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,”

SECURE Act Means It’s Time for an Estate Plan Review
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SECURE Act Means It’s Time for an Estate Plan Review

The most significant legislation affecting retirement was signed into law on Friday, Dec. 20, 2019. After stalling for months, Congress suddenly passed several bills, as attachments to budget appropriations, as reported by Advisor News’ article “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans.”

Here are some of the key points that retirees and those planning their retirements need to know:

Changes to Age Limits for IRA and 401(k) Accounts. The age for taking Required Minimum Distributions (RMDs) has increased from 70½ to 72 years. Adding a year and a half for investors to put away money for retirement gives a little more time to prepare for longer lifespans. The change recognizes the prior limits were arbitrary, and that Americans need to save more.

However, the SECURE Act also brought about the demise of the “stretch” IRA. Americans who inherit an IRA must now withdraw the money within 10 years of the account owner’s death, along with paying taxes. Surviving spouses and minor children are still exempt. The exempt heirs can still spend down inherited IRA accounts over their lifetime, which is an estate planning strategy known as the “stretch.”

Small Business 401(k)s. The SECURE Act expands access to Multiple Employer Plans, known as MEPs, so that employers can pool resources and share the costs of retirement plans for employees. This will cut administration and management costs and ideally, will allow more small businesses to offer higher-quality plans available to their employees.

The law also enhances automatic enrollment and auto-escalation, letting companies automatically enroll employees into a retirement plan at a rate of 6%, instead of 3%. Employers can now raise employee contributions to a maximum of 15% of their annual pay, although workers can opt out of these plans at any time.

Annuities Options. The SECURE Act now allows 401(k) plans to offer annuities as a retirement plan option. Experts have mixed opinions on this. Annuities are a type of life insurance that convert retirement savings into lifetime income. However, fees are often high, and if the insurance company closes its doors, those lifetime income payments may vanish. Under the new law, employers also have what’s called a “safe harbor” from being sued, if annuity providers go out of business or stop making payments to annuity purchasers. Being freed from liability may make employers more likely to offer annuities, but that may put 401(k) investors at more risk, say consumer advocates.

529 Plans and Saving for Children. The new law expands 529 accounts to cover many more types of education, from registered apprenticeships, homeschooling, private elementary, secondary or religious schools. Up to $10,000 can be used for qualified student loan repayments, including for siblings.

Reference: Advisor News (December 23, 2019) “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans”

What Will New Acts of Congress Mean for Stretch IRAs?
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What Will New Acts of Congress Mean for Stretch IRAs?

The SECURE and RESA acts are currently being considered in Congress. These acts may impact stretch IRAs. A stretch IRA is an estate planning strategy that extends the tax-deferred condition of an inherited IRA, when it is passed to a non-spouse beneficiary. This strategy lets the account continue tax-deferred growth over a long period of time.

If a parent doesn’t need her Required Minimum Distributions, does it make sense to do a gradual Roth IRA conversion and use the RMDs to pay taxes on the conversion? Or should the parent invest the RMDs in a brokerage account?

There are several options in this situation, according to nj.com’s recent article, “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

Congress is considering legislation with the SECURE and RESA Acts, that would eliminate the ability of children to create a stretch IRA, one that would let them to stretch distributions from the inherited IRA over their lifetimes.

Under the proposed SECURE and RESA Acts under consideration, the maximum deferral period will be 10 years. If the beneficiary is a minor, the period would be 10 years or age 21.

The best planning strategy for a parent would depend on her overall finances and what she wants for her children’s inheritance.

The conversion to a Roth may be a good planning move, depending on her tax bracket. Putting the money in a brokerage account is also an option.

A parent may also want to think about using the RMD proceeds to purchase a life insurance policy held by an irrevocable trust for the benefit of her children.

It’s best to contact an experienced estate planning attorney, so he or she can review the details of the parent’s finances and help her choose the best options for her situation.

Reference: nj.com (October 15, 2019) “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

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