Beneficiary designations and security law basics


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. This blog examines the basics of security law. The following blogs in the series will examine exceptions to the law and how beneficiary assignments made before the law may not work as intended after the law.

The SECURE Act was passed in December 2019. First, the SECURE Act changes the age of Minimum Required Life Distributions (“RMDs”) from ages 70 to 72. This change is generally beneficial to savers because it delays the date when distributions must be taken from retirement assets. This is useful in two ways. First, it allows assets to grow with tax deferrals. Second, for an additional 18 months from 70 to 72, the account holder will have no tax liability for distributions.

Once the IRA owner (the “participant”) reaches this age (the “required start date”), they must generally make distributions under the Standard Schedule, which represents the combined life expectancy of a person their age and an imaginary spouse 10 years younger (whether they are married or not). If they have a real spouse younger than 10 years, they will use the common life expectancy using the real age of the spouse. Below is a link to the IRS life expectancy tables, including the individual life, joint life, and consolidated schedules.

The biggest change in the SECURE Act concerns the rules for distribution by those participants who designate as a beneficiary to receive assets after the participant’s death. Before the law, unmarried beneficiaries could take distributions based on their life expectancy. Therefore, the younger the beneficiary, the longer the period of distribution is allowed.

Often, lawyers advise clients to name the smallest possible beneficiary to get the maximum outreach. For example, if a customer/participant names their newborn grandson, the distributions can span more than 82 years!

In general, it is best to defer retirement plan distributions for as long as possible. Deferring distributions allows assets to grow tax-deferred (or tax-exempt in the case of a Roth account).

Under the Security Act, unmarried beneficiaries must withdraw everyone Assets by the end of the year which include 10NS Anniversary of the death of the participant. Under the previous law, a beneficiary could take distributions each year over the life expectancy of the beneficiary. So, this is a much faster distribution of retirement benefits.

Let’s look at an example:

John dies leaving $1 million to his 25-year-old daughter, Beth. John passed away in February 2021. The Security Code applies to distributions to Beth since John died late on December 31, 2019. The tenNS The anniversary of John’s death occurs in February 2031. Beth does not need to take any distributions for the first 10 years, but she does need to take everything by December 31, 2031.

In practice, the beneficiary often does not want to wait until the last possible date to take all the assets. If they wait until the last year, income from distributions will be taxed in that one year. Often, it is better to spread the income over several years in order to have a lower marginal tax rate.

Beneficiary assignments can be deceptively simple. Just beware of the rest of the glacier. The following blogs in this series on beneficiary assignments will examine exceptions to the SECURE 10-year rule and how beneficiary assignments that may have been ideal before SECURE may now have unintended consequences.

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
www.aaepa.com

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