In this episode of Protecting and Preserving Wealth, we dive into the changes introduced by the SECURE Act 2.0, which has made significant modifications to IRA and trust regulations. Bruce Hosler and Alex Koury from Hosler Wealth Management explain the complexities and implications of these new regulations.
The conversation begins with Bruce explaining the updated requirements for trusts designated as IRA beneficiaries. Previously, the law mandated that documentation, including copies of the trust, be provided to IRA custodians by a set deadline after the IRA owner’s death. Under SECURE Act 2.0, however, this requirement has been relaxed. Now, instead of submitting full documentation, the trustee only needs to provide a list of beneficiaries and the conditions of their entitlement. For trusts listed as IRA beneficiaries, documentation requirements have been removed entirely, simplifying the process significantly for trustees.
Alex follows by highlighting the second key update, which allows for separate accounts in trusts under certain conditions. Previously, IRA owners could not allocate separate accounts for multiple beneficiaries within a single trust. This limitation meant that multiple beneficiaries inheriting through a trust would share a single account. With the new rules, separate accounting is now permissible for see-through trusts under specific conditions, including those for beneficiaries with special needs. This change allows beneficiaries within a trust to inherit assets based on their own life expectancies, potentially stretching the distributions over a longer period.
Bruce then describes a third important change concerning Required Minimum Distributions (RMDs) for inherited IRAs within trusts. Previously, all beneficiaries of a trust would have to follow the distribution schedule based on the oldest beneficiary’s age, limiting flexibility. Now, the new regulations permit RMDs to be calculated separately for each individual beneficiary based on their own life expectancy, offering potential tax advantages and allowing younger beneficiaries more flexibility in managing distributions.
Throughout the episode, Bruce and Alex underscore the importance of consulting professionals to navigate these complex changes. While these new rules provide increased flexibility and potential tax benefits, they also demand a precise understanding of IRA and trust structures, especially for those with multiple beneficiaries. For anyone affected by these changes, they stress the value of working closely with wealth management professionals who understand both the regulatory landscape and individual client needs.
For personalized advice, Bruce invites listeners to contact Hosler Wealth Management:
Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.
To listen to more Protecting & Preserving Wealth podcast episodes, click here.
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Guest Profile
Alex Koury CFP®, CERTIFIED FINANCIAL PLANNER™ professional and Wealth Manager in Scottsdale, has worked in the financial services industry for fifteen years as a financial advisor and Financial Planner. He holds Series 7, 9, 10 & 66 securities registrations– and is a Registered Representative with Commonwealth Financial Network®.
Podcast Host
Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.
In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
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*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.
Transcript
Protecting and Preserving Wealth – IRA Changes with SECURE Act 2.0
Speakers: Jon Gay, Bruce Hosler, & Alex Koury
[Music Playing]
Jon Gay (00:04):
Welcome back to Protecting and Preserving Wealth. I’m Jon Gay, I’m joined by Bruce Hosler and Alex Koury of Hosler Wealth Management. Good to be with both of you as always.
Bruce Hosler (00:11):
Jon, great to be with you this morning.
Alex Koury (00:13):
Hey, Jon.
Jon Gay (00:14):
Alright, so today, we’re talking about the SECURE Act 2.0, and the regulations that have now gone into effect that are going to create significant rule changes for IRAs, Bruce.
Bruce Hosler (00:23):
Absolutely, Jon. I just recently attended my Ed Slott Master Elite IRA training again, and they went through all of these new final act regulations that were promulgated in July of this year, 2024. And there’s several new rules that we want to cover today, and we want to clarify these changes because the treatment is different when it comes to trusts, when the trust is used as a beneficiary of an IRA.
Now, the new regulations simplify the documentation requirements for trusts that are used as beneficiaries of retirement plan accounts, and they do away with in its entirety, for the trusts that are IRA beneficiaries.
Let me say that again: the old regulations that had limitations for IRAs, those requirements have been done away with. So, let me jump into that to begin with.
So, what we’re considering is the look-through or see-through requirements for IRAs to distribute their assets to the trust as a beneficiary. So, here are the rules.
So, number one: the trust must be valid under state law, or it would be but for the fact that there’s no corpus in the trust.
Number two: the trust has to become irrevocable, and the language has to have an effect that it becomes irrevocable upon the death of the employee or IRA owner.
Number three: the beneficiaries of the trust who are the beneficiaries with respect to the trust’s interest in the employee’s IRA are identifiable. That means we have to be able to identify the beneficiaries of the trust.
Now, the old rule required the copy of the trust must be provided to the trustee by no later than October 31st, Halloween, of the year after the IRA owner’s death. However, that’s an old rule, and that documentation no longer needs to be sent to the IRA custodian.
But the new rule requires that the documentation has been simplified and the plan administrator can require the trustee just to provide a list of the trust beneficiaries with a description of the condition of their entitlement, instead of the actual trust document. So, now, the trustee of the trust can just provide a list to the IRA custodian.
Now, for trusts that are IRA beneficiaries, so the trust is the beneficiary of an IRA, the documentation requirements are eliminated altogether. The trustee of a see-through trust is not required to provide the trust documentation to an IRA custodian at all.
This, folks, is a big change. It’s a huge change from the old rules. We no longer have to worry about the trustee providing a copy of the trust document to the IRA custodian.
Alex Koury (03:17):
I would want to mention something about that as well, Bruce, because sometimes beneficiaries change or trusts change. So, in that example, what should an account owner do in those scenarios? Should they be reaching out to their custodians to update the-
Bruce Hosler (03:34):
It’s only if the trust is a beneficiary of the IRA, and the successor trustee is the one that has to provide the list of beneficiaries to the custodian. The IRA owner’s dead, they can’t provide anything.
So, there’s no requirements while they’re alive other than they named their trust as the beneficiary of an IRA. But when they die, now the spouse, if she is the successor trustee, we’re assuming of course, that the old guy is the first one to go.
Jon Gay (04:03):
Usually the case.
Bruce Hosler (04:04):
(Yeah, yeah. You go to a nursing home and there’s 97 women and three happy little guys that are getting chased around.) But she just has to provide the list of the beneficiaries of the trust if the trust in fact is the beneficiary of the IRA. Great question, Alex.
Jon Gay (04:20):
Alright, Alex, back over to you. What is the second rule change regarding trust and IRAs with the SECURE Act 2.0?
Alex Koury (04:26):
Yeah, so the second big change that’s occurred is we’re looking for separate accounts that are allowed for trusts. So, the old IRA rules generally said that there are no separate accounts for trusts naming separate trusts on the beneficiary form. And that was the only way to really get around this rule.
In the past, while separate accounting was allowed for multiple beneficiaries named directly on the IRA, it was never permitted for the trust itself. The IRS always took the position that if the trust itself is considered the beneficiary rather than the individual beneficiaries of the trust.
So, if three individuals were to inherit an IRA through a trust, you only would have one beneficiary, which would be the trust. Now, to get around the issue, IRA owners could name separate trusts directly on the beneficiary form. But in a private letter ruling, the IRS allowed the beneficiaries of sub-trusts to each use their own life expectancy, which is a big deal.
The difference here was that each sub-trust was named on the IRA beneficiary form rather than the master trust itself.
Bruce Hosler (05:27):
This is very important folks. The trouble that we have had for years is the attorney software, when they write up a trust, were used to just not naming the sub-trust at all. And so, the old rules required us to give the name of the trust and put it on the IRA beneficiary form. That means the attorney had to, in their software, name the sub-trust for each of your children, let’s say if you have three children.
Well, this is a big deal because up until now, if you had three or four children and you left money to each of them, the sub-trust would have to be named inside of your revocable living trust, and usually, the attorneys don’t name that in there. So, this is a big change and it’s really good. It’s very easy now, we don’t have to name those sub-trusts.
Alex Koury (06:18):
So, the SECURE Act changed these rules in a limited way. It allowed separate accounting for certain special needs trusts for disabled or chronically ill beneficiaries called applicable multi-beneficiary trusts, or AMBTs. The final regulations though expand this treatment beyond AMBTs to permit separate accounting to be used for those other see-through trusts if certain requirements are met.
Now, separate accounting may be used for see-through trust if the terms of the trust specifically provide that it is to be divided immediately upon the death of the account holder into separate shares for one or more trust beneficiaries. And a trust is considered to be immediately divided upon death only if it meets all of the following requirements.
Number one, the trust must be terminated. Number two, the separate interests of the trust beneficiaries must be held in separate trusts, and there can be no discretion as to the extent to which the separate trusts will be entitled to receive post-death distributions.
And in addition to that, the final regulations clarify that a trust will not fail to meet the requirement to be divided immediately upon death if there are administrative delays, as long as any amounts received by the trust during the delay period are allocated as if the trust had been divided on the date of the employee’s death.
Bruce Hosler (07:46):
So, folks, can you imagine that you’re going to remember everything that Alex just told you about these rules?
Jon Gay (07:52):
I know I can’t.
Bruce Hosler (07:53):
You can see how complex this is, and it’s moving. Your revocable trust turns irrevocable. You have to split it out to the separate shares for junior trust for each of your kids, and then your original trust has to be terminated, and your other trusts have to be where the beneficiaries will hold their separate shares.
This is all important and you need tax accounting and legal people to help you with this. So, please know this is not really a do-it-yourself or type activity, but these rules are very beneficial for your family.
Jon Gay (08:27):
Alright, Bruce, what’s number three on our list?
Bruce Hosler (08:29):
So, number three is the required minimum distribution rules are applied separately when inherited IRAs are established for trust beneficiaries. What did I just say?
Well, when you have three children and they have inherited IRAs, it used to be the old rules that the trust beneficiaries tried to seek out private letter rulings to allow them to move the funds from a trust to an inherited IRA for each of the beneficiaries individually.
And the IRS was willing to grant such requests, but has always taken the position that the separate accounting rules did not apply. And what that meant is that the beneficiaries would be subject to the same payout period under the required minimum distribution rules as the oldest beneficiary.
In other words, the baby of the family didn’t get to stretch the IRA longer, they had to take the RMDs under the same schedule as the oldest beneficiary of the trust.
Now, the act of retitling the IRA from an inherited IRA for the benefit of the trust to an IRA for the trust’s beneficiary, and the transfer of the inherited assets in that case was a non-taxable event. The new IRA would still be an inherited IRA, but by allowing these transfers, the trust could be terminated, and thereby, you wouldn’t have to file a return every year and deal with all the hassle of that.
However, such a transfer did not change how the RMD would be calculated, and so the beneficiary had to continue using the calculation of the formula that applied to the trust instead of to their individual life.
The final regulations applied to the RMD rules separately to each beneficiary’s inherited IRA. Now, that’s a great benefit, and under the new proposed regulations, one or more of the beneficiaries would be permitted to set up their own inherited IRAs, and the RMD rules would apply separately to each beneficiary depending on their life expectancy and age.
This is a great benefit to IRA beneficiaries, especially your non-spouse beneficiaries. They’re going to benefit from all of these rule changes.
Jon Gay (10:53):
You said it a moment ago, Bruce, this stuff is complicated. It’s really important to work with a team that understands all these new rules, and how to maximize these rules to your benefit in your individual situation.
If our listeners want to contact you and your team at Hosler Wealth Management, how do they best find you?
Bruce Hosler (11:10):
Hey, they can reach us at the website, Jon, at hoslerwm.com. They can reach us in Prescott at (928) 778-7666, and certainly, folks in Scottsdale (480) 994-7342.
Jon Gay (11:28):
Important stuff as always, we’ll talk again in a couple of weeks.
Bruce Hosler (11:31):
Thanks, Jon.
Alex Koury (11:32):
Thanks, Jon.
Jon Gay (11:33):
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