This article discusses selected issues under the 2024 final regulations implementing the SECURE Act and SECURE 2.0. The strategies described in prior articles by the author, “Dealing with Proposed Regs under the SECURE Act,” “Strategy Under the SECURE Act,” and “Impact of SECURE 2.0 on Planning for Trusts,” remain intact under the final regulations, except as mentioned below. This article assumes the reader is familiar with those concepts and builds on them with planning for long-term second marriages and for trying to minimize fiduciary income tax on IRAs held in trust without necessarily getting IRA distributions out of trust.
When IRA Owner Survives Required Beginning Date
The proposed regulations provided that, when an IRA owner survives their required beginning date, distributions are required to continue through—in most cases—Dec. 31 following the tenth anniversary of the IRA owner’s death (the 10-year outer limit). Most experts believed the statute did not require this—that distributions could wait and be taken any time before the 10-year outer limit. The final regulations reiterated the proposed regulations’ requirement. Given the controversy, the final regulations will not penalize taxpayers for not taking these distributions during 2021–2024 and do not require a make-up for those missed distributions. The preamble’s explanation is available here.
Separate Account Treatment
Since the inception of regulations under IRC section 401(a)(9) two dozen years ago, designating a revocable trust as an IRA beneficiary would cause required minimum distributions (RMD) to be taken using the worst payout period available when considering all beneficiaries. For example:
Example 1
A revocable trust distributes to the grantor’s minor child and the grantor’s adult child. If the beneficiary designation had directly named the children, IRA distributions for the minor child could have been stretched through age 31. Because the revocable trust is the beneficiary, IRA distributions for the minor child must be taken within the 10-year outer limit.
Example 2 (applying proposed regulations)
A revocable trust passes to separate trusts for Son and Daughter. The trusts qualify as see-through trusts as Last-One Standing trusts, meaning that assets pass outright to the last remaining individual beneficiary. Son takes IRA distributions quickly. No longer concerned with preserving the use of the 10-year outer limit, he exercises his power of appointment in a manner that disqualifies his trust from being a Last-One Standing trust. Because the beneficiary designation named the revocable trust as beneficiary instead of naming Son’s and Daughter’s separate trusts as beneficiaries, Son’s exercise of his power of appointment disqualifies not only his trust but also Daughter’s trust from using the 10-year outer limit.
Careful Planning Can Be Undone
Suppose you recognize this issue, and the IRA owner’s estate planning lawyer drafts a customized beneficiary designation form to address it.
When the client switches investment advisors, the client transfers their IRA to the custodian the new investment advisor uses. When doing the account opening documentation, the investment advisor fills in the revocable trust as the beneficiary without having the client consult their estate planning lawyer—thinking it’s just paperwork and wanting to spare the client legal fees.
Your careful planning has gone out the window!
2024 Final Regulations to the Rescue!
Reg. section 1.401(a)(9)-8(a)(1)(iii)(C) allows separate account treatment—as if the beneficiary designations had separately named each beneficiary—for a revocable trust, but only if the trust agreement mandates the way the account is to be allocated rather than giving the trustee discretion how to allocate the account.
Normally, the trust agreement allows the trustee to use “pick-and-choose fractional funding,” meaning that the trustee can pick which assets to use to fund each beneficiary’s share. Most states’ laws authorize pick-and-choose fractional funding if the trust agreement doesn’t expressly address the issue.
To take advantage of separate account treatment, the trust agreement should mandate the allocation of any IRAs among beneficiaries and expressly override both the trust agreement’s general funding clause and state law that otherwise would authorize pick-and-choose fractional funding. With these provisions, the revocable trust can safely be designated as the beneficiary.
In states, such as New York, that impose an estate tax using a lower estate tax exemption than the federal exemption, consider mandating how IRAs are allocated between the trust using the state estate tax exemption (the Family Trust) and the marital trust. For example, the Family Trust must be funded first with any Roth IRAs, then with assets other than traditional IRAs, and finally with traditional IRAs as a last resort.
Effect of July 4, 2025, Budget Reconciliation Act
The recent tax law imposes IRC section 68 haircuts on itemized deductions taken by taxpayers in the top tax bracket. Itemized deductions include (among a number of items) charitable deductions and the IRC section 691(c) deduction for federal estate tax paid on income in respect of a decedent. IRC section 68(e) had excluded trusts and estates from this rule, but that subsection was repealed. Thus, estate planning should consider that this loss of these itemized deductions now applies to trusts and estates.
Ideally, any bequest of an IRA to charity would pass directly to charity rather than through a post-mortem revocable trust. That prevents the IRA from increasing the income that generates this haircut and prevents the reduction of any benefit from the IRA passing to charity.
You may wish to consider converting IRAs to Roth accounts, so that the tax paid now (or on the owner’s final individual income tax return) reduces the owner’s estate. Similarly, you may wish to consider accelerating notes from installment sales for a dying client, and electing to report - on a decedent’s final income tax return - any deferred interest on savings bonds.
Steven B. Gorin, CPA, Esq., CGMA, is a partner in Thompson Coburn LLP. He is a past regent and past chair of the Employee Benefits Committee of the American College of Trust & Estate Counsel and former chair of the Business Planning Group of Committees of the American Bar Association’s Real Property, Trust & Estate Law Section. He is a member of the National Association of Estate Planners and Councils (NAEPC) Estate Planning Hall of Fame.
For more information about the author, please visit http://www.thompsoncoburn.com/people/steve-gorin.