IRA heirs, planners get additional RMD breathing room — again

Financial advisors, tax professionals and their clients who inherited individual retirement accounts in this year or the previous three received 12 more months of flexibility from the IRS.

In an April 16 notice, the agency and the Treasury Department tacked on at least one more year without required minimum distributions for IRA and annuity beneficiaries who must transfer the full amount into their income for federal tax purposes within a decade under the terms of the 2019 Secure Act, rather than using the previously available lifetime "stretch" strategy. The "welcome news" for heirs provides more time "for additional growth and compounding without the burden of taxes," Allen Laufer, the director of financial planning for New York-based registered investment advisory firm Silvercrest Asset Management Group, noted in an email.

READ MORE: With Congress slow to act, financial advisors plan ahead on estate taxes

For planners and clients seeking to reduce potential estate taxes and RMD headaches down the line, that extra year of relief also creates an opportunity to consider trust strategies that could address both issues at once, according to Laufer and Theresa de Leon, the national director of sales for Arden Trust, a Kestra Holdings company. 

The notice represents "the final regulations" that "will apply for purposes of determining RMDs for calendar years beginning on or after Jan. 1, 2025," the IRS said in the notice itself. In the meantime, heirs and their tax professionals can think through the potential timing and bracket impact of inheriting the assets amid the potential sunsetting of the lower individual rates of the 2017 Tax Cuts and Jobs Act in 2026, Laufer said. 

"If they're currently in a low tax bracket but anticipate moving to a higher one later, it might make sense to capture taxable income in the lower bracket year," he said. "Let's not forget that the IRA must distribute all its assets within the 10-year period. By deferring distributions, subsequent year distributions may be larger and push individuals into a higher tax bracket."

Since "retirement accounts are always an important part of planning" for an estate transfer, placing the IRA in a trust could be "the easiest and simplest way" for an owner to lessen the taxes and RMDs for heirs in the future, de Leon noted in an interview.

"You never want to go to a client with the answer before you ask all of the questions — that's kind of the mantra that I live by. You have to take the step back and understand your client and what your client's objectives are," she said. "You can really get some of the trusts out of the estate, so that you don't have that first bite of the apple of the estate tax."

READ MORE: How a life insurance strategy could save some wealthy estates millions

Estate taxes, the sunset date of many Tax Cuts and Jobs Act provisions and RMDs under the Secure Act have emerged as three complicated prongs of related planning questions that could occupy planners and their clients for several years. Just as it did the last time the IRS pushed back the beginning of RMDs this past summer, the question remains whether the agency will do so again next year. 

The wording in the IRS notice that the Secure Act rules "will apply" on or after the beginning of 2025 displays a notable difference with the ones bringing that relief in prior years by stating that the RMDs would have to begin "no earlier than the subsequent" year, certified public accountant Ed Zollars wrote on Kaplan Financial Education's "Current Federal Tax Developments" blog.

"Such omissions have historically left the applicability of penalties in the following year ambiguous, with the IRS not specifying its expectations regarding the enforcement of these rules for distributions in that year," Zollars wrote. "And, in fact, such penalties have not applied in those subsequent years. Instead, the current notice indicates that the final regulations are projected to be applicable for determining required minimum distributions for calendar years starting from January 1, 2025. Consequently, it is prudent for taxpayers to operate under the assumption that distributions are likely to be mandated for the tax year 2025 and beyond."

In light of the eventual implementation of the 10-year distribution rules, IRA owners and their tax professionals could set up a charitable remainder trust (CRT) to be the beneficiary, Laufer said. That strategy comes with its own guidelines, such as restricting the annual payouts to heirs to between 5% and 50% of the trust's value and other specific qualifications, he noted. 

"A CRT is a tax-exempt entity that can distribute an annuity based on a percentage of the annual fair-market value of the trust assets," Laufer said. "The beneficiary of the CRT would retain the right to receive an annuity expressed as a percentage of the annual fair-market value of the trust's assets. This annual annuity can be paid to individual beneficiaries for life or for a term up to 20 years. At the end of the CRT term any remaining trust property will pass to the designated qualified charitable beneficiaries."

READ MORE: 26 tips on expiring Tax Cuts and Jobs Act provisions to review before 2026

The many family dynamics involved with estate planning often bring other factors into the mix around a decision about placing the assets in a trust, de Leon noted. Those may include the relative financial sophistication and well-being of one heir as compared to another, protecting assets in the event of a divorce or even concerns about substance abuse problems, she said.

"It's really those kinds of issues — those emotional issues — that tend to lead people to trusts," she said. "Those tend to be more the rationale for people these days. More of my conversations are about that than the tax consequences, frankly."