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Financial Planning > Trusts and Estates > Estate Planning

Ed Slott Warns Advisors: Know IRS' Secure Act RMD Regs or Risk Getting Sued

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What You Need to Know

  • Your clients' beneficiaries could take a bigger tax hit if planning isn't done beforehand.
  • Cementing relationships with clients' beneficiaries is key to avoiding future lawsuits, Slott says.
  • While the IRS regs are not yet final, they are in effect now and it could be years before final regs are issued.

Advisors “cannot ignore” the IRS’ recently released proposed regulations on how to handle required minimum distributions under the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, “because it’s going to trip you up and it could cause everything from embarrassment to litigation,” IRA expert Ed Slott of Ed Slott & Co., told ThinkAdvisor in a recent interview.

The key point to know about the regs, according to Slott, is that they affect clients’ beneficiaries.

“The problem is the rules force the money out very quickly after death, which means there’s a shorter window — all of this money has to come out and it’s subject to future higher taxes,” Slott warns. “A bigger chunk of the money will be lost to taxes if planning is not done now.”

The regs have “little effect on clients during their lives; we’re talking about estate planning,” Slott explained. “On the back end, it affects the clients with the largest IRAs because more of those assets will be left over to the next generation — they’re going to get zapped with taxes in a short window.”

Slott previously told ThinkAdvisor that the regs were “the final nail in the coffin for using IRAs for wealth transfer or estate planning.”

If advisors “don’t know the rules there are certain penalties and all of a sudden the clients’ beneficiaries might say: ‘How did this happen? Why weren’t my parents informed?’”

Most advisors focus on accumulation. “That’s important,” Slott said. “But many people build large retirement accounts where a lion’s share — a big chunk of it — will be left over to beneficiaries and they all have to distribute it within 10 years after death.”

As Slott explained, the 10-year rule “is the payout period by which most non-spouse beneficiaries will have to withdraw the balance in their inherited retirement accounts — technically by the end of the 10th year after death.”

The 10-year rule, he continued, “has essentially replaced the stretch IRA for most non-spouse beneficiaries, resulting in more of the funds being taxed in a shorter window (the 10 years) vs . the old stretch IRA where beneficiaries could extend RMDs for decades, and the tax could be deferred over a longer period.”

Cement Relationships With Next Generation

Advisors “have to start meeting with the next generation of beneficiaries,” Slott advised. “The younger generation of beneficiaries are getting their information from social media. This is where an advisor should be able to step up and cement that relationship … it lowers the likelihood of litigation.”

The IRS’ plan, released in late February, is out for a 90-day public comment period, and a public hearing is scheduled for June 15.

As Slott stated previously, the regs are effective now.

Sarah Brenner, director of retirement education at Slott & Co., said during the interview that the proposed regs “are there and that’s what we have to look to. At some point down the road” — which “could be years” — the IRS will issue final regulations.

The IRS “doesn’t have a good track record of finalizing regs quickly,” Brenner said.

Brenner and Slott talked with ThinkAdvisor from one of Slott’s Elite IRA Advisor training sessions.

How are advisors reacting? “Disbelief,” Slott relayed. Advisors ask: “‘Are these really the rules? Are they [the IRS] going to stick to this?’ They’re still in denial.”


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