By James W. Mallonee
The old rules involving the transferring of your IRA to one of your children, spouse, partner or siblings has changed. The ability of deferring your IRA income over the remaining life time of a majority of beneficiaries has changed to 10 years. Thus, the ability to continue to defer the taxing (non-ROTH) of your IRA by stretching it through a beneficiary’s life expectancy is gone. There are exceptions to this new rule which include the following persons categorized as “eligible designated beneficiaries:” 1) surviving spouses; 2) a beneficiary who is less than 10 years younger than the IRA owner; 3) a minor child; 4) a disabled person; or 5) a chronically ill person. These persons will continue to be eligible for the stretch IRA as in years past. The new rules only apply to persons who are named beneficiaries of an IRA owner who dies after January 1, 2020. Beneficiaries of persons who die before January 1, 2020, continue to enjoy the old IRA rules.
Surviving spouses continue to enjoy the most favorable treatment when inheriting an IRA account and may continue to withdraw over the original owners life expectancy or their own. The ability to roll the IRA into their own IRA still exists and gives the flexibility to begin taking the distributions when the spouse reaches age 72. (That’s correct, the new rule is no longer 70 ½, but 72). Thus, a surviving spouse could benefit from increased growth within the account should he or she be significantly younger than the decedent without having to withdraw any funds.
A person who is less than 10 years younger than the decedent is a new category. This change is primarily directed at siblings or partners who are not married to the original IRA owner and would not otherwise meet the surviving spouse rules. These individuals can use the life expectancy payout method but not the ownership method like a surviving spouse. In essence the 10 year mandatory rule does not apply.
Disabled or chronically ill beneficiaries are determined at the death of the original owner. These persons can take advantage of the stretch IRA rules. A disabled person is an individual who is unable to engage in substantial gainful activity because of some physical or mental impairment over a long period of time. A chronically ill person is determined as an individual who is unable to perform at least two activities of daily living without substantial assistance for a period of at least 90 days. If a person is not disabled or chronically ill at the death of the original owner, he or she cannot make such claim later on should they meet the classification at a later date.
A minor child is also eligible to continue to have IRA required distributions deferred so long as they are a minor. However, the moment they reach the age of majority (usually 18), the ten-year rule takes effect.
Charities, Estates or Trust: These “non-designated beneficiaries,” must take full possession within 5 years following the death of the IRA owner provided the owner died before the age of 72. If the owner died before his or her required beginning distribution date began of January 1, 2020, the non-designated beneficiaries may continue to take possession of the distributions over the life expectancy of the decedent. Remember that these rules apply after January 1, 2020. Thus, if an IRA owner was 70 on January 1, 2020, his or her IRA will not be required to begin distributions until they reach age 72.
“Designated beneficiaries” are now classified as persons (actual human beings) (including some limited see-through trusts) who must take the amount of the remaining IRA over a 10 year period. The minimum amounts to be taken out over the 10 year period is not mandated as in years past. Thus, a designated beneficiary could withdraw all at once or a very small amount for 9 years and then all the remaining IRA before December 31 of the tenth anniversary of the original owner’s death. However, the IRA must be exhausted before December 31 of the tenth anniversary of the original IRA owner’s death.
Given the new rules, the persons who most likely will be impacted by the changes include those individuals with a large IRA balance and those whose number of beneficiaries are small. Grandchildren will also be impacted if the original owner was taking steps to maximize the stretching of the IRA over a longer period of time. The time will now be limited to 10 years unless such individuals fall into the eligible designated beneficiaries category.
The old days of accumulated and conduit trusts being an alternative method of distribution are gone. If you had one of these retirement benefit trusts prepared for you, you’ll need to reconsider how your estate planning might be impacted by these new rules.
Whatever your estate strategy consists of, consider discussing it with the attorney of your choice or your certified financial planner. The retirement benefits landscape has changed for your loved ones and you need to be aware of these changes. It could save your beneficiaries thousands of dollars in future taxes.
This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship.
James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.
In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.
His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.
James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
Facsimile (941) 206-2224
871 Venetia Bay Blvd., #225
Venice, FL 34285