date on which the oldest beneficiary who is a minor child of the participant reaches the age of majority (for this purpose, 21).
For example, if the beneficiaries of an accumulation trust are the participant’s three children, Andre (age 25), Brian (age 18), and Chelsea (age 14), the proposed regulations would have required full distribution of the retirement benefits to the trust by Brian’s 31st birthday. This would have been true regardless of the fact that Chelsea still had not reached age 31. Under the final regulations, the age of the youngest minor child is used in determining the required distribution date. In the example, this would be Chelsea’s 31st birthday.
This new rule may provide planning opportunities for clients with multiple children, at least some of whom are minors. Estate planners may wish to consider the potential benefits of creating a single trust for the client’s children to hold the participant’s retirement benefits after death. The trust could terminate or divide into separate trusts once the youngest child has reached age 31.
Conclusion
Although these are some of the more notable highlights of the changes found in the final SECURE regulations, there are additional changes as well. Attorneys should be sure to set aside time (and perhaps a lot of coffee) for a thorough review of the new final regulations.
The Content Team at InterActive Legal is comprised of experienced Estate Planning and Elder Law attorneys with over 150 years of combined experience, as well as non-attorney legal and technology professionals. These attorneys and other professionals keep the InterActive Legal drafting systems current by monitoring federal and state law changes and new planning ideas. In addition, they strive to provide an excellent user experience through ongoing training and drafting support.