Financial Intelligence Newsletter for Q3 2024

In this publication of Financial Intelligence, I have included an article providing an update on inherited IRAs and whether RMDs are due during the mandated 10-year distribution period. This is a very important development for most non-spouses who inherit an IRA. I have also included an article on the Corporate Transparency Act and the requirements for business owners who must report beneficial ownership information to the federal government or face significant civil penalties. I hope you find the information provided helpful. 

Inherited IRAs and RMD Update:  What You Need to Know 

The SECURE Act of 2019 eliminated the “stretch” IRA for most non-spouse beneficiaries. With a stretch IRA, it was possible to use the life expectancy of the beneficiary to minimize IRA distributions while allowing inherited accounts to continue to grow tax deferred. The 2019 legislation limited the ability to stretch inherited IRAs to surviving spouses, disabled persons, chronically ill persons, persons less than 10 years younger than the decedent, minor children and some see-through trusts benefitting the persons who are a part of this list. For other beneficiaries, considered non-eligible designated beneficiaries under the Act, a 10-year rule was implemented that required an inherited IRA to be liquidated within 10 years following the year of death. Non-designated beneficiaries, such as charities, estates, and non-see-through trusts, would be subject to a 5-year rule, or could be stretched over the decedent’s life expectancy, depending on whether the decedent’s required minimum distributions (RMDs) had commenced.

One question that lingered after the SECURE Act went into effect in 2020 was whether RMDs were due during the 10-year period for non eligible designated beneficiaries. In 2022, the IRS issued an initial proposed regulation regarding the SECURE Act’s provisions and indicated RMDs would be due for non-eligible designated beneficiaries subject to the 10- year rule if the original account holder had reached their required beginning date (RBD). The IRS issued notices in 2022, 2023 and early 2024 indicating that an inherited account holder who failed take an annual RMD in those years would not be assessed an excise tax, essentially delaying the finalization of the regulations that had been proposed in 2022.

Recent final regulations from the IRS in July 2024 have now addressed this question, requiring RMDs to be distributed during years 1 through 9 of the 10-year period, if the beneficiary subject to the 10-year rule inherits from an account owner who died on or after their required beginning date (RBD). Otherwise, if the decedent died prior to the RBD, RMDs are not due during the 10-year period, although the inherited IRA will still need to be distributed in full by the 10th year. The RBD of the deceased is the date on which their first RMD was due, or April 1st of the year after an account holder turns 73. Because it was unknown from 2021 to mid-2024 whether RMDs were due during the 10-year period, the IRS has waived the annual “stretch” RMD requirement for 2021 through 2024 and the annual RMDs must now start in 2025. The 10-year clock still starts the year after death, however, and not in 2025.

Here is an example to illustrate how the above rules work in aggregate. Let us say Jim inherits an IRA from his mother. His mother was 82 years old when she passed away in 2022. Because his mother died after her RBD, and because Jim is a non-eligible designated beneficiary on the account, he is subject to both the 10- year rule and the annual stretch RMD during the first 9 years. But Jim took no distributions in 2023, and none so far in 2024. Because the IRS has waived the penalties for not taking RMDs for the years 2021 through 2024, Jim does not need to make up these “missed” RMDs. He must begin taking them in 2025, however, and must empty the account in full by 2032, which would be the 10th year (starting in the year after his mother’s passing). Below is a helpful chart created by Jeffrey Levine for a presentation on the 10-year rule and the new final regulation related to these changes:

Levine, Jeffrey. “Untangling The IRS’s New Finalized (And  Proposed) Regulations On RMDs: The 10-Year Rule, Trust Beneficiaries, Spousal Beneficiaries, Annuities, And More!” Kitces.com. July 24, 2024.

What is interesting in looking at the above flowchart is that an opportunity exists for the estate to be named the beneficiary once an account holder reaches the required beginning date for RMDs, allowing for the stretch to take place for a non-eligible designated beneficiary over the decedent’s remaining life expectancy (if the estate plan is for a non-eligible designated beneficiary to inherit the account). But any benefit received in planning would be short-lived. As the account owner ages, eventually these RMDs will be so large that it will be more beneficial to name the non-eligible designated beneficiary instead of the estate for planning purposes. The heir would then have 10 full years to manage the distributions needed to empty the  IRA and be subject to RMDs based on their life expectancy, not the decedent’s. There are ancillary considerations in deploying such a strategy that might supersede the temporary benefit, however, such as creating a probatable estate when one might have otherwise been avoided.

There are some other changes to consider in these final regulations, such as when a decedent has multiple IRAs and whether RMDs have yet to be taken in the date of death year, defining a minor for eligible designated beneficiary purposes to be 21 (unifying the differences under various state laws), and some small changes to the rules governing spouses and eligible designated beneficiaries. But the big change for which we were waiting for clarification has now taken place.

Whether it makes sense to draw down the account sooner than the 10th year by taking more than the RMD that is necessary each year is a matter of financial planning and circumstance. Every distribution from an inherited IRA is subject to ordinary income tax and is added to income levels, so careful planning should take place over the 10- year period. If no planning is done and the inherited IRA has a substantial balance, the 10th year could result in a significant tax event.

Inherited Roth IRAs are treated the exact same as inherited IRAs, but Roths are distributed income tax free. Thus, for Roths that are inherited, generally speaking, the plan should be to keep as much money in the account for as long as possible because the balance within the account could continue to grow and be distributed income tax free.

We are seeing more and more clients who have inherited retirement accounts at Peak Asset Management. If you inherit one of these accounts, there are complex rules and strategies associated with managing distributions from the accounts. We are here to assist you at Peak with the necessary financial and tax planning to manage an inherited account subject to the 10-year rule and RMDs.

Corporate Transparency Act:  

What Is It and What Needs to Be Done

Basics. For those clients who own businesses, there is a new requirement mandated by the federal government to assist law enforcement in combating the use of shell companies for money laundering, tax fraud, securities fraud, the financing of terrorism, acts of foreign corruption, and other criminal activities. The Corporate Transparency Act, which is part of the Anti-Money Laundering Act of  2020, requires that a business that meets the definition of a reporting company provide the government with beneficial ownership information about the individuals who own or control the company. These “beneficial owners” fall into 2 categories: 1) Anyone who directly or indirectly exercises substantial control over the business entity; or 2) Someone who owns 25% or more of the business. Start-ups and new businesses in 2024 are also required to provide information about the people who prepared and filed business formation and registration documents. This information is reported to the US Treasury’s Financial Crimes Enforcement Network. Prior to 2024, it was up to financial institutions to collect this information at the time accounts were opened. The Corporate Transparency Act shifts this burden from financial institutions to business owners. Halloran, Lerner, and Hobson. “Sifting through the Corporate Transparency Act: Key Elements to Understand.” Americanbar.org. April 19, 2024.

Exemptions. Businesses such as Limited Liability Companies, Limited Partnerships, S-Corps and C-Corps, must report unless they qualify for one of the exemptions listed in the act. Foreign companies that have registered to do business in any US State may also need to report. There are 23 specific exemptions listed in the act that a business can claim to avoid having to report the beneficial ownership information. Here are some of the most common exemptions that may be applicable to companies and entities:

• Large operating companies physically located in the US with more than 20 full time employees and $5M in gross receipts or sales
• Publicly traded companies registered under the Securities Exchange Act of 1934
• Non-profits, and certain entities that advise tax exempt entities
• Inactive businesses that have been in existence prior to 2020, that have not sent or received more than $1000 in the past 12 months, and that own no  assets
• Banks, credit unions, bank or savings and loan holding companies
• Securities-related businesses that are registered with the SEC, such as broker-dealers, exchanges, clearing agencies, investment companies, and investment advisers
• Insurance companies
• Pooled investment vehicles
• Public utilities
• Both state and local governments, and other entities that exercise government authority

Below is a flowchart published by the US Government’s Financial Crimes Enforcement Network that illustrates whether a business is a reporting or non-reporting company:

“Frequently Asked Questions: Beneficial Ownership  Information: C.1. Reporting Company”. Fincen.gov. 

Because sole proprietors operate businesses without having to file, they would not be considered a reporting company and do not have any reporting requirements under the Corporate Transparency Act. General partnerships are also not registered legal entities and thus not reporting companies. A trust may have a requirement to file with the court in certain jurisdictions but is not considered a reporting company because there is no mandate to file with the secretary of state or any similar office under state law. Similarly, foundations have no registration or filing requirement, although even if there was such a requirement, they likely would be exempt as a non-profit. Filing documents to obtain an IRS employer identification number or filing for a fictitious business name or professional license is different from filing to register an entity to do business in a certain state. The filing or registration requirement from state to state is the differentiating factor here, and state law should be reviewed carefully regarding each entity.

Reporting Obligations. If you operate a non-exempt business, and are deemed a reporting company, information must be detailed in the Beneficial Ownership Interest (BOI) report. As set forth above, a beneficial owner is someone who owns 25% or more of the business or who exercises substantial control over the business.

For an LLC or limited partnership, this 25% is typically made up of membership or partnership interests. For a corporation such as an S-Corp or C-Corp this ownership is typically determined by shares of stock. “Substantial control” of the business could mean a senior officer, president, CEO, COO, general counsel, or other person serving in a management capacity, and may have to report information. This could be someone who has the authority to appoint and remove officers, a decision maker, or a majority of the board of directors or other governing board. Below is a second illustration from the US Government Financial Crimes Enforcement Network site defining “Substantial Control” in more detail: 

“Frequently Asked Questions: Beneficial Ownership Information: D.2. What is substantial Control?”. Fincen. gov.

Whether accountants or lawyers are considered beneficial owners depends on the work being performed. For example, an attorney holding the position of general counsel in a reporting company may be considered a “senior officer,” and beneficial information should be reported. Whether an individual exercises “substantial control” over the business is a gray area and should be determined on a case-by-case basis.

Beneficial Ownership Information includes the name of the business, address of the principal place of business, and tax identification number of the business. It also will include the name of the beneficial owner, date of birth, residential street address, and an image of the individual’s passport, state driver’s license, or ID card issued by a state or local government.

If the non-exempt reporting company was formed in 2024 or later, it must also include the company applicant information in their Beneficial Ownership Information report. This includes information on the person who actually submits business formation or registration paperwork for filing with the state, and the actual party responsible for the filing.

Deadlines and Accessing the Form to File. Existing entities created or registered before January 1, 2024, must file an initial Beneficial Ownership Information report before January 1, 2025. Reporting companies created or registered during 2024 will have 90 days to file a report, and businesses formed in 2025 or later will have 30 days to report BOI. There is no fee required to submit the BOI report, but there are substantial civil penalties for not filing timely ($591 for each day that the violation continues, as of 2024!), and potential criminal penalties for a willful violation. The form can be completed and filed electronically through a secure filing system available via https://boiefiling.fincen.gov. There are no subsequent annual reporting requirements, but the BOI reports must be updated or corrected as needed, no later than 30 days after the date of change. “U.S. Beneficial Ownership Information Registry Now Accepting Reports.” Fincen.gov. January 1, 2024. 

If you have further questions about whether these new corporate filing requirements apply to you and your business, feel free to contact us. We cannot file the BOI report, but we can certainly assist in answering questions.

Jason Foster, JD, AEP®

Terry Hefty, Noel Bennett, John McCorvie, Tara Hefty, Jason Foster, Terry Robinette, Brent Yanagida, Julie Pribble, Johnny Russell, Bethany Aylor, Sophie Berglund, Grant Bugner 

Peak Asset Management, LLC | 303.926.0100 | 800.298.9081 | 1371 E. Hecla Drive, Suite A | Louisville, CO 80027 | PEAKAM.COM 

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