Page 37 - Investment Advisor - October 2021

Avoiding a Key Mistake With Inherited IRAs

dvisors can be a hero to their cli- Tax Trusts &
A ents in one big way: Remind them Planning Estates
to update designated beneficiaries for Financial Portfolio Retirement Social
their IRAs or trusts. As Ed Slott said dur- Planning Construction Planning Security
ing a session at the American Institute of
CPAs conference this summer, not hav-
ing updated designated beneficiaries (or
DBs) “is where all the problems come
from” — particularly in light of changes
under the Setting Every Community Up
for Retirement Enhancement Act.
Beneficiaries need to be checked after
births, deaths, marriages and divorces.
Slott cited the tagline from the film “The
Sixth Sense” — “I see dead people” —
because that’s who he sees a lot of on
beneficiary forms.
In the session, he outlined post-death
and post-Secure Act guidelines that
advisors should be aware of when deal-
ing with beneficiary trusts and IRAs.
A key difference the Secure Act brought in was eliminating What about IRAs left to two children, one an adult and
the stretch IRA (for the most part) and placing a 10-year limit 4 one a minor? The 10-year rule applies to the adult; the
on IRA withdrawals for beneficiaries. For those who died in minor is considered an EDB and can use the stretch until they
2019 or before, their DBs would be eligible for a stretch IRA, become an adult, and then it converts to the 10-year rule.
while the beneficiaries of those who died afterward would not.
There are exceptions. For example, an eligible designated As noted, those heirs who are chronically ill or disabled
beneficiary (or EBD) is defined as a surviving spouse or minor 5 are eligible for the stretch.
child (but not grandchild), or a person with special needs or a
chronic illness. EDBs are eligible for the stretch IRA. Also as noted, heirs of IRA owners who died in 2019 or
Here are examples Slott provided on post-death 6 before are grandfathered into the stretch rule. However,
payout DBs. DBs of IRA owners who died in 2020 must follow the 10-year rule.

The most common example: The IRA owner dies in A successor beneficiary generally gets the 10-year rule.
1 2020 and leaves the IRA to his son, age 32 — a desig- 7 For example, if an IRA owner dies in 2019 but their
nated beneficiary. The son has 10 years to empty the IRA after DB daughter dies in 2020, the daughter’s DB is subject to the
the owner’s death. 10-year rule.

Let’s say the IRA owner dies in 2020 and leaves it to If an IRA owner and their DB both died in 2019, the
2 his adult son, Jerry, who is injured in a car crash and 8 successor is grandfathered into the stretch rule.
becomes disabled. Because he wasn’t an EDB when the father
died, Jerry is still obliged to adhere to the 10-year rule. If an EDB inherits in 2020, they get the stretch, but once
9 they die, their successor is subject to the 10-year rule.
Minor children, however, can be designated EDBs
3 temporarily or until they reach the age of majority: age Slott reiterated that it is “still critically important” to have a
18, or 26 if they stay in school. That means they will be able designated beneficiary now, even though most are subject to
to stretch IRA withdrawals until they turn 18 or 26, and then the 10-year rule. In the end, “the 10-year payout rule is not
have 10 years afterward to empty the account. So let’s say the the worst rule in the world,” he told the audience. What he’s
IRA owner dies in 2020 and leaves the IRA to her 10-year-old seen is that “most young beneficiaries are a smash and grab …
daughter. She is an EDB until she hits 18 (or 26 if she stays in they have the money out before the body’s cold. Now, with the
school) and must convert to the 10-year rule after that. 10-year rule, they might let it play out.”

OCTOBER 2021 INVESTMENT ADVISOR 35