In 2020, we alerted you to the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which became effective as of January 1, 2020.  See our original blog post HERE. The SECURE Act requires most designated beneficiaries (other than a surviving spouse or certain protected classes of beneficiaries) to withdraw the entire balance of an inherited retirement account within a maximum of 10 years of the account owner’s death, rather than the previous life expectancy rule. Under the SECURE Act, a ‘designated beneficiary’ must be a person, so designating a trust in general terms will not qualify the trust as a ‘designated beneficiary.’

This spring, proposed regulations for the SECURE Act were issued by the Treasury (with an effective date of January 1, 2022).  The proposed regulations provide guidance for the reasonable and ‘good faith’ interpretation of the SECURE Act.  Although the regulations are still ‘proposed,’ taxpayers may rely on them for their 2021 and 2022 required minimum distributions.

The Proposed Regulations added a further class of designated beneficiaries referred to as “eligible designated beneficiaries” for purposes of determining the required minimum distributions.  An important issue estate planning attorneys are carefully reviewing is when a trust is considered as a ‘see-through’ trust so that the underlying individual beneficiary can be considered in determining whether the maximum 10 year stretch period can apply.  In order to achieve this, it is generally recommended to designate the underlying beneficiary or sub-trust, rather than just naming the trust generally as a beneficiary.  We were hoping that the proposed regulations would eliminate that requirement, as a detailed beneficiary designation often does not fit on the plan administrator’s form and an attachment is required.  For now, the extrapolated beneficiary designation requirement seems to be here to stay.

The proposed regulations also address issues related to multi-beneficiary trusts and cases where there are multiple designated beneficiaries. In addition, definitions for the protected classes of beneficiaries, such as disabled or chronically ill beneficiaries, have been clarified and expanded.

Further guidance may be forthcoming.  The House Ways and Means committee recently passed a new bill referred to as “SECURE Act 2.0”, which now heads to the Senate, and we are monitoring this development.

If you haven’t updated your estate plan since 2020, or if your beneficiary designation simply names your trust as beneficiary (and not the sub-trusts or beneficiaries thereunder), please contact us for a consultation to ensure that your estate plan is updated to protect against negative tax consequences and to achieve your planning goals.