Are You Making the Most of the SECURE and CARES Acts?
Coronavirus Aid, Relief, And Economic Security Act: Letter Tiles CARES Act On US Flag, 3d illustration

Are You Making the Most of the SECURE and CARES Acts?

The SECURE Act made a number of changes to IRAs, effective January 1, 2020. It was followed by the CARES Act, effective March 27, 2020, which brought even more changes. A recent article from the Milwaukee Business Journal, titled “IRA planning tips for changes associated with the SECURE and CARES acts,” explains what account owners need to know.

Setting Every Community Up for Retirement (SECURE) Act

The age when you have to take your RMD increased from 70½ to 72, if you turned 70½ on or before December 31, 2019. Younger than 70½ before 2020? You still must take your RMDs. But, if you can, consider deferring any distributions from your RMD, until you must. This gives your IRA a chance to rebound, rather than locking in any losses from the current market.

Beneficiary rules changed. The “stretch” feature of the IRA was eliminated. Any non-spousal beneficiary of an IRA owner who dies after Dec. 31, 2019, must take the entire amount of the IRA within 10 years after the date of death. The exceptions are those who fall into the “Eligible Designated Beneficiary” category. That includes the surviving spouse, a child under age 18, a disabled or chronically ill beneficiary, or a beneficiary who is not more than ten years younger than the IRA owner. The Eligible Designated Beneficiary can take distributions over their life expectancy, starting in the year after the death of the IRA holder. If your estate plan intended any IRA to be paid to a trust, the trust may include a “conduit IRA” provision. This may not work under the new rules. Talk with your estate planning attorney.

IRA contributions can be made at any age, as long as there is earned income. If you have earned income and are 70 or 71, consider continuing to contribute to a Roth IRA. These assets grow tax free and qualified withdrawals are also tax free. If you plan on making Qualified Charitable Distributions (QCD), you’ll be able to use that contribution (up to $100,000 per year) from the IRA to offset any RMDs for the year and not be treated as a taxable distribution.

Coronavirus Aid, Relief and Economic Security (CARES) Act

The deadline for contributions for traditional or Roth IRAs this year is July 15, 2020. The 2019 limit is $6,000 if you are younger than 50 and $7,000 if you are 50 and older.

RMDs have been waived for 2020. This applies to life expectancy payments. It may be possible to “undo” an RMD, if it meets these qualifications:

  • The RMD must have been taken between February 1—May 15 and must be recontributed or rolled over prior to July 15.
  • RMDs taken in January or after May 15 are not eligible.
  • Only one rollover per person is permitted within the last 12 months.
  • Life expectancy payments may not be rolled over.

Individuals impacted by coronavirus may be permitted to take out $100,000 from an IRA with no penalties. They are eligible if they have:

  • Been diagnosed with SARS-Cov-2 or COVID-19
  • A spouse or dependent has been diagnosed
  • Have experienced adverse consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus, are unable to work because of a lack of child care, closed or reduced hours of a business owned or operated by the individual or due to other factors, as determined by the Secretary of the Treasury.
  • Note that these distributions are still taxable, but the income taxes can be spread ratably over a three-year period and are not subject to the 10% early distribution penalty.

Keep careful records, as it is not yet known how any of these distributions/redistributions will be accounted for through tax reporting.

Reference: Milwaukee Business Journal (June 1, 2020) “IRA planning tips for changes associated with the SECURE and CARES acts”

Will Your Estate Plan Work Now?

The demise of the stretch IRA is causing many IRA owners and their advisors to take a look at how their estate plans will work under the new law. An article from Financial Advisor titled “Navigating The New Estate Planning Realities” offers several different planning alternatives.

Take larger IRA distributions during your lifetime. If possible, take the IRA distributions and reinvest them in a Roth IRA or other assets that will receive a stepped-up income tax basis on the death of the account owner. The idea is to take out significant additional penalty-free amounts from IRAs during your lifetime, so you will hopefully be taxed at a lower rate than you would be otherwise, with the net after-tax funds then reinvested in either a Roth IRA or other assets that will receive a stepped-up income tax basis when you die.

Paying all or part of the IRA portion of the estate to lower-income tax bracket beneficiaries. The theory here is that if we have to learn to live with the new tax law, at least we can attempt to minimize the tax pain by doing estate planning with a focus on tax planning. If a person has four children, two in high-income tax brackets and two who are in lower tax brackets, leave the IRA portion of the assets to the children in the lower tax brackets and assets with a stepped-up basis to the higher earners.

Withdrawing additional funds early and using the after-tax amount to purchase income-tax-free life or long-term care insurance. Rather than withdrawing all of the IRA funds early, freeze the current value of the IRA, by withdrawing only the account growth or the RMD portion, whichever is greater. Note that this won’t work if the withdrawals push the person’s income into the next higher tax bracket. All or a portion of the after-tax withdrawals then go into an income-tax-free life insurance policy, including second-to-die life insurance that pays only upon the death of both spouses.

Paying IRA benefits to an income tax-exempt charitable remainder trust. This involves designating an income-tax exempt charitable remainder trust as the beneficiary of the IRA proceeds. Let’s say a $100,000 IRA is made payable to a charitable remainder unitrust that pays three adult children or their survivors 7.5% of the value of the trust corpus (determined annually) each year, until the last child dies. Assume this occurs over the course of 30 years, and that the trust grows at the same 7.5% rate for the next twenty years. The children would net nearly $400,000. Note that the principal of the trust may not be accessed, until it’s paid out to the children, according to the designated schedule.

Every situation is different, so it is important to sit down with your estate planning attorney and review your entire estate, tax liabilities under the new law and how different scenarios will work to both minimize taxes during your lifetime and for your heirs. It’s possible that your situation benefits from a combination of all four strategies.

Reference: Financial Advisor (Feb. 11, 2020) “Navigating The New Estate Planning Realities,”

How Much Control from the Grave Can Parents Have?

Parents who want to protect their home from being sold by heirs can do so by way of a dynasty trust, but it gets complicated, explains the Santa Cruz Sentinel’s article “Not a good idea to keep home in ‘dynasty trust.’” Every situation is different, so every family considering this strategy should meet with an estate planning attorney to learn if this is a solution or an added complication.

Why would the parents want to make their children’s lives complicated? Perhaps they think the children are likely to end up in a bad situation, and they are attempting to provide a safe landing for what they believe is inevitable. Or they simply cannot manage the idea, that one day the house won’t be part of the family.

The house can be protected from a sale, through the use of a revocable trust. Instead of distributing the home in equal shares among their children, along with all of their other assets, the house can be put in the trust and their trust can continue after their deaths. The trust can include any restrictions they want, with respect to how they want the home to be maintained after their deaths.

They can even put their home into a dynasty trust. Done correctly, a dynasty trust can hold the property for the children, grandchildren and great-grandchildren. However, there are some issues.

First, if the home is held in trust, it means that the trust must be funded, since there will be expenses for the home, including maintenance and upkeep. Unless the home is used as a rental property, there won’t be any income to pay for these expenses. The parents will need to leave a significant amount of assets in the trust, so that big and small items can be paid for, or the children may be charged with paying for the expenses.

Next is the problem of capital gains taxes. When the parents pass, the home receives a stepped-up cost basis. That means that when the property is eventually sold, the amount of capital gains tax and in this case, California income tax due, will be based on the increase of the value of the property since the surviving spouses’ date of death.

If the home is held in trust until all of the siblings have died, the value of the house will likely have increased dramatically. Where is the money to pay the taxes coming from? Will the house need to be sold to pay the tax?

What if one of the children decides to move into the house and lets it get run down? The other two siblings may never receive their inheritance. There are so many different ways that this could lead to an endless series of family disputes.

Keeping a “spare” house may not be realistic. It may force the children to become rental property managers when they don’t want to. It may exhaust their finances. In other words, it may become a family burden, and not a place of refuge.

Talk with an estate planning attorney. It may be far better to distribute the home outright to the children along with other assets and let them decide what the best way forward will be.

Reference: Santa Cruz Sentinel (December 1, 2019) “Not a good idea to keep home in ‘dynasty trust.’”