Beneficiary Designations: Eligible Designated Beneficiaries


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 Designated Eligible Beneficiaries who are exceptions to the security law’s standard 10-year rule. The following blog will examine how beneficiary assignments made before the law may not function as intended after the law.

As examined in the previous blog in the series, under the Security Act, the recipient must normally have taken all distributions by the end of the year which includes 10NS Anniversary of the death of the participant. However, not all beneficiaries are covered by this requirement for express distribution. Some of the beneficiaries are Designated Eligible Beneficiaries, otherwise known as Economic Development Bodies. The EDB can take distributions based on life expectancy, just as it was before the Security Act.

The economic development bodies by law are:

  1. The surviving spouse of the participant. (The surviving spouse can also do a spouse extension, thus considering assets as in their retirement plan, as under previous law.)
  2. Participant child under the age of majority. However, once a child reaches the age of majority, they fall under the general 10-year rule of the Security Act. It is important to note that the minor child of another person, such as a grandchild, niece, or nephew, is not an EDB member.
  3. Someone less than 10 years younger than the participant,
  4. a person who is “disabled” (within the meaning of Section 72(m)(7) of the IRC), or
  5. a person with a “chronic illness” (within the meaning of IRC Section 7702B(c)(2))

Note that a beneficiary who is disabled or chronically ill must meet the definitions as of the participant’s death in order to become a member of the EDB.

The trust in favor of the Economic Development Board is considered the Economic Development Board. However, with the exception of a beneficiary who is disabled or chronically ill, the share of the EDB trust must be named directly and this trust must be a “channel” of the trust.

After the SECURE Act, planning to extend retirement plan distributions became more difficult. One way to do this is for the retirement assets to go to the EDB, such as a disabled beneficiary, and the other assets to go to other beneficiaries.

However, one group of economic development bodies is somewhat fictitious. The minor child of the participant is EDB, however, he loses EDB status upon adulthood and is subject to the ten-year rule. Therefore, if the subscriber’s son is the beneficiary, they will usually have all the assets at age 28. Often, clients prefer not to transfer their retirement assets to their children at an age at which they may not have the appropriate discretion. Unfortunately, leaving assets in a trust for the child’s benefit won’t help because, by its very nature, the trust gives the beneficiary control or access to funds when distributing from a retirement plan. Again, this means that the participant’s child will have control of the assets at age 28.

Beneficiary assignments can be deceptively simple. Just beware the rest of the glacier. The next blog in this series on beneficiary assignments will examine 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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