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RMD Proposed Regulations – The Good, The Bad, and The Ugly

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RMD Proposed Regulations –  The Good, The Bad, and The Ugly

The proposed regulations consist of 64 pages printed in the Federal Register and are subject to a comment period which ended on May 25, 2022.  Once the IRS considers the comments it will move towards finalization and adoption after which they will become effective.  The IRS has received 119 comments to date so there is a chance for changes before adoption.  However, the proposed regulations provide the IRS’s interpretation of the Secure Act and most provisions are anticipated to be incorporated into the final rule.

Secure Act Changes to RMDs – Background

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (“Appropriations Act”).  The “Setting Every Community Up for Retirement Enhancement Act” (“Secure Act”) was included as part of the Appropriations Act, and it made major changes effective January 1, 2020 impacting individuals and their retirement account distributions both during lifetime and post death. The focus of this article is the portion of the Secure Act and the proposed regulations as they apply to post death distributions to beneficiaries of retirement plan accounts.

Effective for distributions with respect to beneficiaries who died after December 31, 2019, there are now three categories of beneficiaries: those classified as a “non-designated beneficiary” (“NDB”), those classified as a “designated beneficiary” (“DB”), and those classified as an “Eligible Designated Beneficiary” (“EDB”).  These three classifications determine post-death required minimum distribution periods.  In other words, these classifications will govern how rapidly the income tax on deferred retirement accounts will be due. For many clients, a significant element of their estate plan is trying to allow for the most significant deferral of the income tax liability and/or to structure a plan that minimizes the ultimate income tax that will be due. While a retirement account will pass by a direction of a form generally called “Designation of Beneficiary,” the term “Designated Beneficiary” as noted below, has additional legal significance in the plan.

Non-Designated Beneficiary (“NDB”)

NDB’s are those beneficiaries who are not “designated beneficiaries” (“DB”) or “eligible designated beneficiaries” (“EDB”) as defined by the tax code. Usually they consist of estates, charities and certain trusts. As noted below, some trusts can qualify as a DB and they are now referred to as “see-through trusts” (see through trusts can be broken further into “accumulation trusts” and “conduit trusts”).

For NDB’s, the pre-Secure Act rules continue to apply.  These rules provide that if death occurs on or before the account owner reached his or her required beginning date[1], there is a “5-year rule” which requires that the account balance be distributed by December 31st of the year which contains the 5th anniversary of the account owner’s death. If death occurs after the account owner reached his or her required beginning date, the beneficiary can utilize the account owner’s remaining life expectancy determined under the Single Life Table.  For account owners who are ages 72-80, this distribution period is longer than the 10-year distribution period which applies to designated beneficiaries (discussed below).   See Required Minimum Distributions – Life Expectancy and Distribution Tables Updated.

Designated Beneficiary (“DB”)

DBs are usually living individuals, however, they can also include trusts, called “see-through” trusts.  Under the Secure Act, Congress directed that DBs are subject to a limitation that is similar to the rules before the Secure Act, except 5 years is substituted by 10 years, hence, the “10-year rule.” In other words, the deceased owner’s account balance must be distributed to the DB under a 10-year term like above. As discussed below, the Secure Act created exceptions to this 10-year rule for five categories of Eligible Designated Beneficiaries. Nevertheless, for those DBs to which the 10-year rule applies, the entire account balance must be distributed by December 31st of the 10th calendar year following the year of the account owner’s death, whether or not the deceased owner had reached his or her required beginning date. The initial interpretation and understanding of most planners was that there was no requirement for annual distributions to be made to the beneficiary under the 10-year rule, but the Proposed Regulations state otherwise (discussed below).

The 10-year rule is a notable change to pre-Secure Act law, as it accelerates the distribution of these accounts to the beneficiaries by eliminating the possibility of using the “Stretch IRA” plan. The very popular Stretch IRA plan allowed individual beneficiaries and see–through trusts to utilize the life expectancy of the beneficiary determined under IRS Life Expectancy Tables to determine the distribution period.  This allowed for significant income tax deferral. However, under the Secure Act, the Stretch IRA plan is no longer possible for DBs.


Eligible Designated Beneficiary (“EDB”)

An EDB, to which the 10-year distribution period does not apply, is an individual, determined with respect to the account owner, on the date of the account owner’s death, as one of the following:

Surviving Spouse

A surviving spouse of the account owner is an EDB.  The surviving spouse has the ability to rollover the account to his or her own IRA, elect to take the distribution over his or her life expectancy beginning in the year following the year of death under the pre-Secure Act rules, or wait until the deceased owner would have attained his or her required beginning date.  I.R.C. Section 401(a)(9)(E) and 401(a)(9)(H)(ii).

Minor Child

If the beneficiary is a child (not grandchild or other remote descendant or other minor beneficiary), the account must be distributed by the 10th year after the child reaches the age of majority.  The age of majority was initially thought to be determined under the beneficiary’s state law in which he or she is domiciled.  In most states where the age of majority is age 21, this means that the IRA must be distributed by the time the individual attains age 31.  Some commentators believed that the age of majority is determined under the I.R.C., which extends minority to age 26, similar to the requirement that health insurance plans that cover dependents must provide for dependents until age 26.  However, the proposed regulations clarified this by providing age 21 as the definition of a minor (discussed below).


A beneficiary who is disabled, as defined in I.R.C. Section 72(m)(7), is an EDB and permitted to use his or her life expectancy as the required minimum distribution period.  This means that the pre-Secure Act rules apply to the distribution to any disabled individual. Under I.R.C. Section 72(m)(7), an individual is disabled “if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration”.  The determination of disabled was further clarified under the proposed regulations (discussed below).

Chronically Ill

A “chronically ill individual” is an EDB.  A chronically ill individual is defined within I.R.C. Section 7702B(c)(2). Under this section, a chronically ill individual means any individual who has been certified by a licensed health care practitioner as (1) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, (2) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described above, or (3) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. The first requirement is only deemed to be met if there is a certification that, as of such date, the period of inability is an indefinite one which is reasonably expected to be lengthy in nature. In such case, as an EDB the chronically ill individual can utilize his or her life expectancy for purposes of determining required minimum distributions.

Not More Than 10 Years Younger

An individual who is not more than 10 years younger than the owner (such as a sibling or life partner) is an EDB and may utilize his or her life expectancy as the distribution period rather than the required 10-year distribution period which applies to all other beneficiaries.

Death of EDB

Upon the death of an EDB, the 10-year rule applies to the successor beneficiary, meaning the account balance must be distributed by the end of the 10th calendar year following the year of the EDB’s death.  I.R.C. Section 401(a)(9)(H)(iii).

The Proposed Regulations

As with all proposed regulations, there is a comment period which ended on May 25, 2022 and a public hearing scheduled for June 15, 2022, after which the proposed regulations may be modified and finalized.  The proposed regulations are not effective until finalized.

The Good

Under existing rules, when trusts are named as beneficiaries you must examine the trust terms and beneficiaries to determine which set of rules apply.  Only trusts that meet certain requirements are given DB status. These trusts are referred to as “see-through” trusts which consist of either a “conduit” or “accumulation” trusts.  While these terms have been used by practitioners since the current regulations became effective, they are for the first time recognized officially in the proposed regulations.  “See-through” trusts are trusts which meet the following four criteria:

  1. The trust is valid under state law;
  2. The trust is irrevocable at death;
  3. A copy of the trust must be provided to the plan administrator; and
  4. Beneficiaries must be “identifiable.”

The first three requirements remain the same under the proposed regulations as prior regulations.  The fourth requirement is new and a welcome change.  Prior to the proposed regulations, in order to determine if you had a trust that qualified as a DB (a so called “see-through” trust) you had to consider every beneficiary who could possibly receive distributions from the trust except a “mere potential successor” beneficiary. However, under the old rules the “mere potential successor” term was never defined.  This term has now been removed and replaced by a 3-tier system.

One type of see-through trust to qualify for the “10-year” rule is an “accumulation trust.” Here, the first tier is any beneficiary who could receive amounts in the trust that are neither contingent upon, nor delayed until, the death of another trust beneficiary (Tier 1).  The second tier is any beneficiary that could receive amounts that were not distributed to Tier 1 beneficiaries (Tier 2).  The third tier is any beneficiary that could receive amounts that were not distributed to Tier 2 beneficiaries (Tier 3).  Under the proposed regulations, Tier 1 beneficiaries always “count” (to be treated as an heir to the retirement account) and Tier 3 beneficiaries are entirely disregarded.  For accumulation trusts, Tier 1 and Tier 2 beneficiaries are considered, and if such beneficiaries are defined individuals, distributions from the account must be made under the 10-year rule.

A second trust that qualifies for the 10-year payout is a conduit trust. For conduit trusts, only Tier 1 beneficiaries are considered. A conduit trust is a trust that requires that all distributions taken from the account be distributed immediately to the trust beneficiary.  Thus, for conduit trusts, if Tier 1 beneficiaries are DBs or EDBs those rules will apply to determine the required minimum distribution period.  Accumulation trusts are trusts that do not require that all distributions taken from the account be distributed to a beneficiary, allowing distributions to be accumulated within the trust. For accumulation trusts, if Tier 1 and Tier 2 beneficiaries are DBs or EDBs, those rules will apply to determine the required minimum distribution period.

In the event Tier 1 and Tier 2 beneficiaries consist of ages of categories of beneficiaries, the distribution period of the oldest beneficiary will determine the payout period.  In the event a beneficiary predeceases the owner (or is treated as having predeceased the owner, such as in the case of a disclaimer), the predeceased beneficiary is ignored.  The proposed regulations also provide that powers of appointment held in trusts are ignored until they are exercised.

In the case of minor beneficiaries (i.e., beneficiaries under age 21 wo are children of the deceased plan owner), the proposed regulations clarify that a child reaches majority on the child’s 21st birthday, regardless of state law. This allows minor beneficiaries (or see-through trusts with minors as Tier 1 or Tier 2 beneficiaries) to take distributions over the minor’s life expectancy but only until age 21.  Thereafter, the 10-year rule applies meaning that the account must be fully distributed by the minor’s 31st birthday, or 10 years after the minor beneficiary’s death, if sooner.  In the case of a trust with Tier 1 or Tier 2 minor beneficiaries, and other non-minor beneficiaries, the non-minor beneficiaries are disregarded, allowing for distributions to be made based on the life expectancy of the oldest child under the age of 21.

In the case of disabled beneficiaries, the proposed regulations provide three rules for determining disabled status.  For individuals under the age of 18, the individual must have a medically determinable physical or mental impairment that results in marked or severe functional limitations and that can be expected to result in death or to be of long-continued and indefinite duration.  For individuals that are age 18 or older, the individual must be unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.  Any individual who has been determined to be disabled by the Commissioner of Social Security is deemed to be disabled.

The proposed regulations established special rules for trusts with one or more disabled or chronically ill beneficiaries who are entitled to life expectancy payout periods.  These rules exempt such trusts from the “no separate accounts for trust beneficiaries’ rule” by providing that an accumulation trust qualifies for EDB treatment as long as no beneficiary other than the disabled or chronically ill beneficiary receives any distributions during the life of the disabled or chronically ill beneficiary.  These are referred to as “Applicable Multibeneficiary Trusts.”

The Bad

To the surprise of many practitioners, the proposed regulations identified I.R.C. Section 401(a)(9)(B)(i), which was not repealed by the Secure Act and contains the “at least as rapidly rule” when the account owner dies after his or her required beginning date.  The effect of this section is that under the Secure Act 10-year rule that applies in the case of a DB, the “at least as rapidly rule” continues to require the annual payment of required minimum distributions during the 10-year post death period, with a balloon payment of any remaining balance in year 10.  This impacts DBs who inherited accounts from owners who passed away in 2020 and did not take an annual distribution during 2021, thinking they were not required to do so.  Since the regulations are proposed regulations, they are not a legal requirement until finalized and published. However, affected individuals would be prudent to revisit distributions and, at a minimum, begin taking distributions in 2022 while awaiting further guidance as to how to treat RMDs that were not taken in 2021.  Generally penalties are applied if RMDs are not taken when required, but it is possible the IRS will grant a waiver of the penalties or a grace period once the regulations are finalized to allow affected individuals to take the missed distributions in the current year. However, this is not guaranteed.  The IRS has current procedures in place where individuals can request waivers of the penalty for failing to take RMDs (see Q&A #9) and has been routinely approving these waiver requests.

The Ugly (it’s all ugly….)

Despite stated efforts to simplify RMD rules, what have always been set forth in a complicated statutory and regulatory scheme, the Secure Act and its proposed regulations further complicate the rules.  Instead of two categories of beneficiaries (DBs and non-DBs) and two “death day” statuses to consider (before attaining required beginning date or on or after attaining required beginning date), individuals and their advisors have an additional subset of DBs consisting of five categories of EDBs, with special rules applicable to each, some of which toggle back to DB status such as minors who attain age 21.  All of these factors result in seven categories of beneficiaries with six sets of rules to consider, making it easy for taxpayers and advisors to unintentionally apply the rules incorrectly.  One also wonders if the IRS has the tools and resources to monitor and enforce compliance.  Perhaps Congress is taking notice as they are considering reduced penalties for failing to take RMDs under proposed legislation referred to as Secure Act 2.0.

In summary, while we knew from the Secure Act that there are worse rules requiring distributions from qualified retirement accounts to be accelerated, there now are better rules for allowing the use of trusts as beneficiary. However, the complications in the proposed new rules are mind numbing and clients with large account balances should consider their options to defer and minimize the eventual income tax that will be due.

[1] Required beginning date is April 1 following the calendar year you attain age 72 (age 70½ if turned age 70½ prior to January 1, 2020) or your actual retirement date if later and not a 5% or more owner of the employer in which case it is delayed until actual retirement.




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