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.