Beneficiary and Safe Assignments: Presets

Clients spend a lot of time, money and energy planning their properties. Estate planning attorneys assist them by advising these clients and preparing various documents to meet the client’s goals, such as a will or trust.

A growing portion of American wealth is governed by beneficiary designations. According to Statista, Americans had more than $32 trillion in retirement assets alone. That’s a trillion with the letter “t”.

This blog series focuses on beneficiary assignments. Previous blogs have examined the security law. This blog looks at how beneficiary assignments made before the law do not work as intended after the law.

As examined in previous blogs, under the Security Act, the beneficiary must have taken all distributions by the end of the year which includes 10NS Anniversary of the death of the participant. Previous blogs have also explained how economic development agencies can use their own individual life expectancy. However, a minor child of a participant only qualifies to serve as an EDB while being a minor and then falls under the 10-year general rule of the Security Act.

A common strategy prior to the SECURE Act was to use a participant/client’s child trust in order to extend distributions over the life expectancy of the child while transmitting distributions to the beneficiary over the lifetime of the beneficiary. The trustee will only take out the risk management cards and make them available to the beneficiary, as required to achieve the channel’s trust status. This would provide payments for the child throughout the child’s life and would be ideal for a child whose financial maturity was questionable.

Unfortunately, if the participant dies after December 31, 2019, the Security Act will apply. By law, even if the trust channel for a child beneficiary is the Economic Development Bank (because it is a trust channel for a minor child of the participant and is named directly as a beneficiary), the trustee must withdraw all retirement plan assets 10 years after the child reaches the age of majority. Therefore, designating a beneficiary that is designed to spread distributions over a child’s life now would give the child access to the entire retirement plan 10 years after the child reaches adulthood.

What can be done to solve this problem? You can modify the trust so that it does not become a trust channel. The trust share for the child will be under the ten-year rule (because it will not be the EDB) but can keep the retirement plan assets in the fund and pay them only to the beneficiary at the discretion of the trustee. Of course, to the extent the fund maintains the retirement plan in the trust, income tax on distributions will be levied on the fund and will not be levied on the K-1 beneficiary. This may cause distributions to be taxed at a higher marginal rate. (Trusts are taxed at the highest marginal rate on amounts over $13,500 in taxable income, while a single reaches the top bracket on amounts over $523,600 and a married individual filing a joint return reaches the top bracket on amounts over $628,300). A trustee can balance these tax and non-tax considerations.

Beneficiary assignments can be deceptively simple. Just beware the rest of the glacier. Ensure beneficiary assignments get the desired result of post-security law.

Stephen C. Hartnett, JD, LLM
Education Manager
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128

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