Sat. Dec 2nd, 2023

Ruder Ware’s Trusts & Estates blog has featured several blogs (for example, Call to Action: Review Your Estate Plan in Light of the SECURE Act and Why SECURE Act Matters to You) on the SECURE Act, a federal law effective January 1, 2020,  that made significant changes to the payout provisions of inherited retirement benefits, such as 401(k) plans and IRAs.

The most dramatic change brought about by the SECURE Act was the elimination of the ability of a “designated beneficiary” (in most cases an individual, such as a child) to “stretch out” distributions from an inherited retirement benefit over the beneficiary’s life expectancy.  Under the SECURE Act, most “designated beneficiaries” of inherited retirement benefits are subject to a “10-year rule.”  The 10-year rule provides that funds from inherited retirement benefits must be withdrawn by the beneficiary within 10 years starting on January 1st of the year after the owner’s death.

Estate planning attorneys and tax advisors had the common understanding, based on various rules and committee reports surrounding the SECURE Act, that the 10-year rule meant assets within inherited retirement benefits would have to be withdrawn within 10 years starting on January 1st of the year after the death of the account owner, but no distributions from the inherited retirement benefit would be required until the very end of the 10-year term.  In other words, after the passage of the SECURE Act it was widely understood that a beneficiary of an inherited retirement benefit could withdraw assets from the inherited retirement benefit during the 10-year term, but would not have to.  The only requirement was that a beneficiary had to withdraw all of the assets within the inherited retirement benefit by the end of the 10th year.

Much to the dismay of the estate planning community, the Internal Revenue Service (IRS) recently released an updated version of IRS Publication 590-B, which discusses the distribution requirements for retirement benefits inherited by “designated beneficiaries.”  According to the updated version of IRS Publication 590-B, a “designated beneficiary” is required to withdraw a minimum amount from the inherited retirement benefit during each year of the 10-year period.  The amount of the “required minimum distribution” (or “RMD”) that must be withdrawn every year by the “designated beneficiary” is determined under the same rules in effect before passage of the SECURE Act.  At the end of year 10, the “designated beneficiary” is still required to withdraw all remaining funds in the retirement plan.

We are still waiting for official regulations regarding the 10-year rule from the IRS.  It is possible  the IRS will change its position in the official regulations.  It is also possible the IRS simply made a mistake in the most recent version of IRS Publication 590-B.  In any case, there is a state of confusion right now with respect to retirement benefits inherited on or after January 1, 2020.  Ruder Ware’s Trusts & Estates team will be following and monitoring this situation as it continues to develop. 

By senior