• Internal Revenue Service updates qualified domestic trusts (QDOT) regulations—On August 21, 2024, the IRS published proposed amendments, REG-119683-22, to the regulations under section 2056A of the Internal Revenue Code related to QDOTs.
Generally, there is no marital deduction for property that passes to a non-citizen spouse. However, IRC Section 2056A provides that a QDOT (a certain type of marital trust) will qualify for the marital deduction if it meets certain administrative requirements and the appropriate election is made on the estate tax return. Administrative requirements include, among other things, maintaining a US citizen trustee, in some cases having an institution or bank as trustee, and withholding estate taxes on the distribution of principal. A QDOT is needed when property passes from a decedent to a noncitizen spouse to qualify for the marital deduction that would otherwise be denied to such spouses.
The main purpose of these changes is to refresh outdated terminology, references, responsible parties and procedures. The changes detail the following changes:
Updating references to the 1995 temporary regulations. The amendments propose to update references throughout the 1995 interim regulations to the current version in effect.
Updating definitions. The definition of “finally determined” for determining the value of assets within a QDOT has been updated to align with current IRS practices. Specifically, the new definition excludes references to an “estate tax closing letter,” which the IRS no longer requires.
Update IRS offices, officials and file locations. The changes correct outdated references to IRS officials, offices, and specific file locations. For example, the term “District Director” and references to “Assistant Commissioner (International)” are replaced with current titles such as “Chief Tax Compliance Officer, IRS”.
Updating procedures for depositing security instruments. The amendments revise the procedures for filing security instruments required under QDOT provisions, such as bonds. These documents must now be submitted directly to the Estate Tax Advisory Group instead of being attached to the decedent's estate tax return.
Updating references to Customs and Uniform Practice for Documentary Credits. References to Customs and Uniform Practice for Documentary Credits have been updated from the 1993 revision to the latest version.
Deposit locations and methods. The amendments provide updated guidance on where and how to file essential documents with the IRS, directing practitioners to IRS Publication 4235 or the IRS website for the correct filing locations.
These proposed changes are intended to refresh and clarify the regulations to better serve current practitioners and ensure proper administration of QDOT.
• The final regulations (final regs) implement the SAFE Act rules for retirement plan withdrawals-On July 19, 2024, the IRS published final rules, 89 Fed. Reg. 58644, updating the rules for required minimum distributions (RMDs) from retirement accounts, implementing the Every Community Designation for Retirement Enhancement Act of 2019 (SAFE Act).
In the past, individuals were required to begin taking distributions from their individual retirement accounts at age 70½. The final rules provide that individuals born before July 1, 1949 must begin RMDs at age 70 ½. Those born after July 1, 1949 and before January 1, 1951 must start at age 72. Those born after January 1, 1951 but before January 1, 1959 must start at age 73. Those born after January 1, 1960 must start at age 75.
Under the SECURT Act, only “qualified designated beneficiaries” (EDBs) can spread the distribution of inherited superannuation funds over their lifetime. Surviving spouses, minor children, disabled or chronically ill persons, and beneficiaries who are no more than 10 years younger than the decedent may qualify as EDBs. All other beneficiaries must distribute the entire account balance within 10 years of the employee's death. The final rules provide that children are minors if they are under the age of 21, and a child includes a stepchild and certain foster children. It has now been confirmed that payments to a carer for a minor child qualify as child distribution.
When the SECURE Act was first enacted, there was confusion about what RMD program applied during the 10-year period to non-EDBs. The final rules clarify this for taxpayers, which is helpful, since retirement plans are often left to non-EDBs, such as grown children and trusts.
If the owner dies after the required commencement date (RBD), a non-EDB who inherits the retirement plan must continue to receive the RMD. RMDs are based on the beneficiary's life expectancy in year 1 through year 9 and then the balance in year 10. This is known as the “at least as soon” rule, which states that a beneficiary of a retirement plan must continue DRMs at the same frequency set by the testator during life, even if the calculated amount is different because it is based on the life expectancy of the beneficiary and not the life expectancy of the participating owner. While many in the field hoped that the IRS would repeal this requirement from the proposed regulations (the proposed regulations), it remains.
If the owner dies after his RBD, an EDB must receive RMDs based on either his own life expectancy or the life expectancy of the participating owner and is now free to choose the longer payment schedule. This is a change from the proposed rules, which had a “shorter” rule that required the EDB to take the final distribution by the beginning of the last year of their or the participant's life expectancy.
The final rules also provide some helpful clarification when trusts inherit IRAs.
If a decedent has multiple minor children, it is common in estate planning to create a single trust for the benefit of all minor children, usually until the youngest reaches a certain age. Under the proposed rules, if retirement plans are payable into this fund, 100% of the account had to be withdrawn by 10 years after oldest the minor child reached the age of 21. Unfortunately, this hastened the withdrawal without consideration for the youngest child, who, had he been the sole beneficiary of the trust, would otherwise have had until 10th their 21st anniversarystr the birthday. The final rules correct this and now only require 100% withdrawal up to 10th anniversary of younger child 21str the birthday.
The final rules update the rule governing RMDs when a retirement plan is paid to an administrative trust that is ultimately divided into separate trusts for different beneficiaries. The proposed rules provided that all beneficiaries were to be considered, and the life expectancy of the oldest beneficiary was used to determine all RMDs, even if the retirement account was ultimately divided into separate shares for separate trusts, of which had different beneficiaries. The only option under the proposed rules to use the RMD schedule based on each individual beneficiary's life expectancy (known as receiving “separate account treatment”) was to name each subtrust specifically on the beneficiary designation form. Now, an EDB beneficiary of a separate trust can use its lifetime for the RMD schedule, even if only the single administrative trust is named as the beneficiary, if the administrative trust is required by its terms to separate the trust account. annuity between specified sub-trusts. The trust instrument cannot give the trustee the choice to pick and choose the trust's funding assets – the allocation of retirement assets must be clear and binding.
Pension plan withdrawals continue to be administratively complex and time-consuming, so beneficiary designation rules must be considered carefully.