When an Estate Inherits an IRA: New IRS Guidance Allows Tax-Free Division into Separate Inherited IRAs

One of the most common and costly retirement-account mistakes is failing to identify beneficiaries on an IRA. When no beneficiary is designated (or the designation fails), the account passes to the decedent’s estate by default. That outcome usually produces worse required minimum distribution (RMD) rules and can create administrative headaches for the executor and the heirs. In PLR 202624001 (released February 20, 2026), the IRS confirmed a practical and taxpayer-friendly solution: an estate that inherits an IRA can divide the account into separate inherited IRAs for the individual beneficiaries named in the will, using trustee-to-trustee transfers, without triggering a taxable distribution.

The Facts of the RulingThe decedent owned a traditional IRA and died after reaching the age at which RMDs were required. No beneficiary designation was on file, so the estate became the sole beneficiary of the IRA. The decedent’s will left the residuary estate (including the IRA) equally to three children. 

The executor proposed to divide the IRA into three equal shares, and move each share by direct trustee-to-trustee transfer into a separate inherited IRA titled in the decedent’s name for the benefit of each child (as a beneficiary of the estate).  We'll discuss "why" the executor suggested this plan after reporting the ruling of the IRS.

What the IRS Ruled

The Service granted four favorable rulings.  The IRS ruled that:

• each beneficiary’s interest in the estate’s IRA may be segregated into separate IRAs for RMD purposes;

• the new accounts, properly titled and funded by trustee-to-trustee transfer, qualify as inherited IRAs under IRC § 408(d)(3);

• each beneficiary may take RMDs from his or her separate inherited IRA over the decedent’s remaining life expectancy (using the Single Life Table); and

• The trustee-to-trustee transfers themselves are not taxable distributions under § 408(d)(1) and are not treated as rollovers under § 408(d)(3).

In short, splitting the estate-owned IRA into separate inherited IRAs for the will beneficiaries does not create immediate income tax.

The Executor's Objectives

The main goals were administrative clarity, separate control, and cleaner tax reporting, while staying within the limited options available once the estate is the beneficiary.  Key benefits of the approved approach:

• Separate accounts for each beneficiary:  Each child receives their own inherited IRA. They can manage investments, take distributions, and deal with the custodian independently instead of everything flowing through the estate.
• Independent RMD tracking
  Each beneficiary satisfies the required minimum distribution rules from their own account. This avoids the need for the executor to calculate and distribute one combined RMD and then allocate it among the heirs.
• Avoids (or minimizes) estate-level income taxation
  When the IRA stays in the estate’s name, distributions are generally reported to the estate under its EIN. The estate may have to pay tax at compressed fiduciary rates if it retains the funds, or it must distribute the money out so the beneficiaries pick up the income. Splitting into separate inherited IRAs lets the income flow more directly to the individual beneficiaries.
• Non-taxable movement of the assets
  The IRS confirmed that the trustee-to-trustee transfers themselves are not taxable distributions and are not treated as rollovers. The tax is deferred until actual distributions are taken from the new inherited IRAs.
• Practical administration
  Once the separate inherited IRAs are established, the estate can close out its involvement with the retirement account more cleanly.

Note that the beneficiaries still had to use the decedent’s remaining life expectancy for RMDs. Because the estate (not the individuals) was the designated beneficiary, they could not use their own longer life expectancies or the more favorable 10-year rule that usually applies to designated individual beneficiaries.What If the Proposal Had Been Denied?

If the IRS had refused to allow the division into separate inherited IRAs, the practical and tax consequences would have been less favorable:

• The entire IRA would have remained titled in the name of the estate.
• All post-death distributions would be reported on Form 1099-R issued to the estate.
• The estate would include those amounts in its gross income (Form 1041).
  • If the estate retained the funds, it would pay tax at the compressed fiduciary income-tax rates (which reach the highest bracket very quickly).
  • If the estate distributed the money to the beneficiaries in the same year, the income could be passed out via Schedule K-1, but the timing and character still flow through the estate’s return first.
• The executor would have to continue administering the IRA as an estate asset, calculating the single RMD based on the decedent’s remaining life expectancy, and then allocating shares among the three children.
• Beneficiaries would have less direct control and more dependence on the estate administration process.
• There could be delays, extra accounting costs, and potential mismatches between when the estate receives the distribution and when the beneficiaries actually receive their shares.
• Alternately, the executor could have distributed the funds from the IRA, incurring immediate taxable consequences to either the estate or to the individual beneficiaries on the entire amount distributed, sacrificing any favorable tax deferral.

In short, the ruling gave the executor a clean, tax-free way to move from one estate-owned IRA to three separate inherited IRAs. That structure is administratively superior and generally more tax-efficient for the beneficiaries than leaving the account stuck inside the estate. It does not, however, improve the underlying RMD period; that limitation is locked in once the estate is the beneficiary. This is why proper beneficiary designations (or a qualifying look-through trust) remain far preferable to relying on this post-death rescue technique.

Why This Matters and Why It Is Still Second-BestThis guidance is helpful for executors who discover that an IRA has no designated beneficiary. It allows the estate to move the assets into individual inherited IRAs so each heir can manage his or her own share and satisfy RMDs independently.  The ruling, however, also underscores a critical limitation: because the estate was the beneficiary, the heirs are stuck with the decedent’s remaining life expectancy. They cannot use their own longer life expectancies, nor (in most post-SECURE Act cases) the more flexible 10-year rule that often applies to designated individual beneficiaries or qualifying look-through trusts. The result is typically faster forced distributions and higher income taxes over a shorter period.Planning Implications for Aging-in-Place and Elder Law ClientsThe following remain actionable and preferred planning tools:

• Name a Beneficiary:  A properly drafted see-through trust, but if not, an individual primary and contingent beneficiary or beneficiaries. The cleanest solution is still a direct beneficiary designation. This PLR is a rescue technique, not a preferred plan.

• Review Beneficiary Forms Regularly:  Marriage, divorce, births, deaths, and changes in relationships all require updates. Custodians’ default rules (often the estate) should never be left in place by accident.

• Coordinate the Will and Beneficiary Designations: Even when the will names the same people, the absence of a designation on the IRA form forces the slower, less favorable estate-as-beneficiary path.

• Executors should act promptly: Establishing the separate inherited IRAs and confirming the RMD method early reduces the risk of missed distributions or custodian resistance. Some custodians still prefer or require a PLR before allowing the split; this published ruling may ease that process.

• Consider the Income-tax Impact on the Heirs. Faster RMDs based on the decedent’s life expectancy can push beneficiaries into higher tax brackets, another reason to avoid estate-as-beneficiary status whenever possible.

Bottom Line

PLR 202624001 gives executors a clear, tax-free path to divide an estate-owned IRA into separate inherited IRAs for the individual heirs. That is welcome administrative relief. It does not, however, cure the underlying problem of a missing or failed beneficiary designation. The best protection remains proactive: keep beneficiary designations current, coordinate them with the overall estate plan, and avoid letting retirement accounts fall into the estate by default.

Clients who hold IRAs or other retirement accounts should review their beneficiary designations as part of any comprehensive aging-in-place or estate-planning update. A few minutes spent confirming those forms can save heirs both taxes and complications later.

Private Letter Ruling (PLR) 202624001 (released June 12, 2026).  

Ohio Department of Medicaid Changes Treatment of Retirement Plans- Eases Burden of Planning

The Ohio Department of Medicaid (ODM) has finally adopted a change that means retirement accounts will no longer be counted  as resources for determining Medicaid eligibility. This means that Ohio law now comports with existing federal law,"[a]fter six suspenseful years," as one law firm characterized the change,  Understanding the change, and its impact, requires some appreciation of  Medicaid and its role in paying for long-term care.

As most know, Medicare provides no real long-term care benefit. Medicare does not cover the cost of any care in a nursing home when a person requires only custodial care. Custodial care includes the following services:

• bathing
• dressing
• eating
• going to the bathroom

Generally, if the care or services that a person requires can be provided by another person without a degree or certification, Medicare does not cover the service.  There is no licensing required for one person to assist another to bathe, or to dress themselves.  There is, of course, licensing required for dispensing medical care, or providing certain rehabilitative care services such as physical therapy and occupational therapy.  

Further, non-custodial care is not fully covered by Medicare.  The best Medicare will do is pay for acute or rehabilitative care for a short period of time following a three-day hospitalization.  The Medicare benefit provides payment for twenty (20) days of institutional care following hospitalization, and additional payments for necessary care up to a total of one hundred (100) days.  After that one hundred (100) days, if a person needs long-term care (in-home assistance, assisted living, or a nursing home), that care is not paid for by private health insurance or by Medicare. 

Nursing home care can cost, on average, $8-12,000/month. Most people cannot afford to pay out of pocket such a large amount for long, so many turn to Medicaid to cover these costs.

Medicaid will pay for the cost of a nursing home or assisted living facility, provided that the institution accepts Medicaid reimbursement, but Medicaid benefits are limited to the impoverished.  That means that:

• A single person can have no more than $2000 to their name (in addition to a home and a car);
• A married couple is limited to a maximum of $139,000 and often less if the combined estate is less that $278,000 (the Community Spousal Resource Allowance or CSRA is one-half of the estate up to $139,000 but only one-half whatever the estate is valued at if the estate is less than $278,000).

To qualify, Medicaid applicants must "spend down," a euphemism for impoverishing themselves, especially since the person receiving their benefits may have to contribute their income to their cost of care.

Taxes and Retirement Accounts Under The Old Rules

For many people, retirement accounts (IRAs, 401ks, 403bs, deferred compensations, Roths, etc.), have replaced the home as the most valuable asset in their estate. Retirement accounts are owned by human beings (for example, trusts or LLCs cannot own retirement plans), and cannot be transferred between people except by death or divorce. Except for Roth IRAs, the taxes haven’t been paid on the accounts, so if individuals want to cash it out, they’ll incur significant income tax. 

Safeguarding the home or after-tax investments from spend-down ahead of time under the Medicaid rules is and has been fairly straightforward. Simply, to protect the retirement accounts, the account would be liquidated and the tax  incurred and paid.  In addition to the tax consequence, liquidation often meant losing the future benefits of tax deferred growth.  The options for safeguarding retirement accounts were limited, complex, expensive, and, for most people and advisors, frustrating. 

Many people would simply leave their retirement assets exposed to spend-down risk, choosing to forego the tax incurred and necessary, and protect their home and other assets.  Imagine a senior paying the cost and expense necessary to protect their $200,000 home, only to lose their $500,000 IRA left exposed. Those who chose against protecting the IRA in advance would, in crisis situations, end up with a severe tax consequences liquidating their IRA to either pay for care, or to protect other assets.

Under the old rules, if a couple had $500,000 in retirement assets, that amount counted toward their asset limit. They would have to spend their money until they reached $139,000 in total countable assets, incurring taxes along the way.  Retirement accounts were not treated any differently than checking or brokerage accounts for eligibility purposes.

Taxes and Retirement Accounts Under The New Rules

Starting in 2016, Ohio changed how it takes Medicaid funding from the federal government. As part of that change, it had to align Medicaid with Social Security disability asset rules. Under Social Security rules, retirement accounts are not counted as assets if they pay out regular, periodic payments – those payments are counted as income instead. In other words, as long as you take your required minimum distribution, or set up a recurring distribution that looks like a required minimum distribution, then Medicaid wasn't supposed to consider how much is in that account, just how much those distributions are.

After four years, the Ohio Department of Medicaid finally started talking about making the change. Some counties adopted these rules consistently, others inconsistently, and some not all. Finally, after more than a year of promising guidance, ODM published Medicaid Eligibility Policy Letter 164 on May 26, 2022. This letter clarified how the Social Security rules applied to Ohio and confirmed that retirement account payouts should be treated as income, and the principal should not be counted.

The change means seniors won't be forced to cash out their retirement accounts in order to qualify for Medicaid. It will save taxes and allow more money for the applicant or the healthy spouse. 

Some folks believe, and are being led to believe that the new rules completely protect retirement accounts.  That is not true.  The income is still countable, but estate planning can provide a solution in the form of a Qualified Income if the income is excessive.  Even then, and more fundamentally Medicaid estate recovery still exists.  Medicaid estate recovery permits Ohio to recover money paid in benefits from a Medicaid recipient’s estate.  

Regardless, the change will make planning much comfortable for people with large retirement accounts. 

Liberal Magazine Fires Shot Across the Bow of Cruise Ship Roth IRA

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator.  Roth IRA's are popular investment choices for Americans.

Roth IRAs are similar to traditional IRAs, the biggest distinction between the two being how they are taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. Once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

Many people use Roths because account holders don't have to start taking distributions at age 70½ as they do with traditional IRAs. The money can sit untouched and grow tax-free throughout the owner's lifetime—a big plus for those who don't need the assets to live on. And while those who inherit any type of IRA must start taking distributions immediately, they are permitted to stretch out those payments, allowing the bulk of a Roth account to continue growing tax-free.

This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers. They are, at the same time, increasingly unpopular among those who champion government intervention to alleviate wealth disparity.  I have warned investors to consider seriously possible future changes to the laws governing Roth IRA's before investing, and particularly before implementing IRA conversions, i.e., liquidating a traditional IRA, and paying the taxes on the investment, in order to convert the investment to a Roth IRA that permits future tax-free withdrawals of both principal and income. See, "Roth IRAs Dim as Inheritance Vehicles- Beware the Rush to Covert."

Mother Jones Magazine (MJ) recently published an article critical of the government continuing to "support" wealthy individuals in an effort to avoid taxation using Roth IRA's. The article may be the first in a coming onslaught of attacks against the investment option, and may be a bell weather indicating reform. 

Although the article often reads more like a partisan platform or political screed (the article is openly published under the MJ "Politics" section), language choice, narrative, and hyperbole aside, the article explores the uses and misuses of the Roth IRA, particularly as a tool of the ultra-wealthy: 

"For many working Americans, a Roth IRA is a useful, if not particularly interesting, way to save money for retirement. For tech billionaire Peter Thiel, it was a way to accumulate more than $5 billion. The nonprofit journalism shop ProPublica ran an exposé in June revealing how a small number of extremely wealthy folks had ended up with Roths—federally subsidized retirement accounts meant for middle-class savers—worth tens to hundreds of millions of dollars and up. Thiel did so, the article noted, by “stuffing” his Roth IRA with wildly undervalued “founders shares” of pre-IPO startups—potentially an illegal tactic—and then watching as their values rose exponentially, and completely tax-free.

The story prompted congressional leaders to request data from the nonpartisan Joint Committee on Taxation, which reported that, as of 2019, more than 28,000 Americans held combined (Roth and traditional) IRA balances of $5 million or more, and 497 taxpayers had balances of at least $25 million. The latter group had socked away a combined $77 billion in their IRAs—on average, more than $150 million each. 'IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,' Sen. Ron Wyden (D-Ore.) lamented in a press release.  

But it turns out IRAs are only the tip of the iceberg. The bigger problem, according to Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center, is that, thanks to a series of bipartisan bills Congress has passed over the past quarter-century, the government spends a fortune subsidizing a whole range of retirement plans whose benefits flow overwhelmingly to America’s most affluent. 'It’s unbelievable the amounts of dollars at stake, and how tilted they are to the high end,' Rosenthal told me. 'It’s just staggering.'"

The author acknowledges that reform of the Roth IRA is not likely or particularly popular, right now:

“'The wealth defense industry—the lawyers, accountants, and wealth managers to the super-rich—are paid millions to sequester trillions, stretching the limits of the law and sometimes writing the law themselves,' says Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and author, most recently, of a book titled The Wealth Hoarders. 'They have fracked every corner of the tax code, especially tax-advantaged retirement programs, to extract benefits for their wealthy clients.'"

The article concludes with a contributing source explaining possible reforms and illustrating the lack of receptiveness there is for reform in Congress: 

"'To prevent stuffing and other kinds of self-dealing, [Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center] continues, Congress should just forbid people from holding non–publicly traded assets—like shares of a pre-IPO startup—in an IRA. Lawmakers also could enact a combined asset limit that covers all types of tax-advantaged retirement plans—as first proposed by the Obama administration. They also could strengthen nondiscrimination rules or consider shoring up Social Security—which appears to be in trouble—instead of further enriching the families who need the least help in their old age. “Congress will struggle to solve the problem they created,' Rosenthal told me in an email. 'But the longer they wait, the harder it will be.'

He’s not holding his breath. In July, when the Senate Finance Committee held a hearing titled 'Building on Bipartisan Retirement Legislation: How Can Congress Help?,' Rosenthal and University of Chicago professor Daniel Hemel submitted a statement for the record, but most of the professionals present at the hearing were part of what he calls the retirement-industrial complex: 'The benefits community, the practitioners, the retirement service industry—they testified. Nobody was invited to testify who says the emperor has no clothes.'"

MJ, despite is controversies, and mis-fires, has often been at or near the forefront of a once controversial position moving mainstream.  MJ was, for example, among the first to overtly connect Former President Trump to the alt-Right, although it's effort was roundly criticized, from the Left because its article portrayed a neo-nazi in a "positive" light.   

More importantly, the past few years have demonstrated just how quickly change is possible.  Roth IRA's, like all investment options, should be considered carefully. 

Trusts as Beneficiaries of IRAs Post Secure Act- The Song Remains the Same?

A common question this year is, "should I name my trust the beneficiary (or contingent beneficiary) of an IRA after passage of the Secure Act?" The Secure Act limits the ability to "stretch" the IRA over the life expectancies of beneficiaries.

The Secure Act, perhaps, reduces the incentive of creating an accumulation trust whereby the beneficiaries are required to keep and maintain the IRA in trust for weal building, taking, normally, only Required Minimum Distributions) RMD's.  An accumulation trust maximizes the power of tax deferral over the longest possible period of time.  

The Secure Act, however, does not change, fundamentally, the analysis whether a trust can or should be a beneficiary of a Trust.  Of course, there are exceptions, but our office regularly recommends naming a trust a beneficiary of IRA.  The remainder of this article will explore the costs and benefits of each strategy. 

An IRA is an investment account that you own in your individual name. In fact, during your life, only you (or a spouse) can own the IRA without it becoming taxable.  It is, therefore, almost never advisable to transfer your IRA to your trust while you are living (the rare exceptions being certain types of planning where incurring the tax is acceptable under the plan, such as Medicaid planning or tax conversion planning). 

Each year, you can contribute income that you earn, to an IRA subject to certain limits. For traditional IRAs, this contribution typically is deductible from your income, and then later withdrawals are subject to income tax. For Roth IRAs, the contribution generally is not tax deductible, and later withdrawals are tax-free. If you withdraw assets from either type of IRA before age 59 ½, you generally will incur an early-withdrawal penalty of 10%.

When you reach age 72, you must start taking required minimum distributions (RMDs) each year from a traditional IRA. The RMDs are based on your age and a life expectancy factor listed in tables published by the IRS. Roth IRAs are not subject to RMDs during your life.

If you withdraw only the RMDs from your IRA, there will normally be assets left in the IRA at your death. And, if the IRA has a high rate of investment return, it is possible your IRA will be more valuable at your death than it was when you started taking RMDs.

The IRA proceeds, normally, do not pass under the terms of your will or trust, but instead pass by way of the IRA beneficiary designation. The most common designations are to individuals – for example, all to a spouse or in equal shares to children. A trust, however,  can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual or group of individuals.

When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust. Some good reasons to consider naming a trust as an IRA beneficiary, instead of an individual, include:

• Avoiding Probate.  Beneficiary designations, like all forms of Direct Transfer Designations work best when there is a tidy timing, order, and sequence to demise.  If, however, a beneficiary survives, but does not prosecute a claim form (perhaps due to illness, incapacity, or incompetency), the proceeds will be subject to probate in the estate of  the deceased beneficiary even if there is a contingent beneficiary. If a primary and contingent beneficiary both pass nefore the death of an account owner,  and there is no other beneficiary, beneficiary, the proceeds will ordinarily pass as part of the account owner's probate estate.  Each institution, however, will have its own rules, since beneficiary designations are governed by contract.  This can create uncertainty regarding matters such as how long must the beneficiary survive the owner in order to be considered a beneficiary.  Trusts remove these uncertainty, and do not involve probate since assets are distributed at the action of a Trustee, when the Trustee completes the administration, rather than being determined on an arbitrary dates such as when the account owner passes.  

• Beneficiary Ownership Limitations. Perhaps the intended beneficiary is a minor who is legally unable to own the IRA. Or, perhaps the IRA owner wants to support an individual with special needs who will lose access to government benefits if he or she owns assets in his or her own name. A solution in both cases could be to name a trust as the IRA beneficiary, which will then become the legal owner in place of the minor or individual with special needs.  More importantly, a trust can "spring" protection into place when needed.  In other words, the beneficiary is protected even if s/he was healthy and not receiving government benefits when the account owner created the plan, but later unexpectedly suffered some change in circumstance creating disability, challenge or disadvantage to distribution. 

• Second Marriage or Complicated Family Structures. An IRA owner may wish for RMDs to benefit his second spouse during the spouse’s lifetime, and then have the remainder of the IRA pass to his own children. If the IRA owner leaves the IRA outright to his spouse, he can be certain that his spouse will benefit, but he can’t guarantee that his children will receive anything. If he instead leaves the IRA to a properly structured trust, his desire to benefit both sets of beneficiaries can be carried out.

• Competent Management. We often hope IRA beneficiaries will take only the RMDs, but an individual who has inherited an IRA has the right to take larger distributions, or even withdraw the entire balance of the IRA. A beneficiary's access to an inherited IRA owned by a trust will be subject to the terms of the trust.

• Succession Control. When an individual IRA beneficiary inherits an IRA, s/he can name their own successor beneficiaries. If the IRA owner wishes to control succession beyond the initial beneficiary, the owner will need to set forth the succession terms in a trust and name the trust as the IRA beneficiary.  Do you want your grandchildren, for example, to inherit the proceeds instead of your daughter or son-in-law? 

• Creditor Protection. A person’s own IRA has some level of protection from creditors.  Inherited IRAs do not enjoy the same protection; the U.S. Supreme Court ruled  that inherited IRAs do not qualify under the Federal Bankruptcy Code as exempt from the claims of creditors as “retirement funds.” An inherited IRA held instead in a properly structured trust will not be an asset of the beneficiary and will have full or partial protection from creditors.

• Contingency Planning.  What if....?  What if a beneficiary becomes disabled, becomes incompetent, marries unwisely, becomes an addict, becomes a criminal, joins a cult, develops severe marital problems, finds bad luck and has numerous creditors, becomes a citizen of another nation that treats property differently, develops severe mental illness, becomes incarcerated or institutionalized?  Trusts can be flexible forward looking instruments that permit planning you might think unlikely or even impossible.  Beneficiary designations are only a name on a line, regardless of what happens after the name is written.   

• Avoiding Estate Taxes.  Most estate plans for wealthy individuals include trusts designed to minimize and postpone the payment of federal and state estate tax. For such estate plans to work as intended, the portion of these trusts that shelters an individual’s federal or state estate tax exemption amounts needs to be funded upon the individual’s death. Often, the only asset available to do this funding is an IRA.

• Minimizing Income/Capital Gains Taxes. Many estate plans  include trusts designed to minimize and/or postpone the payment of federal and state income or capital gains tax. For such estate plans to work as intended, the portion of these trusts that produces deferral or maximizes step-up in basis need to be controlled by the trust.  Beneficiary designations can, especially combined with other instruments, accomplish these, perhaps, but alone they are powerless to accomplish such objectives.   

Regardless, there is little doubt that the luster of stretching an IRA to minimize income taxes is limited by the Secure Act. The rules about distributing an inherited IRA after the owner dies have changed. The preferred payout has long been the “stretch IRA,” where the post-death RMDs are stretched out, with annual distributions, over the life expectancy of the new IRA beneficiary. In this case, the IRA could continue to grow tax-deferred, often for many decades after the owner’s death.

The SECURE Act, passed in December of 2019, has significantly reduced the ability to create a stretch IRA. The prior stretch rule has been replaced, for most beneficiaries, with a 10-year rule that requires the IRA to be distributed out completely by the end of the tenth year following the year of the IRA owner’s death. It was originally believed that the 10-year rule does not require annual distributions, so long as the full amount is distributed by end of the tenth year. Unfortunately, new rules seem to require RMD's, defying the predictions of many pundits.   

The new 10-year rule does not apply to the following beneficiaries (known as “eligible designated beneficiaries”): the IRA owner’s surviving spouse, the owner’s children while they are minors, certain individuals who are chronically ill or disabled, and any person who is not more than 10 years younger than the IRA owner. The stretch IRA is still available for these beneficiaries.

The post-death RMDs for a trust named as an IRA beneficiary will be calculated under either the stretch payout rule, the 10-year rule, or the 5-year rule, depending on certain attributes of the trust and the trust beneficiaries. It matters whether the trust qualifies as a see-through trust, whether it is a conduit trust or an accumulation trust, and whether the trust beneficiaries are non-individuals, “regular” beneficiaries, or part of the new class of “eligible designated beneficiaries.” 

The analysis of which RMD rule applies is not always clear, and there are aspects of the SECURE Act that will require clarification through IRS regulations. For these reasons, among others, it is important to involve your estate planning attorney and accountant in any decision to name a trust as an IRA beneficiary. You will want to confirm that your reasons for naming a trust as your IRA beneficiary are reflected in the trust terms and will not be negated by the RMD payout rules. It is also important to review beneficiary designations to be sure that any trust beneficiaries are appropriately named.

It is important to note that the RMD payout rules are different than the payout rules of the trust. Even if an IRA must pay out under the 5-year rule to a trust named as the IRA beneficiary, it does not necessarily mean that the IRA assets will distribute out to the trust beneficiaries within five years. Instead, the terms of the trust regarding distribution to trust beneficiaries will apply. For example, if the trust is completely discretionary, then once the IRA assets are distributed out of the IRA to the trust itself, the after-tax proceeds of the IRA will remain invested with other assets of the trust until the trustee exercises its discretion to make a distribution to one or more of the beneficiaries.

Inherited IRA Beneficiaries May Be Required To Take RMD’s

The SECURE Act became law on January 1, 2020 and made several changes to the rules for retirement accounts. One provision is that non-spouse beneficiaries of IRAs, with a few exceptions, must deplete the account within 10 years of the original owner’s death. This applies to all deaths after January 1, 2020. With this requirement, the SECURE Act put an end to the IRA Trust, which allowed IRA beneficiaries to stretch the Required Minimum Distributions (RMDs) over beneficiary’s  entire lifetime. Stretching was limited to a child and/or a grandchild or a qualifying trust benefitting a child and or a grandchild.

Many legal experts who analyzed the SECURE Act assumed the new 10-year rule would work like the existing 5-year rule for IRAs whose owners died prior to 72 and that had no designated beneficiary: although all funds had to be depleted within that time frame, no annual RMDs were required. The publication of IRS 590-B on March 21, 2021  (see pages 11-12), suggests the assumption was wrong and that the Internal Revenue Service requires RMDs.

590-B appears to suggest that not only would non-spouse beneficiaries of IRAs have to empty the entire account within ten years, but they also might  be required to take annual required minimum distributions in years 1-9. Those withdrawals would be based on the beneficiary’s own age and life expectancy. 

The tax implications are significant. Beneficiaries of traditional IRAs would have to pay taxes on their withdrawals, based on their tax bracket. Beneficiaries of Roth IRAs would lose the opportunity for the entire amount to grow tax-free before withdrawing it all at the end of the ten-year period.  This, of course, is the federal government's intention; the SECURE Act removes the tax benefits of stretch IRAs and ensures the government a meaningful opportunity to collect taxes as soon as possible.

The IRS rule has not been finalized, and is now open for public comment. Non-spouse IRA beneficiaries should be aware that depending on what happens, they may have to take a withdrawal this year. 

RMD's for 2020 were waived, by the way, due to COVID-19.

Importance of Senior Tax Deduction Returns in 2021

A tax break for seniors that all but disappeared last year has resurface this year. This tax break benefits retirees in their 70s and up. These tax breaks are qualified charitable distributions (QCD), "which allow individual retirement account holders to divert some of their federally taxable required distributions to charity." The deductions allow IRA holders to make donations and reduce their federally taxable income. 

The pandemic limited the effectiveness of this deduction last year.  The Cares Act effectively cancelled required minimum distributions (RMDs).  Even though you could still use QCDs, their effectiveness was almost completely eliminated due to the cancellation of RMD requirements in 2020:  those who didn't want the taxable income could simply forego the RMD, and thus, there was no need to take take advantage of the QCD.

Now, retirees can take advantage of these contributions. However, if considering QCDs, you should consult with your financial or tax  advisor to discuss the best way to take advantage of these contributions, or possibly to stay away from them.  There are limitations and possible pitfalls. 

For more information, go here.

Source: Allan Sloan, "A tax break for retirees is back. Here’s how to use it — and what to avoid," Washington Post, March 18, 2021. 

Secure Act- As the Dust Settles

The SECURE Act was passed in late December, so the first few weeks of the year brought significant discussion about what it means, what it accomplishes, and how it effects estate and financial plans.  Fleming and Curti, PLC, in Tuscon, Arizona assembled the "most interesting articles, blog posts, and musings" regarding the Secure Act.  Among them was, of course, Attorney Robert B. Fleming's highlights,  but noted that many others were "giving similar overviews."  

Here are just a few:

• National Law Review;
• K&L Gates, global law firm;
• Kiplinger;
• Kitces’s blog, "(with a nifty summary chart)," and;
• Investment News magazine..

Natalie Choate, the universally recognized guru of estate planning and retirement plans provides a "deep dive" in the form of a 35-page analysis.

Fleming and Curti noted: 

"[a]s the days passed, more reading ensued. Nuances of the Act, some good and some not so good, were dissected and discussed. Because this is still new, expect this to continue in the months (and probably years) ahead." 

Among the interesting reads on specific Act-related topics:

• How law affects special needs trusts, including fixing the “kiddie tax” treatment for minor beneficiaries.
• One possibly unintended consequence: the Act limits the amount of Qualified Charitable Distributions (“QCDs”) the holder of a traditional IRA can make.
• Tucson attorney Brent Nelson explained that, if you really dissect the options, naming a trust as an IRA beneficiary became even more complicated.

In addition, to deal with the much-discussed loss of the “stretch” for inherited IRAs, different strategies are emerging:

• Consider the likely tax situation of the potential beneficiaries and adjust designated beneficiaries accordingly.
• If you have charitable intent, consider a charitable remainder trust.
• Think about converting to a Roth: Is it right for you?; how a conversion works with an IRA trust; and some traps to avoid.

Of course, there is a lot more out there. If you are interested in ongoing analysis, there’s The Slott Report, with almost daily posts on IRA news. Don’t believe everything you read, though. Especially right after a new law arrives, be mindful that 1) it takes a while for the dust to settle, 2) regulations, certain to come along, should clarify some things, and 3) every person’s situation is different. Plan to talk with your financial advisor and estate planning attorney.

This blog will post a separate article in a few days outlining how our office is revising trusts, and IRA beneficiary strategies as a result of the Secure Act.  The most obvious impact, of course, is the loss of the "stretch" IRA for the generation of an IRA owner's grandchildren.  IRA trusts still have utility, but the financial benefits are obviously less compelling.   There is not, however, an utter loss of the tax deferral for children or spouses, however, despite misinformation to the contrary.  The ten-year pay-out rule is not always the result, for good or ill.  Stay tuned!     

Skipping the 401(k) RMD Without Penalty For Those Continuing to Work After Age 70

More than ever, workers are continuing to work into their 70s and beyond.  The general rules governing retirement accounts require nearly every individual account owner to begin taking Required Minimum Distributions (RMDs) by April 1 of the year following the year in which the owner turns 70½.  There exists a notable exception for employer-sponsored 401(k) accounts owned by employees who continue working past age 70½.

If the plan allows, an owner who leaves funds in the 401(k) can avoid RMDs if s/he remains employed with the employer who sponsors the plan.  Moreover, the owner can also continue to make contributions to the 401(k)! 

This exception has some significant requirements, though.  The current employer must sponsor the 401(k);  an owner cannot change employers and defer RMDs beyond age 70½.  In other words, if a former employer sponsors the relevant 401(k), the owner must take RMDs even if continuing to work for another employer that also sponsors a 401(k).  If the owner has more than one 401(k) and the plans allow for rollovers, however, it may be possible to roll all 401(k) funds into the 401(k) of a current employer and delay RMDs on all of the funds if the still working exception applies. Combining accounts will also simplify RMD planning once the owner stops working, because the RMD on each account would have to be determined separately.

The plan, too, must permit the exception.  Because not all 401(k) plans permit the exception, even though permitted by law, an account owner must ensure that his/her plan actually does allow the funds to remain in the plan to avoid a steep 50 percent penalty that apply to missed RMDs.

The exception does not apply if the plan is an IRA (whether a traditional, SEP or SIMPLE IRA).  As an aside, remember that RMDs do not apply to Roth IRAs during the original account owner's lifetime.   

Despite these carefully prescribed and limited conditions, the last condition, that the owner continues to work for the employer, is without a concrete definition, and therefore, may permit flexibility.  Because the IRS does not provide a provides a concrete definition of what it means to continue working past age 70½, it may be possible for an owner to continue working on a reduced-hours or consulting basis and still defer his or her RMDs past the traditional required beginning date.Of course, if special arrangements are crafted by an employer and employee, it is advisable to consult an attorney to document the special relationship in order to ensure that it won't be deemed a sham or fraudulent  arrangement by the IRS.

While an account owner may generally avoid taking RMDs from his or her 401(k) as long as s/he continues working past age 70½, many small business owners are not permitted to take advantage of this exception, because the exception does not apply to participants who are five percent owners of the business sponsoring the retirement plan.  Plan participants  who own a portion of the business sponsoring the 401(k) must also be aware of the constructive ownership rules that apply when determining whether s/he is a five percent owner; interests held by certain members of the owner's family (e.g., spouse, children, parents, etc.) and by certain entities which the owner controls  will be added to the ownership interest of the participant/business owner in determining whether the 5 percent threshold has been crossed.

The above article is based upon an article  published by ThinkAdvisor, which in turn was drawn from Tax Facts Online, and originally published by The National Underwriter Company, a Division of ALM Media, LLC, as well as a sister division of ThinkAdvisor. 

Inherited IRA Not Part of New Jersey Resident's Bankruptcy Estate

A U.S. bankruptcy court determined recently that, at least under New Jersey law, an inherited IRA is not part of the bankruptcy estate, notwithstanding the recent U.S. Supreme Court ruling in Clark v. Rameker. In re: Andolino, (Bankr. D. N.J., No. 13-17238, Feb. 25, 2015).

Christopher Andolino inherited an IRA worth $120,000 from his mother. He later filed for Chapter 13 bankruptcy, and claimed the IRA was an exempt asset.

The bankruptcy trustee objected to Mr. Andolino's bankruptcy plan, asserting that under the Supreme Court's decision in Clark v. Rameker (U.S., No. 13-299, June 13, 2014), inherited IRAs are property of the estate.  To read my previous article on the decision in Clark v. Rameker, click here.

The U.S. Bankruptcy Court, District of New Jersey, held that the inherited IRA is not property of the estate. According to the court, "whereas the inherited IRA at issue in Clark was determined to be an asset of the bankruptcy estate pursuant to nonbankruptcy law, i.e., Wisconsin law, this Court first must apply relevant New Jersey law to determine whether [Mr. Andolino's] inherited IRA is property of the bankruptcy estate." The court determined that under New Jersey law, an inherited IRA does not lose "qualified trust" status, so it is exempt from the bankruptcy estate under federal bankruptcy law.

For the full text of this decision, click here.