An Open Letter To Our Clients On The Secure Act And How To Fix Your Estate Planning

As you may have read in the fall issue of our newsletter, the SECURE (Setting Every Community Up for Retirement Enhancement) Act was likely, at that time, to change the rules governing IRAs and retirement assets.

As feared, that has now just happened, and the SECURE Act changes will affect almost everyone’s estate planning who have IRA or other retirement accounts such as 403(b) and 401(k) accounts.

The SECURE Act, which was signed into law in December of 2019 and is already effective, changes the way beneficiaries will receive money from inherited retirement accounts. While not every clients’ beneficiaries are automatically in danger of a big tax hit, EVERYONE who has a retirement account needs to understand how it works and how it may change your estate planning strategies and your documents.

This email and some to follow (as we continue to analyze the new law) will help you through the process of deciding what to do in your own case.

To understand more about the new law just click here to see our blog or read on to the P.S. and the P.P.S. (which includes a few answers to the FAQs we are getting from clients).

Because the law is so new, and we, as well as other tax and legal analysts, are still working through all the ramifications to you and how to adjust your estate planning documents, we will be supplementing this note with additional emails, articles, and some telephone call-in seminars and briefings. If needed, we’ll also be scheduling you for a review by phone and in some cases, an in-person meeting to sign the changes.

However, there is a lot of misinformation out there and we wanted to address some of the concerns you no doubt have.

Who Does The SECURE Act Target And What Should You Do?

Basically, there are four different situations (and several more smaller variations) and each situation requires different actions. Read below to determine your situation and the actions to take (if any).

SITUATION 1) You have smaller IRA and retirement accounts, adult children who are all currently healthy and all of them are the direct or contingent beneficiaries (after your spouse) of your IRA/retirement accounts.

If this is you, then you probably don’t have to be too concerned. For these purposes “smaller” IRAs are generally those where, when divided among your children, each child would receive $200,000 or less.

There are exceptions when an heir (other than your spouse) is below the age of 21, chronically ill, or where you want to protect your beneficiary or beneficiaries from divorce and lawsuits. There is another exception - if your planning was done before 2012 as it may need to be updated for other reasons and changes (we’ll discuss that more later).

WHAT TO DO: While we are continuing to review the Act and all of your options, if you: 1) have estate planning without IRA trusts and 2) have currently healthy adult children and you are sure that they are named as direct beneficiaries, then simply call Lisa, Tammy, Kara or Denise at 610.933.8069 to schedule a telephone review, later in the year, or sooner if you want to create a trust to protect your heirs’ inherited IRA accounts from future divorce, lawsuit and creditor concerns. There will be no cost for the call.

That’s it.

You might not even need to do anything.

But, again, if your documents are older or you have larger IRA accounts, younger beneficiaries or you want your children to have divorce and asset protection for the IRAs, see below.

SITUATION 2) Your will or revocable trust contain special IRA trusts and/or you have children or grandchildren as beneficiaries and they are below the age of 21, have a chronic illness, or a special need.

If you have a will or trust that contains IRA trusts and/or you have named one or more of those trusts as a beneficiary of your IRA or retirement accounts rather than a child or grandchild directly, then the trusts will no longer operate as intended and you should call to schedule a telephone conference. If you are unsure, then see below.

WHAT TO DO: As noted, call Lisa, Tammy, Kara or Denise at 610.933.8069 to schedule a brief telephone conference with one of our lawyers to review your options. There is no charge for the call.

There are also some very simple fixes available that cost between $750 and $1500.00 so that your heirs will continue to get all the benefits you wanted them to have and the negative tax effects of the new law can be minimized. The appointments to sign the newly “repaired trusts" will be under an hour in most cases.

Unfortunately, because of the complexity of the SECURE Act (and how quickly it was enacted and became effective) and the importance of the trusts being carefully constructed to receive IRAs, many lawyers and accountants either know that they cannot do these or they are providing misinformation to clients. As a result, the demand on us to fix these trusts is very high and we are scheduling people now through the upcoming summer months. so please call to schedule a telephone conference.

SITUATION 3) You have a “stand alone” IRA trust or any of the primary or contingent beneficiaries of your current retirement accounts include a trust.

If you have a stand alone IRA trust (which has always been the best practice for those with larger IRAs and retirement accounts), it is probably structured as a “Conduit Trust” and will no longer work as you expected. While the Internal Revenue code still recognizes conduit trusts, it may be important to change the trust to an accumulation trust or a hybrid trust depending on your particular circumstances.

WHAT TO DO: In this case, you should call to review the situation with one of our trust and estate attorneys (Doug, David and Andrew). Once we have verified the best approach to updating the trust to comply with the new law, we will also schedule you for an appointment to revise the trust.

In these cases, you will almost certainly elect to fix the old trust but the costs and the time to do so will be as low and as efficient as possible.

SITUATION 4) Your planning documents were done prior to 2012.

Finally, if your estate planning documents were executed before 2012 (whether or not you have retirement accounts), you should call to schedule an update of your planning (which, due to many changes in the law since that time, may now no longer function as intended). Simply call 610-933-8069 and ask for a planning update questionnaire and appointment.

Again, we apologize that Congress saw fit to pass a law that has so many negative effects on so many of you. However, we are dedicated to making sure that your planning is customized to your needs and goals and that it functions as intended. Due to the new law that may no longer be the case and we are here to help you to find out for sure.

David Frees, JD

Douglas Kaune, JD

Andrew Friedlander, JD, LL.M.

P.S. What does the new law do?

Generally speaking, the new rules say beneficiaries of qualified retirement accounts, such as individual retirement accounts and 401(k) plans, need to withdraw all of the money out of those accounts within 10 years, instead of over their life expectancy as was previously allowed.

There are no required minimum distributions within that time frame, but the account balance must be zero after the 10th year. As a result, your heirs will pay the income tax on those assets much sooner than they would have under prior law by “stretching” the withdrawals over the beneficiary’s life expectancy.

As a result of these changes, which are complicated, original account holders and their beneficiaries may want to discuss their retirement account beneficiaries, as well as current inheritance and withdrawal plans with UTBF estate planning attorneys, your financial professionals, such as an adviser, the institution housing the assets, or the firm handling a trust. Failure to act on these changes, if necessary, could leave some beneficiaries paying substantially more in taxes—or getting locked out of their inheritance for a decade.

The old rules concerning spouses still apply. However, there are a number of important situations that require your attention and we are happy to discuss those issues.

P.P.S. Here are a few questions readers had about the new rule:

I have been taking RMDs out of an inherited IRA for a few years now. Will I be subjected to the 10-year rule?

No. The new 10-year rule only applies to accounts of benefactors who die in 2020 and beyond.

Current beneficiaries of inherited IRAs and 401(k) plans will still be allowed to withdraw the required minimum distributions over their life expectancy, said Douglas L Kaune, a partner of UTBF. Andrew Friedlander, an associate and tax attorney noted, “The 10-year rule will take effect on Jan. 1, 2020, which means anyone who died by Dec. 31, 2019 will not be affected.”

Are there exceptions to the rule?

The rule does not apply to spousal beneficiaries, as well as disabled beneficiaries, and those who are not more than 10 years younger than the account holder (such as a slightly younger sibling, for example). Minor children are also exempt, but only until they reach majority age. After that, they will have 10 years to withdraw the assets in an inherited account.

Spouses, disabled beneficiaries and others under the exception will still be allowed to take distributions over their life expectancies.

How should I withdraw the money from this account under the new 10-year rule?

This depends entirely on the individual’s situation, but there are some factors to take into consideration. The withdrawals will be taxed at the beneficiary’s ordinary income-tax rate, which means someone in their peak earning years will be more heavily taxed than someone with lower income. Beneficiaries nearing their own retirement (in less than 10 years) may want to delay taking any withdrawals from these inherited accounts under the 10-year rule until after they’ve retired, so that the withdrawal is not taken on top of their earned income, said both Dave Frees and Andrew Friedlander.

Can I roll over the inherited assets into another traditional IRA? Do I have alternatives to keeping the money in this inherited IRA?

Non-spouses cannot roll over an inherited IRA from one account to another — they can only take distributions from them, according to the Internal Revenue Service. (They may look into a trustee-to-trustee transfer if the account receiving the rollover is set up in the name of the deceased IRA owner, however). Beneficiaries of 401(k) plans can roll the money over into an “inherited IRA.”

For many, the new 10-year rule drastically diminishes the chances of withdrawing assets in a tax-friendly manner (this provision alone is expected to generate about $15.7 billion in tax revenue over the next decade). But there are alternatives, said Steve Parrish, co-director of the Retirement Income Center at the American College of Financial Services in King of Prussia, PA. One option is a benefactor buying life insurance.

Take for example, a grandmother wanting to leave her adult grandson an IRA with a $100,000 balance. Prior to the enactment of the SECURE Act, she may have wanted to leave it to him in its current state so he could withdraw the assets over his life expectancy. But now that the law has changed, she could pay premiums on a life insurance policy and name her grandson as the beneficiary, Parrish said. She’ll be paying taxes on the premium, not the life insurance death benefit, and her grandson will receive the benefit tax-free. “A huge motivation to stretching out the payment of an IRA after death was the ability to lower taxes,” Parrish said. “Now this motivation has been substantially curtailed.”

We hope that these examples have helped and we’re ready to talk further about fixing your beneficiary designations. Just call 610-933-8069 to set up a call.

 
David M. Frees, III
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Attorney, Speaker and Author
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