New IRA rules benefit the living, but not so much their survivors. The May 2019 SECURE Act restricts the tax-advantage IRAs that were benefiting spouses, children, and even grandchildren. In a conference call today with McManus & Associates clients, the firm’s Founding Principal John O. McManus educates on the Act’s changes to IRAs and how estate planning strategies should be modified as a result. Listen to the discussion by hitting play, and review an overview of the discussion with the outline below.
1. The SECURE Act is here.
The Setting Up Every Community for Retirement Enhancement (SECURE) Act was introduced to the U.S. House of Representatives by Rep. Richard Neal (D-MA) as H.R. 1994, where it was passed by a 417-3 vote in May, 2019. It was then attached to the Senate’s end-of-year appropriations act, and thereafter signed into law by President Trump right before the end of the year. It has officially taken effect with the start of 2020.
2. The SECURE Act is being pitched as a means of making retirement more attainable for more Americans.
Lawmakers have prominently highlighted the delay of the beginning age for required minimum distributions from 70½ to 72 and the elimination of the prohibition on contributions to an IRA after age 70½.
3. The touted benefits of the SECURE Act are derived from the termination of the “stretch” (at a potential cost to your family).
To offset the budgetary impact of these modifications, the Act ends the “stretch” provision of IRAs and 401(k) plans. This means that, with some exceptions, the distributions of IRAs and other qualified retirement plans must be made to beneficiaries within 10 years of the death of the participant, instead of over the beneficiary’s lifetime.
4. This change now demands a shift in the estate planning best practices.
The benefits of designating grandchildren or significantly younger children as the beneficiaries of retirement accounts, rather than older, financially independent children, are significantly diminished because they will no longer benefit from tax-deferred growth over the course of their (longer) lifetimes.
5. There are now increased concerns about the use of “conduit trusts” under a Will or Revocable Trust.
If you have implemented a conduit trust as part of your estate plan, the lump sum distribution of the retirement account in the tenth year exposes the net proceeds to marital issues, litigation, creditors, and other attacks.
6. Consider an accumulation trust instead.
In most cases, it continues to be advisable to deploy an accumulation trust under a Will or Revocable Trust in order to best secure the proceeds of the retirement account from vulnerabilities.
7. Charitable Remainder Trusts and retirement accounts.
Such trusts can help to reduce the tax consequences of a large income event when the account is required to terminate and, if the estate is subject to estate or inheritance tax, a deduction is available because a charity is the beneficiary when the Trust ends.
8. Life Insurance as a means of mitigating the income tax fallout.
Life insurance can provide liquidity to pay the income tax at the final distribution in the tenth year or, in the case of a Charitable Remainder Trust, help to ensure that a legacy passes down to the grandchildren.
9. Preparing heirs for the inheritance.
Since the SECURE Act so clearly affects your youngest, perhaps least financially independent heirs, these changes may present a teachable moment to better educate them about exposure to wealth they may inherit, issues that can dramatically impact an estate plan, and the importance of developing financial responsibility and other productive habits.
10. Review the benefits of a Roth IRA.
For many, especially those who may not need required minimum distributions for quality of life expenses, it may be worth performing a tax analysis to determine whether conversion to a Roth IRA will have a more meaningful wealth transfer impact for heirs.
Regardless of your personal
political leanings, the 2020 Election results will likely impact estate
planning as we know it today. Certain estate planning strategies will likely evaporate
if there is a Democratic sweep in Congress and the presidency. Take advantage
of current estate planning opportunities and strategies since there is no
certainty that they will be preserved in their present form after the 2020
Election. For example, Bernie Sanders’s proposed For the 99.8 Percent Act (the
“99.8 Percent Act”) that was introduced in the Senate in 2019 includes the
following changes: decreasing the gift
tax annual and lifetime exclusions; decreasing the estate tax exemption;
eliminating valuation discounts; placing restrictions on GRATs; eliminating the
use of grantor trusts; and limiting the duration of dynasty trusts to 50 years.
This proposed Act could be a template for future legislation proposals.
In a conference call with clients this week, John O. McManus, founding principal of McManus & Associates, offered existing wealth preservation and growth strategies and recommendations to consider for immediate action. Listen and review below:
1. Consider making larger gifts now before the annual gift exclusion is lowered
The 99.8% Act would sharply limit
the annual gift exclusion to $10,000 per donee (currently $15,000) and $20,000
per donor; the lifetime gift exclusion would be decreased to $1 million. The
annual exclusion was meant to shield from tax and recordkeeping the usual
giving done around holidays and birthdays. This extremely low limit per donor would
greatly affect planning at all levels and would particularly affect the funding
of irrevocable life insurance trusts and prefunded 529 plans. Gifts over the $20,000 per donor limit would
require you to use the proposed $1 million lifetime gift exclusion. The lifetime gift exemption, which is currently
$11.58 million for 2020, is the amount of assets that can be transferred out of
your estate during your lifetime without having to pay any gift tax. Therefore, in some cases the maximum annual
gifting should be done now before there is a possible reduction of the
exclusion. If you make annual gifts to
ILITs and other trusts, you may want to consider making a larger gift now
utilizing the larger available exclusion to fund the trusts.
2. Utilize the current 2020 $11.58 M estate tax exemption per person, before it is lowered to $3.5M per person
The 99.8 Percent Act seeks to raise
the present estate tax rates to the following:
$3.5 million to $10 million 45%
$10 million to $50 million 50%
valued at $55 million or more 55%
valued at $1 billion or more 77%
Under the 99.8 Percent Act, a
married couple would only get a total combined estate tax exemption of $7
million. If this amount is placed in trusts, the $7 million would double every
12 years and the total assets in the trusts will be only $28 million free of
tax. This is a significantly lower
number than if the current joint exemption of $23.2 million was placed into
trust. Furthermore, with the elimination
of discounting discussed later, the restriction on gifting would be even more
significant. Not only is the growth lower, but there remains a significant
amount of assets in your estate because of the loss of discounting, as well as
less assets being transferred into trust.
Gifting is most efficient when done
as large as possible, since the limits may be lowered and now is the time to do
as much as possible before the paradigm shifts to make this a less useful
option. The assets gifted and their appreciation over your lifetimes are not
subject to federal estate tax at the end of your lifetime.
However, making such large gifts to
utilize the large exemption may require that you have access to the transferred
assets. This access can be achieved by
setting up a credit shelter trust: one spouse creates the trust and the other
spouse is named as a beneficiary so that distributions can be made at any time
for their needs. The spouse who is the beneficiary is also appointed as trustee
and will retain control over the management of the trust assets. In order to provide flexibility to access the
trust assets, the spouse who created the trust reserves the power to remove and
appoint trustees, receive loans from the trust, and reacquire assets from the
trust by substituting assets of equal value into the trust.
Therefore, in order to avoid last-minute
planning should the exemption drop to $3.5 million, you should do your planning
now before any possible changes, especially if you have been waiting to plan
because of the current high exemption.
3. Take advantage of valuation
discounting before the strategy is eliminated
Valuation discounting has been an
area of IRS scrutiny for many years. The proposed 99.8 Percent Act would
eliminate valuation discounts applied to intra-family transfers by gift or
inheritance, which has driven a lot of estate planning strategy.
The current version of the 99.8
Percent Act proposal if adopted would have a major impact on the way assets can
be discounted for estate planning purposes. No discounting would be permitted
if the transferee and family members have control or majority ownership; this
would effectively eliminate the discount strategy.
Therefore, you should consider
creating a family partnership – or making additional transfers of family
partnership interests – since the valuation discounting opportunity may soon
disappear. Currently, since non-managing interests possess limited authority,
the fair market value can be discounted for lack of control and lack of
marketability. For example, with the currently available discounting, a 50%
noncontrolling interest in your real estate investments could be worth $3.25 million
for gift tax purposes instead of their fair market value of $5 million. In
addition, the assets grow outside of your estate in a tax-efficient trust.
4. Utilize short-term and
mid-term Grantor Retained Annuity Trusts (GRATs)
Restrictions outlined in former President
Obama’s annual Greenbook are incorporated into the 99.8 Percent Act and could
be pursued by Congress. One of the significant proposals of the 98.8 Percent
Act is requiring a minimum GRAT term of 10 years and requiring a minimum
remainder interest of not less than an amount equal to the greater of 25% of
the trust value or $500,000. This
effectively eliminates the potential for zeroed out GRATs where the remainder interest
has a zero value. Also, rolling two-year
GRATs would not be possible.
The 99.8% Act would serve to prevent
perceived abuses of GRATs by barring donors from taking assets back from these
trusts just a few years after establishing them to avoid gift taxes (while
earnings on the assets are left to heirs tax-free). This strategy has cost the
Treasury $100 billion since 2000.
the purpose of the GRAT is to make a loan of investment assets to your children
or loved ones. Your loved ones benefit from any growth above the initial
contribution. To be valid, the original contribution must be paid back (with
modest interest) in installments over a fixed period of years.
key? The grantor must outlive the final repayment. If you die before the final
payment, all of the growth that would have been otherwise excluded is now
destroyed and reverts back to being included in your estate. The 99.8 Percent
Act could dissuade taxpayers from taking advantage of GRATs by setting a 10-year
minimum term for the GRAT. This would mean that there would be gift tax
consequences for the first time for an historically gift-tax free strategy.
the ideal GRAT plan chooses investments that will accelerate most rapidly in
value during the GRAT’s term. After the final payment is made, the result is
that all growth over the original amount is out of your estate and excluded for
estate tax purposes and without any gift tax consequences. Any assets remaining in the GRAT (after all
annuities have been paid back) should continue to be held in trust for the
benefit of the grantor’s spouse and children.
established now would be protected by law. Before changes go into effect, we
recommend the creation of two GRATs:
GRAT: Since you must survive the term of the GRAT, a short-term GRAT of two
years will minimize the risk of significant wealth failing to pass tax-free
because the grantor dies prior to its completion.
GRAT: We also suggest a longer term GRAT, between five and seven years, to
avoid the risk that you get caught short if the law changes with only the
option to do 10-year GRATs. Mid-term GRATs would be grandfathered and could
continue without any consequences during the next four years of a Democratic
Congress or presidency.
5. Anticipate the loss of use of
The 99.8% Act would prevent wealthy
families who currently avoid gift tax by paying income taxes on earnings
generated by assets in grantor trusts from doing so. The Act would include in the taxpayer’s
estate any assets in his or her grantor trusts, as well as any distributions
from his or her grantor trust during the lifetime of the grantor. Any assets in
a grantor trust that is converted to a non-grantor trust would also be included
in the grantor’s estate.
If you have been considering establishing
or using a grantor trust, there is urgency to start the process and move assets
into trust now, as it may no longer be an option starting in 2021.
The sooner one starts, the better
the chance of being able to adequately set up a trust that can be grandfathered
in. While this legislation and paradigm shift may not necessarily go into
effect immediately, this option might only be available for the next year or
so. To wait longer is to risk the unknown and to potentially lose the
opportunity to utilize this strategy.
Reach out to McManus & Associates
should you have questions about these opportunities and strategies.
There are several tax and estate planning strategies that high-net-worth individuals (HNWIs) should consider seizing upon before year-end. In a conference call with clients today, John O. McManus, founding principal of McManus & Associates, weighed in on timely topics for the benefit of clients, from legislative initiatives that may impact estate planning to why an estate plan needs to include provisions governing digital assets. Below, listen to the call recording and find an outline of the issues covered during the discussion:
What legislative initiatives and political
current events may impact estate planning? If enacted, the SECURE Act will drastically limit the
ability to “stretch” an IRA for your children and the estate and wealth tax
proposals of the Democratic candidates for President may suggest urgency in
need to complete wealth transfers.
How does being diagnosed with a significant
health problem impact the estate plan? It is best to re-focus on the estate plan and have
difficult conversations with family members and advisors as soon as reasonably
possible because of the elevated concern about incapacity or demise.
Why should major life events cause one to
re-visit the estate plan? Marriages or divorces in the family, the acquisition of new
assets or investments, starting a business can all serve to undermine the
intended estate plan or create a new blind spot or vulnerability.
What are the important principles in planning
for the modern family? Blended
families, same-sex marriages, single-parent families, and domestic partnerships
each raise their own nuanced considerations, which places a greater emphasis on
a specialized and flexible approach.
Why and how should you discuss your estate
plan with your children? Discussing
death, taxes, and asset protection may be uncomfortable, but they are essential
to best prepare your heirs for their inheritance.
What is a family mission and how can it be
integrated into the estate plan? It is important to consider imparting sentiments in
support of the family legacy, such as preserving family traditions and
What are the risks of failing to properly plan
for the disposition of a specific asset, such as a home, personal effects, a
business, or even frequent flyer miles? Items that may have a sentimental value or disproportionately
favor one child over another may cause divisiveness and other
What estate planning lessons can be drawn from
the Financial Independence, Retire Early (FIRE) movement? Prudently structuring discretionary
trusts can avoid an outcome in which children are deprived of their motivation
for self-sufficiency and can also provide opportunities for them to amplify
their personal wealth.
Once an estate plan is completed for the time
being, what are the practical steps that should be taken to protect the
documents and other important information? Current best practices include various options
for physical and electronic storage to ensure these materials are readily
available during an emergency or tragedy.
Why must an estate plan include provisions
governing digital assets, including web-based accounts and cryptocurrencies? Wills, Trusts, and Powers of Attorney
should specifically authorize a fiduciary to have access to all information,
including online and digital passwords to ensure efficient access to accounts.
Yesterday, McManus & Associates held a client conference call reviewing several immediate strategies that clients should consider employing before year-end. With the proposed tax reforms listed in President Obama’s budget, certain planning strategies are in the crosshairs and may not be around for long. Although legislation next year could be made retroactive to January 1, 2014, if you act before the end of 2013 such changes will not affect your planning. Get inside the castle walls now.
During the half-hour call, the firm shares effective strategies and highlights maintenance items required to ensure one’s family wealth remains protected. Below are the 10 questions that will be answered by listening to the recording.
Laws could change with new revenue debates. Have you made lifetime gifts in trust? Created a grantor trust?
Have you made sure to operate your family LLC/Limited partnership as a legitimate business? What should you do before year-end?
What should you give away? Are you planning to make annual exclusion gifts, gift appreciated securities etc? Have you prepared Crummey notices?
Should you create lifetime trusts for your children? Have you given your trustees a limited power of appointment?
What can you prepay? What should you prepay? Home, deductibles, medical expenses, major year-end purchases?
Have you crossed any major milestones this year? Do you have children who turned 18 this year? Do the fiduciaries and guardians named in your documents still reflect your current wishes? Are your powers of attorney up to date?
Have you made contributions to your family foundation and/or donated to charity?
Are you over 70 ½? How to use Required Minimum Distribution to your advantage.
Create GRATs or QPRTs. Given the current interest rates what should you consider?
How should you consider harvesting capital gains, timing long-term losses?
Give us a call at 908-898-0100. We can help you identify which strategies you should implement now before the calendar rolls over to 2014.