Stretch IRA Alternatives under the SECURE Act

The SECURE Act reduces the amount of retirement assets left to most beneficiaries. Here are 3 stretch IRA alternatives to consider for your loved ones.

The majority of many people’s wealth is in their IRAs or retirement plans that are saved from a lifetime of work. Their goal is to leave their retirement plans to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.  This accelerates taxation and ultimately reduces wealth passed to beneficiaries.  As a result, clients are seeking stretch IRA alternatives.

Now, this blog won’t address all of the details of the SECURE Act, it is instead going to focus on what I’m calling stretch IRA alternatives as a way to pass more wealth to your beneficiaries under the new rules.  Mary Galligan from our office did an excellent webinar on the SECURE act itself as well as an overview which you can find here https://www.galliganmanning.com/-the-secure-act-/  You can also review my past blogs on the topic here https://www.galliganmanning.com/how-the-secure-act-impacts-your-estate-plan/.

That said, keep in mind that existing beneficiaries of stretch IRAs will not be affected by the change in the law. But for retirement plan holders who die January 1, 2020, most retirement plan beneficiaries, —with a few exceptions, including spousal beneficiaries for example—will have to take their withdrawals within a ten year period of time instead of over their life expectancy.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners as stretch IRA alternatives.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.  It also assumes the retirement plan holder is insurable, which might not be true given their health and age.  Life insurance also works well with all variety of beneficiaries, including trusts for your loved ones.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust.  A Charitable Remainder Trust allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.  This also also a potentially much longer stream of income to beneficiaries compared to a 10 year payout.

If you plan to leave retirement assets to your loved ones and want to maximize their legacy, please contact of office to schedule an appointment and discuss with your financial advisor about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

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How the SECURE Act Impacts Your Estate Plan

The SECURE Act made major changes to beneficiary distributions you should consider in your estate plan.

The SECURE Act has made big changes to how certain retirement plans, such as IRAs, 401(k)s, and 403(b)s, distribute after death. Anyone who owns such a retirement plan, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.  Our firm has mentioned the SECURE Act in past blogs, such as here:  https://www.galliganmanning.com/proposed-ira-rules-and-their-effect-on-stretch-iras/ on Kevin’s Korner and will address the impact of these changes in the future, but today I wanted to focus on some key issues as mentioned in the article.

First, the SECURE Act means changes to some existing estate plans, especially ones including provisions creating conduit trusts that had been created to hold retirement plan death benefits and preserve the stretch benefit, while the retirement plan owner was still alive.  Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust or to evaluate possible plans.

This first change will apply to many, many clients.  A typical client who may be affected by the SECURE Act is a parent creating a trust for their children’s inheritance.  These types of trusts typically serve to provide creditor or divorce protection for their beneficiaries while maximizing the tax benefits of stretching the retirement.  Now that the stretch benefit may not apply to a beneficiary, it may make sense to alter the trust to maximize asset protection instead of the tax savings that are no longer available.  If you have this situation, you definitely want to review your plan.

Another potential strategy for clients who are including charities in their estate plan be making a charity the beneficiary of the retirement account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation to heirs.

One more creative alternative is to pay the retirement account balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.  This is a more complex strategy, but may be effective for charitably minded clients.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the stretch treatment for beneficiaries inheriting retirement plans after 2019. Most beneficiaries who inherit a retirement account after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch retirement payments out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the retirement account continued to grow tax free.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the retirement assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many retirement account owners to bequeath a large retirement balance completely to their heirs. Others, with larger retirement accounts, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, disabled heirs and some individuals not less than 10 years younger than the account owner. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the retirement plan and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. If you believe these changes affect you, contact our office at 713-522-9220 to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

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