“Nothing is for Free, Cory,” a physician once explained to me. “If we take steps to address this particular health problem, it will have adverse consequences on other organs.” Just as there is often a “cost” for a particular medical treatment option, there are certain tax and control tradeoffs in estate planning decisions. Tax-deferred retirement accounts can be owned by a trust following death, thereby providing control and protection benefits to the account owner’s family. However, this usually comes at a “cost” of higher taxes.
Last month, I summarized the current tax rules for post-death IRA assets. As a follow up to last month’s update, on February 23, 2022, the IRS released 275 pages of “clarifications” to the 2019 SECURE Act. One noteworthy clarification relates to the required minimum distributions (“RMDs”) required of adult children beneficiaries who do not have a disability or chronic illness (“non-eligible beneficiaries”). According to the IRS, if the deceased account owner had reached the required beginning date, such non-eligible beneficiaries must continue to take RMDs annually in accordance with the deceased account owner’s RMD schedule. If the account owner has not yet reached the required beginning date, there are no such annual RMD requirements. However, regardless of when the account owner died, all remaining retirement account assets must be withdrawn by the December 31st of the calendar year that contains the 10th anniversary of the account owner’s death.
This month, I share three hypotheticals to illustrate the “trust control” versus “tax efficiency” tradeoff.