SECURE Act Proposed Regulations Clarify Meaning of “Disabled” Beneficiary.

The SECURE Act created a special beneficiary class entitled to rely upon pre-SECURE Act life expectancy distribution rules. These beneficiaries, referred to as “eligible designated beneficiaries,” avoid the harsher 10 year distribution requirement designated beneficiaries must abide by.

One category of “eligible designated beneficiary” is an individual who is “disabled” as of the date of the IRA owner’s death. Unfortunately, the SECURE Act does not define the term “disabled” for us to refer to.

The proposed regulations adopt the definition of disability under §72(m)(7) of the Internal Revenue Code, which provides that an individual is deemed to be disabled if she is unable to engage in substantial gainful activity “by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” If the IRA beneficiary is under the age of 18, the regulations apply a similar standard requiring the beneficiary to have a medically determinable physical or mental impairment that results in marked or severe functional limitations, and that can be expected to result in death or to be of long-continuing and indefinite duration.

The beneficiary will be deemed to be disabled if, as of the date of the IRA owner’s death, the Commissioner of Social Security had already determined that she is disabled under the Social Security Act. If the beneficiary can’t satisfy that safe harbor, she must be able to provide documentation sufficient to establish she was disabled as of the date of the account owner’s death.

In the case of a beneficiary who is a disabled minor child of the deceased IRA owner, the child will continue to be treated as an eligible designated beneficiary beyond age 21 (on account of being disabled) if she continues to meet the definition of “disabled” under the regulations. This is an ongoing requirement. Thus, if at some point after reaching her 21st birthday she is not able to meet the definition of disabled, she will be deemed to no longer be an “eligible designated beneficiary” and must switch to the 10 year distribution rule with respect to liquidation of the remaining account balance.

If the minor child is not disabled as of the date of the IRA owner’s death, but becomes disabled thereafter while still a minor, the child’s later disability will not be taken into account and she will cease to be an eligible designated beneficiary on her 21st birthday. She must switch to the 10 year rule with respect to liquidation of the remaining account balance.

Sounds complicated. Who would have thought!? If you are struggling with beneficiary planning for your IRA, or have questions regarding an IRA you inherited, give us a call. We can help.