The Secure Act governs distributions from IRA’s and other retirement plans. After the death of the account holder, most named beneficiaries are required to take the funds out over ten years.
While the IRS has not finalized the regulations, the safest approach is to take minimum distributions for the first nine years, based on the life expectancy of the beneficiary. More may be taken, and taxes will be based on that amount. The way the minimum distribution works is as follows. Let’s say the beneficiary has a life expectancy of forty years when the account holder dies. In the year following the account holder’s death they must take one-fortieth, the following year one-thirty-ninth, and so on until year ten when they are required to take the retirement account balance in full.
There are a few exceptions to the ten year rule. Spouses may roll the inherited IRA into an IRA of their own and continue it for their own lifetime — generally waiting until they are 72 to start taking required minimum distributions (RMD’s) unless they need the funds earlier.
Disabled or chronically ill beneficiaries are entitled to the “stretch-out” of payments for life. So, in the above example, they would not have to liquidate the account in year ten but instead would be able to take the distributions over the full forty years.
Non-spouses less than ten years younger are also entitled to the stretch-out. This might be a sibling or a life partner.
Correctly prepared trusts may be beneficiaries of your IRA’s subject to the ten year rule. However, Special Needs Trusts get the exception of the stretch-out. These trusts may be set up for special needs children and grandchildren.
One strategy for getting the highly valuable lifetime stretch would be to leave the IRA to the Special Needs Trust and other assets to the other children. The purchase of life insurance, with premiums being paid from RMD’s during the account holder’s lifetime, may be used to make up for any shortfall in the shares to the other children.