Inheriting an IRA? New Rules to Consider Under the SECURE Act

Inheriting an IRA? New Rules to Consider Under the SECURE Act

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our sixth of six installments on inherited IRAs.

 

I’m about to inherit an IRA. Will these changes mean I pay more taxes?

Before the SECURE Act was signed into law, non-spouse IRA beneficiaries were able to stretch RMDs over their lifetime with annual RMD calculations based on their life expectancy. However, the implementation of the SECURE Act requires non-spouse beneficiaries to distribute an inherited IRA within 10 years following the death of the original owner. Inherited IRAs left to minor children must also be fully distributed within 10 years of the beneficiary reaching the age of majority.

Distributing your inherited IRA balance over 10 years instead of over your lifetime will accelerate your receipt of income. If you inherit a large Traditional IRA, income from your inherited IRA could push you into a higher tax bracket and increase your tax rate. We can help you plan the best way to distribute income from your inherited IRA within 10 years relative to your income and tax situation each year to minimize additional taxes.

For example, an individual who is earning a gross income of $150k per year would fall in the 24% marginal tax bracket after claiming the standard deduction. However, adding annual $100k+ distributions from a $1.0 million inherited IRA balance that must be distributed over 10 years will push that person into the 35% tax bracket. If income fluctuates over that period, there may be opportunities to take additional distributions in lower income years to minimize overall taxes on the inherited IRA.

We can help you avoid running afoul of the new SECURE Act requirements by evaluating your income and taxes to develop the best strategy for adhering to the latest rules for your inherited IRA.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

 

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Fifth Installment: The SECURE Act: Important Estate Planning Considerations

 

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

 

The SECURE Act: Important Estate Planning Considerations

The SECURE Act: Important Estate Planning Considerations

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our fifth of six installments on how the SECURE Act could impact you.

I set up a trust to protect this money for my children after I pass. What impact will the SECURE Act have on this?

If you have significant retirement plan assets, you may have considered naming a trust as the beneficiary of your IRA. Trusts can provide asset protection from creditors and ensure that beneficiaries cannot receive all inherited assets at once. This aspect of control is appealing to many parents or grandparents who want assurance their heirs won’t be able to quickly spend down an inheritance. Previously these trusts would have been set up as pass-through or conduit trusts that allowed Required Minimum Distributions (RMDs) to pass through to the beneficiary over the course of their lifetime.

Under the new rules of the SECURE Act, most non-spouse beneficiaries are no longer subject to yearly RMDs, but they are required to distribute all funds by the end of year 10. there are no RMDs for most non-spouse beneficiaries until year 10. Conduit trusts would now hold IRA assets within the trust for 10 years and then distribute the entire account balance at once at the end of the 10 year period. This means that trusts previously set up to protect children or grandchildren from having access to inherited IRA assets all at once no longer serve this purpose. There are also significant tax implications to all assets being paid out as income in one year.

If it is important to you that beneficiaries receive an inheritance over a longer period and not all at once, there are a couple of strategies you might consider:

  • A discretionary or accumulation trust can retain IRA funds, even after 10 years. The downside is that income retained within these types of trusts are taxed at high trust tax rates. However, this is a potential solution if control of assets is much more important than minimizing taxes.
  • Some are turning to life insurance products as a way to leave assets to a trust. Since there are no RMDs and the proceeds are tax-free, this option provides a lot more flexibility around how funds are distributed.

If you’ve named a trust as a beneficiary to an IRA, we recommend reviewing your estate plan with an attorney.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Sixth Installment: Inheriting an IRA? New Rules to Consider

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing some of the high-level changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our fourth of six installments on stretching IRA distributions.

One of the major changes from the SECURE Act was the elimination of the ‘stretch’ IRA, which allowed beneficiaries to take retirement account distribution over their lifetime to spread out the income.  While a limited number of beneficiaries still have this option (see blog article referenced above), the act has replaced this option for the vast majority of beneficiaries with a new 10-year payout rule, requiring the retirement account to be emptied by the end of the 10th year following the year of death.  This will significantly shortening the distribution period on those retirement accounts and require the beneficiaries to recognize income more quickly than they would have had to do before.

Now that the stretch has been eliminated for IRAs, are there other options for my beneficiary to receive the income over a period longer than 10 years?

Since the law is only a few months old, new strategies are still being considered to address the compressed distribution schedule for non-spouse beneficiaries. A few strategies have gained traction, but they require intentional actions by the account owner before a death occurs. They include:

  • Designating a charitable remainder trust as the beneficiary on the IRA. The CRT can pay a lifetime income stream to a person (or persons) of the IRA owner’s choice, but any residual balance will be retained by the charity. This option works best for owners who are already charitably inclined.
  • Consider tactical bequests. For example, leave Traditional IRAs to spouses (since they still have the stretch distribution options) or to charity (since they don’t pay taxes, so the compressed distribution won’t matter to them) but leave Roth IRAs, after-tax accounts, or real estate assets to non-spouse beneficiaries.
  • Take larger IRA distributions during your lifetime to purchase life insurance which can be paid to a trust. Since the life insurance proceeds are post-tax assets, there would be no time requirement on the trust distribution. The trust can even be set up as an Irrevocable Life Insurance Trust to keep the insurance proceeds out of the decedent’s estate if federal or state estate taxes are a concern.

Each of these strategies require careful consideration but can potentially provide your beneficiaries with income beyond the next decade.  We recommend speaking with your financial advisor or estate planner if you think any of these strategies may be appropriate for you.

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment: Inheriting an IRA? New Rules to Consider

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

Crafting A Family Legacy Letter

Crafting A Family Legacy Letter

 

As we’re experiencing such a strange and challenging time, many people find themselves wondering what their families did in the past to get through difficult economic times. We may remember little snippets of stories told by our elders or passed on through our family, but often wish we knew more.

As wealth advisors we know firsthand the importance of legacy planning through legal documents and also believe in the value of sharing the essence of who you are for future generations to come. In this document, we provide ideas on how to craft a Family Legacy Letter to share your life story, personal values, beliefs, and advice for future generations.

Now is a great time to pass on your values and share experiences with your heirs.

 

Must-Know Changes for Your Estate Plan After the SECURE Act

Must-Know Changes for Your Estate Plan After the SECURE Act

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our third of six installments on the SECURE Act and how it could impact you.

 

Given the new rules for inherited IRAs, who should be considering changes to their estate plan?

IRA owners will need to evaluate how changes in the SECURE Act impact estate planning and beneficiaries. If you have a small Traditional IRA and plan to leave your assets to several beneficiaries, the accelerated income your beneficiaries will receive from distributing their share of your IRA within 10 years of your passing may not significantly affect their taxes. However, if you have a very large IRA balance or plan to leave your assets to only one or two people, distributions could push your beneficiaries into higher tax brackets. It will be important to evaluate your tax situation and potential taxes to your heirs to determine if it makes sense to accelerate IRA distributions or conversions during your lifetime.

 

Here are some strategies you might consider:

Leave IRAs to multiple beneficiaries: Here, each person receives income from a smaller portion of the account, which reduces the likelihood of pushing them into a higher tax bracket.

Make Roth conversions: IRA owners can evaluate their personal tax situation compared to their beneficiaries. For example, if large inherited IRA distributions would likely push beneficiaries into higher tax brackets like the 32% marginal rate, an account owner might have an opportunity to convert some assets to a Roth IRA now at a lower rate. Current owners may be able to convert at a lower tax rate if they have a more favorable tax situation (e.g. earning less ordinary income) or can spread out conversions. Planning Roth conversions throughout retirement at lower rates can reduce the taxable portion of future inherited IRAs.

Evaluate Trust structures: Many people name a trust as the beneficiary of their IRA, and they need to evaluate their trust structure following the implementation of the SECURE Act to make sure the trust is properly drafted to account for new provisions in the law. Commonly used trust structures like conduit and accumulation trusts, or those with “see-through” provisions, are affected by changes in the new law. Existing conduit trusts could face issues with how RMDs are distributed to beneficiaries, and accumulation trusts may need to include flexibility for discretionary distributions to allow tax-efficient planning. We can help facilitate a review with your estate attorney or recommend one of our trusted professionals to evaluate your plan.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment: Inheriting an IRA? New Rules to Consider

 

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

 

When Your Will Isn’t Enough

When Your Will Isn’t Enough

Estate planning is near the top of the list of things we know we need to do but often put off. We dread thinking about the end of our lives. Regardless of how unpleasant it is, the end could come at any time, without warning. Therefore, it’s important to have all basic estate planning documents in place, like a will, medical directive and durable power of attorney. These basics are necessary, but it’s extremely helpful to your loved ones if you take it a step further and give them specific instructions that aren’t contained in your legal documents. (more…)