What did the SECURE Act do to change the law?
Without a doubt, the most important change is that the law ends the ability to “stretch” inherited IRA distributions for non-spousal beneficiaries. Before the change, IRA owners could name beneficiaries who could “stretch” the distributions across their own life expectancies. But, now, for any IRAs inherited after December 31, 2019, those beneficiaries (with a few exceptions–such as a spouse) will be required to liquidate the IRA (both traditional and Roth) within ten years of the inheritance. Bottom line: the SECURE Act dramatically changes the income tax consequences associated with an inherited IRA, depending on its type and size.
For those inheriting a traditional IRA, planning will be important to avoid bunching income in a given year, perhaps causing more income tax than necessary. For those inheriting a Roth IRA, on the other hand, it may make sense for inheritors to wait until the tenth year to take a distribution in order to allow the maximum amount of tax-free growth.
A quick and brief summary of the new rules if your IRA beneficiary is:
- Your spouse: the rules around spousal inheritance have not changed. Most surviving spouses opt to roll over the IRA and continue it as his or her own IRA. This option remains viable.
- Your children: they will be subject to the ten year distribution rule and assessing your options (or, at the very least, getting a realistic picture of what the income tax liability may look like) is probably a wise choice.
- A trust: many trusts were established to serve as “see-through” trusts, which are designed to stretch the distributions for all beneficiaries to the age of the oldest inheritor. They rely on the old required distribution rules; therefore, some of the languages within them doesn’t make sense under the new SECURE Act. If you have a trust as a beneficiary of your IRA, you should talk with us to see if an update is necessary.
A few ideas to consider, now that the ground rules have changed:
- Should you liquidate your IRA over your lifetime? While withdrawals definitely mean that you pay income tax, you may need the income to live on, and your IRA and tax bracket may be lower than your beneficiaries.
- Should you convert your traditional IRA to a Roth? With this strategy comes the same income tax burden as above, but could be a good fit if you don’t need the distributions yourself. The drawback is, if you don’t need the income, you’re likely enjoying cash flow from some other hard-earned source, such as a pension or Social Security, which may limit the amount you can convert without pushing you into uncomfortable tax territory.
- Charitably minded? Leave your Traditional IRA (or some portion of it) to your charity of choice. While not new to the SECURE Act, naming a charity as one of your traditional IRA beneficiaries is even more valuable than before. The income tax liability disappears once received by the charity, because charities do not pay income tax!
- Should you buy life insurance? Life insurance may be a way to meet your legacy plans without the burden of income or estate taxes for your heirs, if properly structured.
What is a Will?
A will directs the probate court about who is in charge after death, who receives probate assets, and how they should be distributed. It speaks at the moment of death, and it directs the probate court, acting as a roadmap for the probate judge to follow.
What is a Trust?
A trust is a legal entity that can achieve a number of things. It serves as a will substitute, because it will direct who should receive your assets, and how they should receive them, after you die. It will own your assets during your lifetime, thereby avoiding the probate process after you die. Because it owns your assets, it also makes it easier to manage those assets should you ever become incapacitated, avoiding the court-directed conservatorship process. Trusts can be drafted to protect assets, provide management, and save gift and estate taxes.
Why do I need an Advance Directive?
The Advance Directive for Health Care was drafted by the Oregon legislature to enable Oregonians to have control over their own health care choices. You can name the persons you trust to make decisions for you, should you ever reach the stage where you cannot communicate with your physician. You can also state your own wishes when it comes to the question of taking away tube feeding or life support.
How long will the estate planning process take?
The length of the process always depends on the choices you make. Sometimes it is easy to come to a decision and to implement that choice. Other times, it may take some time to sleep on things, consider the design of your plan, and give your attorney the final approval so that the plan can be implemented. Once your decisions are made, documents can be drafted for review and signature; the time between final decision and review of documents is usually a month or less.
How much will it cost?
The cost depends upon you – your assets, your family, your choices. Generally speaking, it will cost less to plan with a will than to plan with a living trust – at least at the drafting stage of the process. (It is generally more expensive to administer an estate that is will-based at the time of transition – death or disability; it is usually simpler and thus less expensive to administer a trust-based estate at the time of transition.)
We charge a fee of $250 when we meet for the first time, which is applied to the cost of your plan, should you decide to move forward in the planning process. Overall fees will be discussed as you move forward and make decisions.
Why is estate planning important?
Estate planning is important because it allows you to control what will happen at the time you die or if you ever become incapacitated. Instead of letting the government dictate who is in charge and who receives what, estate planning lets you decide how you want things handled for the benefit of the ones you love. It lets you control costs and timing, and it lets you decide how much to pay in the way of death taxes.
How can I incorporate charitable giving into my plan?
Continuing to support the charities that are important to you can be a very simple piece of any estate plan. For instance, you can simply direct a gift, by way of dollar amount or percentage, to your favorite charities. An effective way to include charity is to name the charity as a beneficiary (for all or for a percentage) of any retirement account. As we all know, other than Roth IRAs, traditional retirement accounts are subject to income tax at the time the money is withdrawn from the account; if money is directed to charity – instead of a person – the charity does not pay that income tax! Distributions from a retirement account directly to charity means that the charity gets the benefit of 100 cents on every dollar; distributions to people mean that the IRS takes some part of every dollar.
Other charitable planning tools can become more complex, sharing a gift between charities and people. Ask about charitable remainder trusts, charitable lead trusts, gift annuities, or other tools.