American Funds Default Beneficiary Designations Under SECURE Act

Submitted by Clark Randall on Tue, 2020-02-25 17:46

I have several clients at American Funds who have used the AF Default Beneficiary designations which reads:

“Your default beneficiary will be your spouse. In the event you have no spouse, your beneficiary(ies) will be your children equally. If any child does not survive you,, the deceased child’s share will go to his or her children (your grandchildren) or, if none, the surviving children equally. If no children or grandchildren survive you, your beneficiary will be your estate.”

I am wondering if this default which names “spouse” and “children” and “grandchildren” is enough under the Secure Act or if each child needs to be listed by name in order to qualify for either the Non-Eligible Designated Beneficiary ten year payout period OR the Eligible Designated Beneficiary RMD for minor children then ten year payout period at age of majority RATHER THAN the Non Designated Beneficiary 5 year payout.

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Permalink Submitted by Alan - IRA critic on Tue, 2020-02-25 19:27

The Secure Act did not affect the definition of a designated beneficiary per IRS Reg 1.401(a)(9)-4, Q 1 copied below, and beneficiaries do not have to be listed by name.
“A designated beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan. The members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, to identify the class member with the shortest life expectancy.”
If there are multiple individuals identified per the above, the distribution period for the 10 year rule beneficiaries is no longer affected by the deadline to establish separate inherited IRAs since being older or younger is no longer a factor. However, if any of these beneficiaries are “eligible” beneficiaries (eg a beneficiary not more than 10 years younger than decedent), the deadline for establishing separate accounts still matters since their age now determines their stretch period. If there are two EDB beneficiaries (perhaps siblings), one 9 years younger and one 6 years older, separate accounts need to be established by the deadline in order for the younger beneficiary to avoid having to distribute their inherited account as fast as the older beneficiary.