New IRS Regulations Applicable to SECURE Act – Part 3

In this third post on new proposed IRS regulations applicable to the SECURE Act, I cover cases where a disabled individual is the beneficiary of a retirement account. Before I do, however, let’s briefly review the changes made by the SECURE Act.

The law, which became effective for 2020 tax year, raised the minimum required distribution age from 70 and 1/2 to 72.  At the same time, however, Congress severely limited the ability to stretch out payments from tax deferred retirement accounts by death beneficiaries when the account owner dies.  With limited exceptions, an inherited retirement account must be emptied within an outer limit of 10 years instead of over the life expectancy of the beneficiary.

Last week we discussed exceptions to this outer limit year in the case of a surviving spouse and minor child as death beneficiaries.  This week I cover disabled and chronically ill death beneficiaries.  First let’s define these terms.

A death beneficiary is considered disabled if, at the death of the retirement account owner, he/she is unable to engage in any substantial gainful activity because of any medically determinable physical or mental impairment that is expected to result in death or be of long continued and indefinite duration.  This definition is almost identical to the one used by Social Security in order to qualify applicants for Social Security disability benefits.

A chronically ill individual is defined as one who needs assistance with at least 2 activities of daily living (ADL).  This definition is similar to that used in long term care insurance policies.  The ADLs are ambulating, dressing, toileting, feeding, bathing and having incontinence issues.

So, if a death beneficiary is disabled or chronically ill that person can make withdrawals over his or her life expectancy and avoid the new 10 year limit.  While that is a good thing, many of these individuals are receiving or may in the future need to apply for government benefits to pay for very costly care.  Many families opt to name special needs trusts as the beneficiary to receive assets for disabled and chronically ill individuals so these assets can be used for what the government benefits don’t provide.

How does the SECURE Act apply to trusts that are named beneficiaries of retirement accounts?  We’ll cover that next week.