One of the hot estate planning strategies earlier in this century was to name a minor child as the surviving beneficiary of an IRA. The child would have to take Required Minimum Distributions (RMDs) from the IRA every year, but they would be geared to the child’s lifetime, so very low payouts in the early years. What awonderful lifetime financial resource!

The idea was too good to last, and it was ended with the SECURE Act in 2019. Although there are some exceptions, including for a surviving spouse, in general an inherited IRA must be distributed to the heir during the 10 years following the owner’s death.

One of the exceptions in the new law had a troublesome ambiguity concerning an heir who is a minor child. The law states that the 10-year rule for minors only kicks in when they reach the “age of majority.” Until then, they may take much smaller distributions based upon their life expectancy. But states have different laws as to when the age of majority happens. What’s more, in some states the status of “minor” may be extended for full-time college students, until age 26.

The IRS put the ambiguity to rest in Proposed Regulations in February. For purposes of inherited IRA distributions, the age of majority will be 21, and there are no exceptions for students. For example, if the 10-year-old child of the IRA owner inherits the account, there will be small RMDs for 11 years, and then the account will have to be distributed over the next 10 years. The IRA must be terminated when the child reaches age 31.

(April 2022)

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