2. The importance of
the Beneficiary
Designation.
Any retirement plan is a
contract between the
sponsor and the account
owner.
Distribution to
beneficiaries on the
account owner’s death is
governed by the
beneficiary designation.
If there is no beneficiary,
it goes through probate.
This Photo by Unknown Author is licensed under CC BY-NC
3. Who should be
beneficiary?
If the account owner names
individuals, the individuals
pay income tax as they
withdraw it.
If the account owner names a
charity, the charity and the
family pay no income tax on
the portion going to charity.
You should rarely name a
trust.
This Photo by Unknown Author is licensed under CC BY
4. Summary of the old rules-stretch IRA
Before January 1, 2020, an IRA account holder would
name a spouse as primary beneficiary and children as
contingent beneficiaries.
After the account owner’s death, the spouse would take
distributions over his/her life expectancy.
On spouse’s death, children could take over their
respective life expectancies.
5. Economics of a stretch IRA
The children could commonly take distributions over 30
years.
This would allow the children to accumulate more on a
tax-deferred basis.
Congress never liked the idea that beneficiaries could use
inherited IRAs to provide for retirement.
6. Inputs for case study
Age of (oldest trust) beneficiary 50
IRA Balance $1,000,000
Pre-tax growth rate 5%
After-tax growth rate 3%
Average income tax rate: life expectancy 25%
Average income tax rate: ten-year rule 30%
Distributions at beginning or end of period? End
Lump Sum distribution or amortize Amortize
7. Summary of economics
Years after death Ten Year Rule Life Expectancy
10 $1,039,237 $1,195,301
20 $1,396,648 $1,818,366
30 $1,876,978 $2,633,563
40 $2,522,502 $3,598,207
8. Summary of the new rules
Congress passed a major revision of retirement plan rules,
including IRA distributions, effective on January 1, 2020.
The Secure Act changes the economics of leaving
retirement plans to charities.
Account owner and account owner’s spouse – the account
owner and the account owner’s spouse continue to use their
life expectancies.
9. Important Provisions of the Secure Act
Begin minimum required distributions (MRD) at MRD at age 72.
If you were 70 ½ before January 1, you continue to use the old
rules and you must take MRD.
If you weren’t 70 ½ before January 1, 2020, you can start
taking MRD at 72.
Beneficiaries other than the account owner and spouse must
take the entire inherited IRA within 10 years of the death of the
account owner or the spouse.
10. Limited exceptions to the 10-year rule
The surviving spouse can still use life expectancy.
The following individuals are not limited to 10 years:
Disabled individuals – life expectancy as long as the person is
disabled. If the disability ends, you change to the 10-year rule.
Chronically ill individuals – 10-year rule is suspended.
Those who are less than 10 years younger than the account owner
– life expectancy
Minor beneficiaries can get distributions until the age of majority
(presumably age 21) plus the 10-year period.
11. Definition of a designated beneficiary
An Individual
Trust meeting certain conditions
Irrevocable under state law or will become so on the
account owner’s death
Valid under state law
The trust’s underlying beneficiaries must be identifiable
Copy of the trust document must be provided to the IRA
custodian by October 31 of the year following the year of
the account owner’s death.
12. Effect of the 10-year rule
This means that the children face a significantly higher income
tax bill on the IRA distributions unless the account owners review
and alter their plans.
Depending on the size of the IRA, the children could face several
hundred thousand dollars in additional income taxes.
14. Charitable IRA rollover
The Qualified Charitable Distribution (QCD), otherwise known
as the Charitable IRA rollover is still available.
Direct the custodian to distribute up to $100,000 to a public
charity.
Cannot distribute to private foundation or donor advised fund
Distribution to charity satisfies your required minimum
distribution.
Donor reports no income and gets no deduction
15. IMPORTANT NEW RULE
There is one important change: if you do a Charitable IRA
rollover with an IRA for which you took deductions, it is not tax
free.
You must do it with an IRA rolled over from a 401k plan.
Tax deductible contributions are recaptured.
Investment growth is not recaptured.
16. Example of taxable QCD
Individual who turned 70.5 before 2020 deducts $5,000 for
contributions in each of 2020 and 2021 but makes no
contribution for 2022.
The individual makes no qualified charitable distribution
for 2020 but makes QCDs of $6,000 for 2021 and $6500 for
2022.
17. Calculation of amount excludable
Excludable amount is $6,000 for 2021 minus $10,000 in
contributions for 2020 and 2021, or ($4,000).
Excludable amount for 2022 is $6500 minus the amount of
deductible contributions not previously applied to a QCD.
Excludable amount is $6500 minus $4,000 = $2500.
Deductible contributions are applied only once.
18. Naming a charity
at death
The donor can still name
charity as a beneficiary at their
death.
Family will pay no income
tax on the portion going to
charity
You would need to stretch an
IRA out over 40 years to get the
same tax benefit
This Photo by Unknown Author is licensed under CC BY-NC-ND
19. Testamentary Charitable Remainder
Unitrust
The testamentary Charitable Remainder Unitrust provides
another possible solution.
A charitable remainder unitrust is an irrevocable trust
which provides for a payment to one or more income
beneficiaries of an amount between 5% and 50% of the
value of the assets as determined on a specific date each
year.
On the death of the income beneficiary(ies) the amount
left goes to charity.
20. Economics of a CRUT
It comes the closest to simulating a life expectancy
distribution.
If the value of the assets increases, distribution
increases.
If the value of the assets decreases, the distribution
decreases
You would only recommend this for a family with strong
charitable intent
21. Payout Period for a CRUT
The payout can be for
the life or lives of the income beneficiaries or
for a period of years not longer than 20.
At the end of the distribution period for the income
beneficiaries the balance goes to charity.
Each year at least a portion of each distribution will
be taxable.
The testamentary charitable remainder trust is more
complicated but does the best job of simulating the
stretch.
22. Life Insurance
Consider using life insurance
to replace amount lost to
tax
Life insurance not
subject to income tax in
most cases
23. Disclaimer
Consider using a
disclaimer by spouse
in appropriates cases.
The IRA disclaimed
would go to children
or other beneficiaries.
This Photo by Unknown Author is licensed under CC BY
24. Tax Benefits of Disclaimer
Would reduce future Illinois or Federal estate tax
Children would set up an inherited IRA for disclaimed
amount
Would reduce the income tax for the person disclaiming.
25. Do A Roth IRA Conversion
Consider one or more smaller Roth IRA conversionsConsider
Use smaller IRA conversions to stretch out
prepayment of income taxUse
The account owner will pay income tax now.Pay
Children will withdraw over the 10-year period but
pay no income tax.
Withdraw
over
26. Summary
SECURE Act is the first major revision to distribution rules
since 2002
It radically changes the economics of IRA distribution
planning
There are solutions to reduce the damage
However, none of them are great solutions.
27. Contact Information
James C Provenza & Associates, PC
1701 E Lake Avenue #260
Glenview, IL 60025
Phone 847-729-3939
E-mail: jprovenza@provenzalaw.com
