What Kind of Trust Is Right for You?

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report.

What is a trust and what do trusts accomplish? Trusts are not just for the wealthy. Many families use trusts to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.

There are two basic kinds of trust. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.

There are pros and cons for each type of trust.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: they can’t be amended once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.

However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.

Your estate planning attorney will know which type of trust is best for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs.

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

The SECURE Act and Your Retirement

For anyone who has saved a high six- or seven-figure balance in their retirement accounts, the SECURE Act will definitely affect their retirement plans. That includes 401(k)s, 403(b)s, and other workplace plans, as well as traditional IRAs and Roth IRA accounts. The article “How the new Secure Act affects your retirement” from the Daily Camera provides a clear picture of the changes.

Stretch IRAs are Curtailed. Anyone who inherited an IRA (traditional or Roth) from a parent before 2020, may take Required Minimum Distributions (RMDs) from those accounts over their own life expectancy. Let’s say a parent died when you were 48—you could stretch those distributions out over the course of 36 years. This option gave heirs the ability to spread income and the taxes that come with the income out over decades—with little distributions having little impact on taxes. If you inherited a Roth IRA, you could benefit from its tax-free growth over your entire lifetime.

All that’s changed now. A non-spousal heir (or one who is disabled, chronically ill or a minor child) now has ten years in which to take their distributions. They have to pay ordinary income taxes on the amount they take out, over a far shorter period of time. Newly inherited Roth IRAs have the same rules, but usually there are no taxes due. If a minor inherits an IRA, once they reach the age of majority, they have ten years in which to take their distributions.

A Small Break for Required IRA Distributions. Until the SECURE Act, retirees had to start taking their RMDs out of IRAs soon after turning 70½. The new age for taking RMDs is now 72 for those who are younger than age 70½ at the end of 2019. This won’t alter the plans of most retirees, since they usually start taking those distributions well before age 72 to cover expenses. Roth IRAs have another benefit: they continue to escape distribution requirements, unless they are inherited.

No Age Cap for Traditional IRA Contributions. Workers may now continue to contribute funds into a traditional IRA at any age. Before the SECURE Act, workers had to stop contributing funds once they turned 70½. Note that you or your spouse are still required to have earned income to put funds in a traditional or Roth IRA.

Other Changes. There are many more changes from the SECURE Act and thought leaders in the estate planning community will be reviewing and analyzing the law for months, or perhaps years, to come. Some of the changes that are widely recognized already include the ability to withdraw $5,000 penalty-free from retirement plan accounts per newly born or adopted child, although in most cases, income tax will need to be paid on the withdrawal.

Section 529 educational savings accounts can be used, up to a lifetime limit of $10,000 per student, to pay off student loans. In most states, this will be considered a non-qualified withdrawal and state income taxes will be due, but at least the money can be used for this purpose.

Lastly, there are new tax credits available to smaller companies that set up new retirement plans, and there are new rules regarding including part-time employees in company sponsored 401(k) plans.

The changes from the SECURE Act, particularly regarding the loss of the IRA Stretch, have created a need for people to review their estate plans, if they included leaving large retirement accounts to their children. Speak with your estate planning attorney to ensure that your plan still works.

Reference: Daily Camera (Jan. 11, 2020) “How the new Secure Act affects your retirement”

Facts and Figures for Older Workers and Retirees in 2020

A new year always brings change, and this year is no exception. From Market Watch, the article “Numbers that older workers and retirees need to know in 2020” provides key information for this new year.

Retirement Plan Changes. Limits for how much can be saved in 401(k), 403(b), Thrift Savings Plan, and most 457 plans have increased by $500 to $19,500 for 2020. If you are 50 and older, the “catch-up” contribution has also increased by $500, so you can now save an additional $6,500 in those accounts.

For those with SIMPLE retirement plans, which are usually from small businesses with 100 or fewer employees, you can increase savings by $500 to $13,500.

What hasn’t changed—if you have an individual traditional IRA, you can save $6,000, with a catch-up contribution of $1,000.

Social Security Changes. The Social Security Administration reports that the average monthly benefit in 2019 was $1,356.05. This will rise by 1.6% in 2020, which will mean an increase of $21.69 per month. Last year, some 63.8 million Americans took Social Security benefits. It was the first year since the program began in 1935 that spending topped $1 trillion.

Another change to Social Security in 2020 is the longer period of time to reach full retirement age. For people born in 1958, this now increases to 66 years and eight months. If you were born in 1958, you’ll need to be that age to collect your full retirement benefit. The longer period is also going to increase in 2021 and 2022—making the full retirement age 67 for anyone born in 1960 or later.

That doesn’t mean people can’t get Social Security benefits earlier—you can elect to take benefits as early as age 62—but you’ll receive less. If you take benefits at age 62, they’ll be 75% of the monthly benefits because you will have added 48 months. At age 65, you’ll receive 93.3% of full benefits because of adding an additional 12 months. If you are taking spousal benefits, there are more numbers to consider.

Medicare Changes. The good news was the increase from Social Security. The bad news? Standard monthly Part B premiums will increase 6.7%, from $135.50 in 2019 to $144.60. That’s the minimum premium. Depending upon your premium, they could go as high as $491.60 per month. Medicare officials blame higher drug prices on the increase.

Health care costs are part of a rising tide of costs facing retirees and older workers. Considering how few Americans have enough money saved for retirement, this is going to become more of a national issue as boomers and millennials age. It should serve as a reminder for all—save as much as you can for retirement, starting now.

Reference: Market Watch (Dec. 28, 2019) “Numbers that older workers and retirees need to know in 2020”