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Debate: Are the New RMD Regs for Successor Beneficiaries Too Complex?

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The IRS’ new proposed RMD regulations under the Setting Every Community Up for Retirement Enhancement (Secure) Act bring a new twist for successor beneficiaries — those who inherit a retirement account from a beneficiary of the original owner.

if the original account beneficiary was subject to the Secure Act’s requirement to empty the account within 10 years, the successor must continue to take distributions within the same 10-year window. If the original beneficiary was an eligible designated beneficiary using the life expectancy method for distributions, the successor beneficiary obtains a new 10-year distribution window. 

An original beneficiary using the 10-year distribution window must take annual RMDs if the original account owner died after their required beginning date. If the original account owner died before the required beginning date, no annual RMDs are required, and the beneficiary can elect to withdraw the entire account balance as a lump sum in year 10. 

That same rule dictates whether the successor beneficiary will be required to take annual RMDs after the successor inherits the account from the original beneficiary. In other words, the successor beneficiary’s distribution obligations do not depend on the original beneficiary’s RMD obligations, but instead depend on the original account owner’s RMD obligations.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the new proposed RMD rules for successor beneficiaries.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: The challenges and controversy surrounding the new RMD rule for successor beneficiaries of retirement accounts is a bit overblown. Yes, the new rule may be inconvenient in some situations, but the primary challenge is about record-keeping, not whether the rule itself is fair. 

Bloink: The new rule will be an administrative nightmare for countless clients who have inherited accounts from beneficiaries. These successor beneficiaries might legitimately not know what happened decades ago. Retirement accounts change custodians all the time. These financial institutions don’t always communicate full information with each other when the beneficiary decides to move to another financial institution. The new rule would be extremely challenging and just seems unfair.

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Byrnes: If this rule becomes finalized, the fact is that financial institutions will simply need to update their processes and keep better track of IRA owners and beneficiaries and beneficiaries of beneficiaries going forward to maximize what little “stretch” benefit to the rule remains. In reality, this is something that could be beneficial to everyone involved, and the rules will push advisors to pay more attention.

Bloink: Retirement accounts don’t always pass down through a family. Account owners and, eventually, account beneficiaries can list anyone they want as designated beneficiary, even if the person has no ties to the person from whom the account was originally inherited. Even when the account is passed down through a family line, should we really expect the grandkids to remember whether Grandma and Grandpa were taking required distributions from their retirement accounts at death? It’s simply unreasonable.

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Byrnes: We have to remember that we’re talking about tax-preferred accounts designed to provide retirement income — not estate planning vehicles. If we agree that these accounts shouldn’t be used as estate planning vehicles, it’s only fair that we should require someone who inherits the account to empty it within a relatively short time span.

Bloink: If the proposed rule becomes finalized in its current form, there’s really no way to provide transition relief unless it applies only to accounts that are currently still owned by the original owner. Unless this type of relief is provided to give notice to anyone who owns a retirement account so that it applies on a purely prospective basis, I can’t see a fair way to implement it without punishing taxpayers who had no way of knowing this is how the IRS would interpret a law that didn’t even exist when the original account owner died.

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