The fourth and final day of Heckerling 2021 was another great day, with terrific presenters sharing a wealth of information.
Here are some of the day’s highlights:
Natalie Choate gave a presentation on the impact of the SECURE Act on retirement benefits and planning. The loss of the stretch IRA (except in very few circumstances), whereby a non-spousal beneficiary could take an IRA out over their own life expectancy, left estate planners with less options when planning for estates with substantial IRAs.
Conduit trusts and trusteed IRAs are losing their appeal under the distribution restrictions of the SECURE Act, but see-through accumulation trusts still have a place in planning, if only to protect beneficiaries from themselves. These trusts must still collect the full proceeds of the IRA within 10 years, except in certain circumstances, but they are not required to distribute those proceeds to the beneficiary.
While we have all been struggling to navigate the provisions of the SECURE Act, it turns out that the IRS has been having its own issues trying to issue clear, concise guidance. One thing to keep in mind, despite what some IRS publications seem to say, is that if the beneficiary chooses to take a full distribution of the funds within 10 years, there is no need to take annual required minimum distributions (RMDs). Careful here – the IRS has not OFFICIALLY announced this. They seem to have acknowledged the error.
The SECURE Act still allows for a spouse to inherit an IRA and be subject to the RMD rules, which are more complicated and less rewarding than the previous rules. The presenter also warned us to keep in mind that while Roth IRAs are not subject to tax on distribution, they are subject to the ordinary RMD rules if held within a 401k plan.
Keep an eye out, the IRS is issuing new life expectancy tables in 2022.
Jeremiah Doyle provided a great review of distributable net income (DNI), and its components and calculations. We were reminded that trust accounting income is different from DNI and requires a separate calculation. When calculating DNI, the allocation of DNI among beneficiaries may not be equal under the beneficiary tier system. It is also important to note that the separate share rule requires a separate calculation of DNI for each beneficiary’s share.
There are a few DNI rules that are often missed and worth mentioning. The 65-Day Rule gives the trustee the ability to make distributions within 65 days of the succeeding tax year, but deduct the distributions in the year being filed. If using this rule, an election must be included on the return, and it is limited to the greater of DNI or trust accounting income. A specific bequest does not carry out DNI (subject to certain requirements). Distributions in kind carry out DNI based on the cost basis of the property. However, if the trust or estate elects to treat this as a sale to the beneficiary and recognize the gain, the beneficiary receives a basis equal to fair market value.
As a general rule, capital gains are not part of DNI. However, you can elect to treat capital gains as income and includable in DNI if certain conditions are met. It is important to note that once a trust elects to treat capital gains as DNI, the trust must be consistent with capital gain treatment going forward.
As the 55th Annual Heckerling Institute on Estate Planning bids us farewell, we look forward to returning in person next year for number 56. Stay well and thank you for tuning in to Citrin Cooperman’s Heard at Heckerling.