The proposed regulations have been released for post-death distributions from qualified accounts, also called, required minimum distributions (RMDs), after the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Proposed does not mean final, but most rules involving spouses are the same.

In other blogs, we discussed key points and how the proposed post-death RMD rules for retirement accountsafter the SECURE Act might affect a designated beneficiary (DB), eligible designated beneficiaries (EDBs), and a trust as the beneficiary of qualified assets such as IRAs. This blog will focus on post-death RMDs when the beneficiary is a spouse. A spouse is one of the five individual beneficiariesclassified as an EDB, the new class of beneficiary created by the SECURE Act. As comments on the proposed regulations were due 5/25/22 and the public hearing was scheduled for 6/15/22, it is reasonable to expect the regulations to go into effect this year.

First, let’s consider two common ways an IRA or qualified account might be left to a spouse.

• Outright by beneficiary designation. This is the easiest option and offers the spouse the most choices. A surviving spouse has a unique option: he or she can roll the IRA or qualified assets to his or her own account as well as remain the beneficiary, for example, inherit, and, in some cases noted below, use the 10-year rule as a beneficiary.
• Conduit trust. A conduit trust is just that—a conduit for receiving payments from the inherited account and passing them through to the spouse. The trust cannot accumulate these payments. The rules allow a surviving spouse to name a beneficiary (by power of appointment) of any  emaining assets the surviving spouse did not receive. Because a conduit trust distributes all payments, the trust rules require that the spouse is considered when determining who is a beneficiary of these payments for purposes of the distribution rules.

The proposed regulations also specifically define the  requirements to be considered a “see through” trust. That means valid under state law, irrevocable at the death of the grantor, a copy of the document must be delivered to the custodian by 10/31 of the year following the year of death, and the trust must have identifiable beneficiaries.

How Could the Proposed Post-death RMD Regulations Affect Leaving an IRA to a Spouse?

As has always been true, spouses are special. They have choices about how to receive IRAs and qualified accounts that other beneficiaries—even other EDBs—do not have.

Let’s use a hypothetical example to consider how the proposed regulations might affect a spouse.

On an adventure travel trip, Thomas, age 65, and Timothy, age 73, were killed in a tragic accident. Both left their IRAs to their respective surviving spouses, Teresa and Tina. Teresa is age 70 and Tina is age 65.

The question: What options do Teresa and Tina have for distributions under the proposed rules? What would change if the assets were left to a trust?

What if Teresa elects the 10-year rule so she can hold the account without starting RMDs? Note that Teresa is older than Thomas. She has a clever idea! She will elect the 10-year rule and avoid taking current distributions. In year 9, the year BEFORE Thomas’ RBD, she will roll the assets to her IRA. This opportunity is eliminated by the new deemed RMD rule. As RMDs are not eligible rollover assets, the amount that Teresa can roll over will be reduced by deemed RMDs, which are also called “hypothetical RMDs.” The total amount of these deemed RMDs (hypothetical RMDs), is equal to the annual RMDs Teresa would have been required to take if she had not elected (or been defaulted to) the 10-year rule.

What, if Any, Steps Should Clients Take Today?

Spouses are special and the proposed regulations continue that view. However, it does seem to place some limits on how special a spouse might be. If a married couple has a significant difference in age, additional planning may be required to assure the greatest range of options.

The proposed RMD regulations are likely to go into effect in 2022. This is an excellent time to review beneficiary designations and determine if adjustments should be made to allow greater flexibility. Reach out to clients today!

Additional Resources and Links

Required Minimum Distributions (Federal Register)

The SECURE Act: Several Key Retirement Plan Provisions

Further Consolidated Appropriations Act of 2020 (includes SECURE Act)

For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

This material is educational and intended for an audience with financial services knowledge.

Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.