Welcome Changes 1. The penalty for missed RMDs is reduced from 25% to 10% if corrective actions are taken within the “correction window” and a return (Form 5329) is filed reflecting the 10% penalty. 2. The correction window is defined as the earliest of the end of the second year following the missed RMD year, the mailing of a deficiency notice, or the assessment of the 25% penalty. PLANNING OPPORTUNITIES The final regulations allow the RMD in the year of the employee’s death to be distributed to any beneficiary, providing flexibility in estate planning. ELIMINATION OF SEPARATE ACCOUNT RULE The IRS has eliminated the requirement for separate accounts at the beneficiary designation level. Retirement plan assets can now be divided within a trust provided a retirement account is divided on a pro rata basis. Many existing trusts have a “pick and choose” formula that would violate this rule. Have clients update their trusts if they have significant retirement plans that will be payable to a trustee of a trust upon death. STATE LAW MODIFICATIONS State law modifications of a trust that add or delete beneficiaries will be respected if made by Sept. 30 of the year following the employee’s death. SEE-THROUGH TRUST RULE The see-through trust rule remains unchanged, but the final regulations clarify which beneficiaries need to be considered and which can be disregarded. SPOUSAL ELECTION Section 327 of Secure Act 2.0 introduces a special spousal election, allowing the use of the Uniform Lifetime Table and delaying RMDs until the employee spouse would have been required to take them. However, this election does not allow a spouse to avoid RMDs on a Roth account entirely. ROTH ACCOUNTS The Secure Act states that RMDs do not apply to amounts in Roth accounts. The final regulations clarify that lifetime distributions from Roth accounts do not count as RMDs and can be rolled over to a new Roth account. In conclusion, the Secure Act sets forth specific rules governing required minimum distributions after death whereas practitioners previously had to advise clients based largely upon a hodge podge of private letter rulings. This is an improvement. However, if the goal of the final regulations was simplicity, the IRS failed in that regard. Kent Endacott is a co-founder of Endacott Timmer, a boutique law firm focused on trusts and estates. Endacott has extensive experience in IRS matters and has successfully represented clients before the Internal Revenue Service in U.S. Tax Court. He is a member of the American College of Trust and Estate Counsel and currently serves on its Fiduciary Income Tax Committee and Employee Benefits Committee. He can be reached at kendacott@endacotttimmer.com. If the goal of the final regulations was simplicity, the IRS failed in that regard. 15 nescpa.org
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