RTS #022 What if you could make 10 years become 20?

In case you missed it (which seems unlikely for how often we have talked about it), with the changes that came out of Secure 2.0, non-spousal beneficiaries of inherited IRAs have just 10 years to fully distribute the account. There is also the potential for RMDs being needed, but that is a topic for another day and a more detailed newsletter. Many beneficiaries will be stuck with that 10-year timeline, but with the right advanced planning, there is still a chance that we could turn 10 years into 20.

This is possible through disclaiming assets.

The idea behind this strategy is that within 9 months of an IRA holder’s passing, the primary beneficiary can decide to pass a portion (or all) of the account balance to the contingent beneficiaries. This will start a 10-year clock for the contingent beneficiaries, but assuming only a portion of the account was disclaimed, we now have the opportunity for two separate 10-year clocks. One beginning with the year the assets were disclaimed, and the other when the primary beneficiary eventually passes and leaves the remaining assets to the contingent beneficiaries that have now become primary.

There are, of course, other nuances to how this works (it’s still the IRS we’re dealing with), but with an intentional plan, it can be accomplished with relative ease. An important nuance that can easily get missed is that the funds have to go directly to the contingent beneficiary without any input or influence from the primary beneficiary. This means it can only go to people who are actually named as beneficiaries on the account.
The bigger question might be, “why go through the hassle”? When it comes to inherited IRAs, depending on the size of the account in question, simply spreading the distributions over 10 years instead of 1 can have a 6 figure impact on the total taxes paid, so this strategy can give us an extra 10 years to work with and the potential for even greater tax savings. Helping clients not get killed on taxes is always a win.

Another great benefit of this strategy is being able to take the guesswork out of establishing primary beneficiary percentages before someone passes away. For couples who want to make sure the surviving spouse is comfortable but also start giving their contingent beneficiaries (often kids or grandkids) access to the wealth they’ve accumulated, disclaiming assets gives greater flexibility in the year the first spouse passes compared to guessing potentially years ahead of time what the split might look like.

What can you do about it?

This is a topic that should be on your radar for any client with qualified assets and needs to be on your checklist for the year a client passes away. Thankfully, there is a nine-month window we have to work with, but being proactive is always going to be better. Like any other tax planning, this needs to be aligned with the clients’ goals first, and then figure out the math on the optimal way to execute from a tax perspective. If you are new to this strategy, it is one worth finding another advisor who can share their first-hand experience so you have better insight going in.

Happy Tax Planning!