The Setting Every Community Up for Retirement Enhancement (SECURE) Act made waves as it went into effect on January 1, 2020.

One of its most significant provisions is the changes to the post-death distribution rules.

Before the SECURE Act, Inherited Retirement Account (IRA) beneficiaries were able to “stretch" out distributions based on their life expectancy. In many cases, beneficiaries deplete the IRA sooner than projected. But this meant benefits on income tax as it allowed longer income tax deferral.

Now, this “stretch" provision is no longer applicable for most non-spouse beneficiaries as the new retirement law requires complete distribution of the inherited IRA within 10 years. In some cases, these withdrawals may take place during the beneficiary’s highest tax years.

However, there are five types of people under the Eligible Designated Beneficiaries category that are exempted and can still qualify for the “stretch" IRA:

• Surviving spouse

To be considered an Eligible Designated Beneficiary under this provision, one must have been legally married to the plan participant. A surviving spouse has two options—roll over the IRA to his or her own account or accept it as an inherited account.

• Disabled individual

A person is considered disabled “if he or she is not able to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued indefinite duration,” as stipulated in IRC Tax Code Section 72(m)(7).

• Chronically ill individual

This beneficiary does not need to be related to the plan participant to be qualified. Tax Code Section 7702B(c)(2) and the SECURE Act states that people who can be classified as chronically ill are those who are unable to perform at least two activities of daily living (ADL) for a minimum of 90 days, or those who necessitate substantial supervision due to severe cognitive impairment.

• Individuals not more than 10 years younger than the plan participant

Those who are most likely to benefit from this provision are siblings, parents, and unmarried partners of the plan participant, as long as they are not more than 10 years younger.

• Minor child of the plan participant

If there’s a sole minor child designated as IRA beneficiary, the required annual withdrawal will be based on his or her life expectancy until he or she reaches majority age. After which, the 10-year rule will apply and the remaining IRA must be withdrawn.

Impact on the Special Needs Trust

The SECURE Act has a clear benefit for disabled individuals as it permits them to continue to stretch withdrawals. But a Special Needs Trust will only qualify for this treatment if the disabled individual is the sole beneficiary of the trust in his or her lifetime. If the trust also permits income distributions to a child or spouse, it will be considered as an accumulation trust and the exception to the 10-year rule will no longer apply. It must be withdrawn within 10 years and taxes has to be paid at higher rates and sooner.

Importance of Special Needs Planning

The tax bracket for trusts posts the highest federal marginal income tax rate in comparison to individual tax brackets. If you own IRAs and have a disabled child, it is very important to conduct a Special Needs Planning meeting in order to assess how assets should be allocated given the stretch out available for disabled children, but also taking into consideration the tax rate on trusts. Also, during your meeting, options concerning eligibility and availability of public benefits will be reviewed and discussed.

The SECURE Act has definitely posted many recent changes and holding a new planning session will help you maneuver through it. Talking to a lawyer experienced in Special Needs Planning will help ensure you cover all aspects.

In need of further assistance? Give Koler Law Office a call.