Estate Planning For Retirement Benefits In 2025 Going Forward: A Summary Guide To A Complicated New World

I. INTRODUCTION

Congress and the Treasury Department have made several substantive changes to retirement plan distribution systems. These changes should cause every estate planner to re-evaluate how to treat retirement plan assets when planning for clients with significant retirement plan assets.¹

This article is not intended to be an exhaustive or all-inclusive summary or analysis of the new rules. Rather, it is intended to provide practical short-form guidance on how to engage in estate planning moving forward for clients with significant retirement plan assets.

For ease of reading, this article uses the terms "Owner" and "client" interchangeably, while the pertinent IRS primary sources generally use the terms "employee" or "participant."

II. MAJOR CHANGES SINCE DECEMBER 2019

The major recent changes to retirement plan distribution law since December 2019, pertaining to planning moving forward, are:

1. The Setting Every Community Up for Retirement Enhancement Act (the "SECURE" Act) was signed into law on December 20, 2019, as part of the massive congressional budget bill (spending over $1.7 trillion).² It was generally effective for our purposes starting on January 1, 2020. The SECURE Act radically altered roughly 30 years of retirement plan distribution law, potentially reducing the long-term value of retirement plan assets held at the death of an account Owner by generally requiring these retirement plan assets to be distributed on a more accelerated basis than was required under prior law.
2. SECURE 2.0,³ generally effective at the end of 2022, extended and broadened the changes started in the SECURE Act.
3. The Treasury Department's final regulations (for SECURE)⁴ and proposed regulations (for SECURE 2.0)⁵ incorporating and interpreting both acts, were issued in July 2024 (replacing 275 pages of proposed SECURE regulations issued in 2022).
4. IRS Notices 2022-53,⁶ 2023-54,⁷ and 2024-35,⁸ granting relief for most beneficiaries and setting 2025 as the effective date for many of the new required minimum distribution (RMD) rules.

This article summarizes the planning landscape following all of these changes. If there are administration cases already in process (e.g., deaths from 2020 through 2024), other considerations or opportunities may apply. These new changes layer on top of the existing laws and tools instead of supplanting them. Accordingly, an understanding of pre-existing laws and regulations remains essential.

III. THE CHANGES SUMMARIZED WITH A PRACTICAL EYE

For more than 30 years, owners of retirement plan assets (401(k)s, 403(b)s, IRAs, Roth IRAs, SEPs, and the like) planned their beneficiary designations around the basic premise that a "stretch" arrangement served to increase the after-tax value of the Owner's retirement plan assets as those assets were distributed to the named beneficiary(ies) after the Owner's death. Appropriately drafted and administered trusts could stand in as individual beneficiaries, using the same lengthy life expectancies. These opportunities allowed clients to leave large portions of retirement plan assets in tax-deferred (or tax-free, in the case of Roth IRAs, Roth 401(k) accounts, and the like) status for decades after the Owner's death, allowing those assets to remain invested and grow tax-deferred or tax-free—swelling the real economic value of those assets over the lifetime of the named beneficiary.

However, the SECURE Act changed all that. The SECURE Act wiped away the "stretch" arrangements available under previous law for all but specified niche categories of beneficiaries, discussed more below. In place of those "stretch" arrangements, the SECURE Act borrowed from the pre-existing "5 Year Rule" concept requiring full distribution of retirement plan accounts within a new "10 Year Rule." Thus, the new normal of retirement distributions after the Owner's death, following SECURE and SECURE 2.0, will require full retirement account distributions within around 10 years of the Owner's date of death, or somewhat longer for certain beneficiaries. Under the new rules, estates and non-qualifying trusts receiving retirement plan distributions will continue to be subject to comparatively rapid taxation.

Congress held open the possibility for "stretch" arrangements, largely parallel to prior law, only for specific categories of beneficiaries. The following new special categories of beneficiaries, termed "eligible designated beneficiaries" (EDBs), remain eligible for "stretch" arrangements, with various caveats and limitations:

1. A surviving spouse of the Owner;
2. A "minor child" of the Owner;⁹
3. A "disabled" or "chronically ill" beneficiary;¹⁰ and
4. A beneficiary who is less than 10 years younger than the Owner (including a beneficiary older than the Owner).

To apply the new distribution rules, some threshold analysis is necessary.

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Footnotes

1. Much credit in the preparation of this article is owed to Natalie Choate, and to Robert A. McLeod, based on their very detailed outline materials.

2. https://www.govinfo.gov/content/pkg/PLAW-116publ94/html/PLAW-116publ94.htm.

3. Signed into law by President Biden on December 29, 2022 as Division T of the Consolidated Appropriations Act, 2023, https://www.congress.gov/amendment/117th-congress/senate-amendment/6552/actions?r=14&q=%7B%22search%22%3A%222617%22%7D.

4. July 2024: 26 CFR Parts 1, 31, and 54, https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions.

5. July 2024: 26 CFR Part 1 RIN 1545-BQ66, https://www.federalregister.gov/documents/2024/07/19/2024-14543/required-minimum-distributions#h-15.

6. https://www.irs.gov/pub/irs-drop/n-22-53.pdf.

7. https://www.irs.gov/pub/irs-drop/n-23-54.pdf.

8. https://www.irs.gov/pub/irs-drop/n-24-35.pdf.

9. Child of the Owner, but includes stepchildren and certain foster children of the Owner. See 26 U.S.C.A. § 152(f)(1) and Reg. § 1.401(a)(9)-4(e)(1)(ii). "Minor" (child who has not reached the age of majority in IRS-speak) is, for this purpose, a child of the Owner under age 21.

10. The Regulations include a documentation/certification component (Reg. § 1.401(a)(9)-4(e)(7)) and detailed definitions of what constitutes being disabled (Reg. § 1.401(a)(9)-4(e)(4)(i)) and what constitutes being chronically ill (Reg. § 1.401(a)(9)-4(e)(5)). In either case, the status must exist as of the death of the Owner (not later).

Originally published by Probate Law Journal of Ohio.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.