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SECURE Act 2.0 — Cascading Beneficiary Strategy for Married IRA Owners

Regulations of the SECURE Act 2.0 were approved on March 29, 2022. Do you need to try "disclaimer planning"?

By James Lange, CPA

Editor’s note: This article received a lot of attention not only when it was originally published in September, 2020, but is still receiving many views. Now, after the House voted to approve proposed regulations known as SECURE Act 2.0 on March 29, 2022, readers want to know whether they should change their estate plan.

We asked the author of the article, James Lange, to integrate the proposed regulations update into his older article so you get the benefit of the original article as well as the recent updates.

Most traditional estate plans take a fixed-in-stone approach that does not account for changing circumstances. There will likely be significant changes between the time you draft your wills, trusts and beneficiary designations of IRAs and retirement plans and the time of your death. The changes could come in the form of portfolio changes and/or circumstances of different family members. In addition, there could be tax law changes such as those wrought by the SECURE Act and enhanced by the new proposed regulations. There is a much better alternative estate plan for most married couples.

The SECURE Act, followed by the House voting on the SECURE Act 2.0 proposed regulations, has radically changed the laws governing inherited IRAs and retirement plans. Many traditional estate plans take a fixed-in-stone approach that does not account for changing circumstances.

Most married IRA owners have “I love you” wills. They typically name their surviving spouse as the primary beneficiary, and then their children equally as the contingent beneficiaries. Hopefully, the documents name trusts for the grandchildren of predeceased children. Under this arrangement, the children usually don’t get any money until both the husband and wife die, and the grandchildren don’t get anything unless their parent predeceased their grandparents.

Using Disclaimers to Benefit your Heirs

It is possible to add flexibility to traditional wills, trusts, and IRA and retirement plan beneficiary designations, through the use of “disclaimers.” A disclaimer provision allows your named beneficiary to say, “I don’t want this money — give it to the next person in line.” When you include disclaimer provisions your surviving spouse has up to nine months after your death to consider how much to keep and how much to pass on to your children. Your children would also have the option to disclaim to well-drafted trusts for the benefit of their own children.

Beneficiary disclaimer

The most drastic consequence of the SECURE Act is its impact on inherited IRAs. Subject to some exceptions, a non-spouse beneficiary of a traditional inherited IRA must withdraw and pay taxes on that inherited IRA within 10 years of the IRA owner’s death — this is in sharp contrast to the old “stretch” rules that allowed distributions to continue over a lifetime.

To add to the misery of beneficiaries of IRAs, the proposed regulations of the SECURE Act 2.0 were approved overwhelmingly by the House of Representatives on March 29, 2022. If these proposed regulations become law, which I think is highly likely, the beneficiaries of IRAs and retirement accounts who inherited from IRA or retirement account owners already receiving required minimum distributions (RMDs) will be required to take annual distributions in the first nine years immediately following the year of the IRA owner’s death, and then be forced to take a lump-sum distribution for the balance of the retirement account in the final distribution year.

We were hoping that at least the beneficiaries could time their taxable distributions any time they wanted within ten years of the IRA owner's death. These new proposed regulations will apply to traditional IRAs and retirement accounts but not to Roth IRAs because Roth IRAs don’t have a minimum required distribution for the original IRA owner or the original Roth IRA owner’s spouse.

A surviving spouse, as well as a few other exceptions, is not subject to the 10-year rule. The fact that the surviving spouse has the potential to defer distributions for a much longer period of time than to a non-spousal beneficiary, most likely your children or grandchildren is a tax disincentive to leave IRA dollars to a child or grandchild. Under the old law for IRA owners dying before January 1, 2020, there was great incentive to leave IRA dollars to young beneficiaries who, under the old law, could have “stretched” or partially deferred taxable distributions of the inherited IRA over their lifetimes.

But, given certain circumstances that may be hard to predict, there is an incentive to disclaim after-tax or non-IRA dollars. There might be compelling reasons for who should get what — whether it is an IRA, a Roth IRA, a brokerage account, life insurance, an annuity, a house, or other assets — both at your death and when your spouse dies, that you can’t accurately predict today.

If your estate planning documents “fix in stone” the distribution of your all assets to your heirs, they are not likely to get the full benefit of your legacy. Better decisions will be made when circumstances are current and clear. Furthermore, if your estate planning documents are drafted with disclaimer options like Lange’s Cascading Beneficiary Plan (the name of the plan I created for my clients at Lange Financial Group), the nine-month-decision-making window provides time to think about options and determine the best strategies for the whole family.

Let’s assume you die with more money than your surviving spouse needs, but your children have current needs. Under the proposed flexible estate plan, the surviving spouse could “disclaim” a portion of the IRA or after-tax dollars to the children.

Under the old law, it would have been better to disclaim IRA money so the children could have stretched or deferred distributions over their lifetimes. Under the new law, it would be better to disclaim after-tax dollars to the children so the surviving spouse could take advantage of the favorable rules for surviving spouses being able to roll over their spouse's IRA into their own.

With disclaimer planning, your surviving spouse can make tax-savvy decisions with the help of family, or ideally, with family and a trusted adviser who understands the benefits of drafting flexible estate documents as well as understanding the benefits of post-mortem (after death) planning.

About the author: James Lange

James Lange, a CPA, Attorney and Registered Investment Advisor, is a nationally-recognized IRA, Roth IRA, 401(k), and retirement plan distribution expert. Lange is the author of Beating the New Death Tax. For more information, visit