Congress Debates the Five-Year Rule For IRA Trust Planning


In Recent Blogs, The Evolution of IRA’s: Why Designating the Right Beneficiary is Only the Beginning and The Importance of IRA Distribution Planning, we have discussed the long term planning goals for maximizing IRA benefits.  On February 27, 2012 in the Senate, Senator Baucus, in Senate Bill 2132, proposed a five-year rule that would result in a major shift in how we in the financial preservation industry view the utilization of IRA’s and legacy planning in general.

The five-year rule, as proposed, effectively limits the ability for IRA trust planning in a manner to accelerate the required distributions to occur, after an owner’s death, within a five-year period.  This limits the ability for IRA rollover or inherited IRA options.  However, the bill does designate a class of “eligible beneficiaries” including, the surviving spouse of the IRA owner, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the decedent, and all children under the age of majority.  This class of beneficiaries is not subject to the proposed five-year rule.  It is explained in Senate Report 112-152 that the aim of the five-year rule is to prevent those, non-eligible beneficiaries, from continuing to benefit from the tax deferral of the retirement asset.  The end goal is to eliminate the ability for non-eligible individuals to “stretch” IRA’s and benefit from unlimited tax-deferred growth of such funds.

While the provisions of the five-year rule in Senate Bill 2132 remain calendared for discussion, a similar bill, Senate Bill 1813, was passed in the Senate on March 14, 2012 absent the provisions of the five-year rule.  The companion bill, House Bill 14 is currently being debated in Committee in the House of Representatives.  The question is, will they reintroduce language of the five-year rule, or agree to its exclusion, as the Senate did.  In its current form, House Bill 14 does not contain the provisions of the five-year rule.

Stay tuned, because the outcome could affect how you chose to manage your IRA’s.

–  Gary Altman, Esq. and Adam Abramowitz, Esq.

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