Effective January 1, 2020, the SECURE Act has changed the rules for non-spouse designated beneficiaries. In this article, we’ll discuss the change in the IRA stretch rules and the qualified disclaimer strategy for spousal beneficiaries of 2019 decedents. This strategy, however, is subject to a time limit.
Are you the beneficiary of a 2019 decedent?
While the SECURE Act ushered in a number of positive changes for retirement savers, it also changed the disbursement rules, affecting non-spouse designated beneficiaries. As of January 1, 2020, non-spouse designated beneficiaries of a qualified retirement plan or an IRA are now required to withdraw the entire balance of the retirement account in the 10 years following the death of the original account owner (subject to limited exceptions not addressed in this writing).
Previously, the rules allowed for non-spouse designated beneficiaries to take disbursements from the retirement account by taking annual required minimum distributions (RMDs) based on their life expectancy or the life expectancy of the original, deceased account owner. This stretch technique minimized tax exposure for the recipient over the course of their lifetime. Whereas, a mandatory 10-year disbursement may create negative estate planning and income tax consequences that need to be considered in light of the new law.
Federal rules and most states require that a qualified disclaimer be completed within nine months of the decedent’s date of death.
Consider a qualified disclaimer
If you are the non-spouse beneficiary of a 2019 decedent, the new SECURE Act rules do not affect you. However, if you are the spouse of a 2019 decedent, and you’d like to preserve and pass down the IRA to your beneficiaries, you may want to consider a qualified disclaimer so that a non-spouse beneficiary can utilize the stretch technique over their lifetime.
When to Consider the Disclaimer Planning Technique:
- Spouse passed away in 2019
- The period for a qualified disclaimer has not expired
- The retirement account custodial agreement recognizes qualified disclaimers
- The surviving spouse is named the primary beneficiary and a contingent beneficiary is named for the IRA (e.g., surviving children) or the custodial agreement provides for payment to a contingent beneficiary, and
- Surviving spouse does not need the IRA assets for living expenses
If you are the primary beneficiary of your spouse’s retirement account(s) and your spouse passed in 2019—and you don’t need the income—you should consider executing a qualified disclaimer of your interest in your deceased spouse’s retirement account(s). Be sure to review the terms of the custodial agreement to ensure that disclaimers are recognized under the agreement, and confirm to whom the account will transfer if the disclaimer is executed.
Here’s an example of how this works:
Herb passed away on November 15, 2019. Wendy is the primary beneficiary of Herb’s IRA and Christine is the contingent beneficiary. Wendy disclaims the IRA on February 15, 2020. Christine inherits the IRA and is allowed to stretch the payments over her life expectancy.
If, however, as the surviving spouse, instead of disclaiming, you choose to take ownership of your deceased spouse’s retirement account through a rollover or through creating an inherited IRA, you will be subjecting your successor beneficiaries to the SECURE Act’s limited 10-year stretch rules.
Before you take ownership of your deceased spouse’s retirement account, talk to your estate planning attorney and your Ayco advisor.
