Ask the Expert: Leaving an IRA to a minor beneficiary, Part 1

What's the best way to leave my IRA to my 2-year-old grandchild? (Part 1)

It will take more than one column to address that question! This week, I'll explain how a new law has changed the answer. Next week, I'll describe how you might adapt to the new rules.

Until Jan. 1, 2020, the best strategy was to name a "pass-through" trust for your minor heir as your IRA beneficiary. After your death, the IRA paid annual required minimum distributions (RMDs) to the trust based on the child's life expectancy and taxable at his rate. Nothing accumulated in the trust. It passed the RMDs to the trustee, who spent them on the child's behalf. This strategy prolonged the inherited IRA's tax-deferred growth, minimized taxable distributions and ensured your heir didn't control his inheritance until he was old enough to handle money.

The new law has made this strategy obsolete.

With few exceptions, an IRA inherited by anyone but the decedent's surviving spouse now must be emptied by Dec. 31 of the 10th year following the year of the original account owner's death.

The deceased IRA owner's minor children (but not grandchildren) are exempt from this requirement until reaching majority (age 18 in New York), or until age 26 if still in school. But this exemption won't be invoked very often, says Ed Slott, a Rockville Center tax accountant. "What's the likelihood of an IRA owner who dies at, say, 85, having a minor child? It's likelier with a person dying at 40 — but then there would probably be much less saved in the IRA, and therefore less of a tax problem for the beneficiary."

The bottom line

Children or grandchildren who inherit your IRA can no longer stretch distributions from the account over their life expectancies.

More information

nwsdy.li/KitcesIRAStretchElim

nwsdy.li/InvestopediaSECUREAct