Secure Act includes one critical tax change ‘that will send estate planners reeling’ - MarketWatch

On Dec. 20, President Trump signed into law the awkwardly named Setting Every Community Up for Retirement Enhancement Act (Secure Act). The new law is mainly intended to expand opportunities for individuals to increase their retirement savings. But it also includes one big anti-taxpayer change that will send some financially comfortable folks and their estate planners reeling. The Secure Act includes some other important tax changes that have nothing to do with retirement.

In several installments, MarketWatch will cover the changes that are most likely to affect individuals and small businesses.

No more age restriction on traditional IRA contributions

Before the Secure Act, you could not make contributions to a traditional IRA for the year during which you reached age 70 1/2 or any later year. (There’s no age restriction on Roth IRA contributions, and the Secure Act does not change that.)

New law: For tax years beginning after 2019, the Secure Act repeals the age restriction on contributions to traditional IRAs. So, for tax years beginning in 2020 and beyond, you can make contributions after reaching age 70½. That’s the good news.

Key point: The deadline for making a contribution for your 2019 tax year is April 15, 2020, but you cannot make a contribution for 2019 if you were age 70 1/2 or older as of Dec. 31, 2019. Thanks to the new law, you can make contributions for tax year 2020 and beyond.

Side effect for IRA qualified charitable distributions

After reaching age 70 1/2, you can make qualified charitable contributions of up to $100,000 per year directly from your IRA(s). These contributions are called qualified charitable distributions, or QCDs. Effective for QCDs made in a tax year beginning after 2019, the $100,000 QCD limit for that year is reduced (but not below zero) by the aggregate amount of deductions allowed for prior tax years due to the aforementioned Secure Act change. In other words, deductible IRA contributions made for the year you reach age 70 1/2 and later years can reduce your annual QCD allowance.

New age-72 start date for required minimum distributions from IRAs and retirement plans

Before the Secure Act, the initial required minimum distributions was for the year you turned age 70 1/2. You could postpone taking that initial payout until as late as April 1 of the year after you reached the magic age.

You generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts, 401(k) accounts, and the like) and pay the resulting income tax hit. However, you need not take RMDs from any Roth IRA(s) set up in your name.

Before the Secure Act, the initial RMD was for the year you turned age 70 1/2. You could postpone taking that initial payout until as late as April 1 of the year after you reached the magic age. If you chose that option, however, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year) plus another by Dec. 31 (the RMD for the current year). For each subsequent year, you must take another RMD by Dec. 31. Under an exception, if you’re still working as an employee after reaching the magic age and you don’t own over 5% of the outfit that employs you, you can postpone taking RMDs from your employer’s plan(s) until after you’ve retired.

New law: The Secure Act increases the age after which you must begin taking RMDs from 70 1/2 to 72. But this favorable development only applies to folks who reach 70 1/2 after 2019. So, if you turned 70 1/2 in 2019 or earlier, you’re unaffected. But if you will turn 70 1/2 in 2020 or later, you won’t need to start taking RMDs until after attaining age 72. As under prior law, if you’re still working after reaching the magic age and you don’t own over 5% of the employer, you can postpone taking RMDs from your employer’s plan(s) until after you’ve retired.

Key point: If you turned 70 1/2 in 2019 and have not yet taken your initial RMD for that year, you must take that RMD, which is for the 2019 tax year, by no later than 4/1/20 or face a 50% penalty on the shortfall. You must then take your second RMD, which is for the 2020 tax year, by Dec. 31, 2020.

Now for the bad news

Stricter rules for post-death required minimum distributions curtail ‘Stretch IRAs’: The Secure Act requires most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. This is a big anti-taxpayer change for financially comfortable folks who don’t need their IRA balances for their own retirement years but want to use those balances to set up a long-term tax-advantaged deal for their heirs.

Before the Secure Act, the required minimum distribution (RMD) rules allowed you as a non-spouse beneficiary to gradually drain the substantial IRA that you inherited from, say, your grandfather over your IRS-defined life expectancy.

For example, say you inherited Grandpa Dave’s $750,000 Roth IRA when you were 40 years old. The current IRS life expectancy table says you have 43.6 years to live. You must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your remaining life expectancy as of the end of the current year.

So, your first RMD would equal the account balance as of the previous year-end divided by 43.6, which would amount to only 2.3% of the balance. Your second RMD would equal the account balance as of the end of the following year divided by 42.6, which translates to only 2.35% of the balance. And so, on until you drain the inherited Roth account.

As you can see, the pre-Secure Act RMD regime allowed you to keep the inherited account open for many years and reap the tax advantages for those many years. With an IRA, this is called the “Stretch IRA” strategy. The Stretch IRA strategy is particularly advantageous for inherited Roth IRAs, because the income those accounts produce can grow and be withdrawn federal-income-tax-free. So, under the pre-Secure Act rules, a Stretch Roth IRA could give you some protection from future federal income tax rate increases for many years. That’s the upside.

This development will have some well-off folks and their estate planning advisers scrambling for months (at least) to react.

Unfortunately, the Secure Act’s 10-year rule puts a damper on the Stretch IRA strategy. It can still work, but only in the limited circumstances when the 10-year rule does not apply (explained below). This development will have some well-off folks and their estate planning advisers scrambling for months (at least) to react. That’s especially true if you’ve set up a “conduit” or “pass-through” trust as the beneficiary of what you intended to be a Stretch IRA for your heirs.

Also see: Inheriting a parent’s IRA or 401(k). Here’s how the Secure Act could create a disaster

Key point: According to the Congressional Research Service, the lid put on the Stretch IRA strategy by the new law has the potential to generate about $15.7 billion in tax revenue over the next decade. 

Effective date: The Secure Act’s anti-taxpayer RMD change is generally effective for RMDs taken from accounts whose owners die after 2019. The RMD rules for accounts inherited from owners who died before 2020 are unchanged.

Who is affected?

The Secure Act’s anti-taxpayer RMD change will not affect account owners who drain their accounts during their retirement years. And account beneficiaries who want to quickly drain inherited accounts will be unaffected. The change will only affect certain non-spouse beneficiaries who want to keep inherited accounts open for as long as possible to reap the tax advantages. In other words, “rich” folks with lots of financial self-discipline.

The Secure Act’s anti-taxpayer RMD change also will not affect accounts inherited by a so-called eligible designated beneficiary. An eligible designated beneficiary is: (1) the surviving spouse of the deceased account owner, (2) a minor child of the deceased account owner, (3) a beneficiary who is no more than 10 years younger than the deceased account owner, or (4) a chronically-ill individual (as defined).

If your grandfather dies in 2020 or later, you can only keep the big Roth IRA that you inherit from him open for 10 years after his departure.

Under the exception for eligible designated beneficiaries, RMDs from the inherited account can generally be taken over the life or life expectancy of the eligible designated beneficiary, beginning with the year following the year of the account owner’s death. Same as before the Secure Act.

So, the Stretch IRA strategy can still work for an eligible designated beneficiary, such as an account owner’s much-younger spouse or recently born tot. Other non-spouse beneficiaries (such as an adult child, grandchild, niece or nephew) will get slammed by the new 10-year account liquidation requirement. So, if your grandfather dies in 2020 or later, you can only keep the big Roth IRA that you inherit from him open for 10 years after his departure. Bummer!

10-year rule specifics: When it applies, the new 10-year rule generally applies regardless of whether the account owner dies before or after his or her RMD required beginning date (RBD). Thanks to another Secure Act change explained earlier, the RMD rules do not kick in until age 72 for account owners who attain age 70 1/2 after 2019. So, the RBD for those folks will be April 1 of the year following the year they attain age 72.

Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years.

When an account owner’s child reaches the age of majority under applicable state law, the account balance must be distributed within 10 years after that date.

The bottom line: As you can see, the Secure Act includes both good and bad news for folks who don’t enjoy paying taxes. The new law includes more important tax changes that I’ve not covered here.

3 examples of new RMD rules for non-spousal retirement account beneficiaries

Example 1: Harold dies in 2020 and leaves his IRA to designated beneficiary Hermione, his sister, who was born eight years after Harold. Hermione is an eligible designated beneficiary. Therefore, the balance in the inherited IRA can be paid out over her life expectancy. If Hermione dies before the account is exhausted, the remaining balance must be paid out within 10 years after her death.

Example 2: Ingrid dies in 2020 and leaves her IRA to designated beneficiary Ignacio, her brother, who was born 12 years after Ingrid. Ignacio is not an eligible designated beneficiary because he is more than 10 years younger than Ingrid. The balance in the inherited IRA must be paid out within 10 years after Ingrid’s death.

Example 3: Jerry dies in 2020 at age 85. He lives his $2 million Roth IRA to his 24-year-old spouse Jasmine. Since Jasmine is an eligible designated beneficiary, the new 10-year rule does not apply to her. As a surviving spouse, she can retitle the inherited Roth account in her own name. Then she will not have to take any RMDs for as long as she lives. So, this is a situation where the Stretch IRA strategy still works well (although not quite as well as before the Secure Act for reasons that are too complicated to explain here).

Example 4: Kendrick dies on Dec. 15, 2019. He left his IRA to designated beneficiary Kelli, his beloved niece, who is 30 years younger than Kendrick. Because Kendrick died before 2020, the balance in the inherited IRA can be paid out over Kelli’s life expectancy under the pre-Secure Act RMD rules. If Kelli dies on or after 1/1/20, the balance in the IRA must be paid out to her designated beneficiary or beneficiaries or the heir(s) who inherit the account within 10 years after Kelli’s death.

More from the Tax Guy

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2019-12-30 10:51:00Z
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The Decade of Debt: big deals, bigger risk - Reuters

NEW YORK (Reuters) - Whatever nickname ultimately gets attached to the now-ending Twenty-tens, on Wall Street and across Corporate America it arguably should be tagged as the “Decade of Debt.”

FILE PHOTO: A picture illustration shows a $100 banknote laying on $1 banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel/File Photo

With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market to load up on cash.

Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run, according to SIFMA, the securities industry trade group.

In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies - those in the S&P 500 Index .SPX - account for roughly 70% of that, nearly $7 trillion.

Graphic: Long-term debt for S&P 500 here

What did they do with all that money?

It’s a truism in corporate finance that cash needs to be either “earning or returning” - that is, being put to use growing the business or getting sent back to shareholders.

As it happens, American companies did a lot more returning than earning with their cash during the ‘Tens.

In the first year of the decade, companies spent roughly $60 billion more on dividends and buying back their own shares than on new facilities, equipment and technology. By last year that gap had mushroomed to more than $600 billion, and the gap in 2019 could be just as large, especially given the constraint on capital spending from the trade war.

The buy-back boom is credited with helping to fuel a decade-long bull market in U.S. equities.

Graphic: S&P 500 shareholder payouts here

Meanwhile, capital expenditure growth has been choppy at best over 10 years. This is despite a massive fiscal stimulus package by the Trump administration, marked by the reduction in the corporate tax rate to 21% from 35%, that it had predicted would boost business spending.

Graphic: Capital expenditure of S&P 500 here

One byproduct of stock buy-backs is they make companies look more profitable by Wall Street’s favorite performance metric - earnings per share - than they would otherwise appear to be.

With companies purchasing more and more of their own stock, S&P 500 EPS has roughly doubled in 10 years. Meanwhile net profit has risen by half that, and far more erratically.

Graphic: S&P 500 earnings per share here

Graphic: Reported earnings for S&P 500 here

The corporate bond market has not only gotten bigger, it has gotten riskier.

With investors clamoring for yield in a low-rate world, debt rated only a notch or two above high-yield - or junk - bond levels now accounts for more than half of the investment-grade market, versus around a third at the dawn of the decade.

Graphic: BBB/Baa issuance spikes here

Reporting by Joshua Franklin and Kate Duguid in New York; Editing by Dan Burns and Dan Grebler

Our Standards:The Thomson Reuters Trust Principles.

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SECURE Act: More Planning Ideas For You To Consider - Forbes

The Setting Every Community Up for Retirement Enhancement Act of 2019, called the “SECURE Act” makes significant changes to how IRAs and certain retirement benefits must be treated post-death. We reviewed many of the changes and planning implications of this new law on your IRA and retirement benefits in “SECURE Act New IRA Rules: Change Your Estate Plan,” Dec 25, 2019. This article will expand on those discussions and explore additional rules, implications and planning ideas.

Killing the Stretch

The heart of the SECURE Act is the mandated payout of many plans in about 10 years after the plan owner dies. Estimates are that this might raise almost $16 Billion for the Treasury.

10-Year Rule – Plan Pay Out After 10-Years

If the beneficiary of the plan is an individual, then the entire plan balance will have to be paid out by the 10^th anniversary of the plan holder’s death. Many taxpayers relied on the assumption that the valuable income tax deferral and tax free growth inside the plan would dissuade an otherwise imprudent beneficiary from taking the plan balance faster then the long-term or “stretched” payout period, even if no trust were used. But with the loss of that motivating tax benefit in after 10-years, that may not be the case.

Given the horror stories and statistics on how fast many heirs burn through an inheritance, IRA or otherwise, that assumption that a valuable tax benefit would dissuade an heir from taking more than the minimum payment required to be made out of an inherited IRA may not have been reliable in many cases. Perhaps that is the reason that has given rise to so many taxpayers with larger balances relying instead on naming trusts as beneficiaries of their IRAs, rather than the intended heir directly.

If the beneficiary of the conduit trust does not qualify as an eligible designated beneficiary (“EDB”), then the entire plan balance will have to be paid out by the 10^th anniversary of the plan holder’s death. That limits the deferral and protection to about 10 years for many plan beneficiaries even if a protective trust is used.

Some commentators have suggested that the plan balance will have to be distributed by the end of the calendar year (December 31) which year includes the 10^th anniversary of the plan holder’s death. Thus, the post-SECURE Act “stretch” can be longer than 10 years.

10-Year Rule – Income Tax Considerations

The long life expectancy payout under prior law often resulted in small and manageable income tax consequences since the annual payment may not have pushed the receiving beneficiary into a higher income tax bracket. Post-Secure Act a large lump sum payment of an entire plan balance to a trust, could expose those dollars to a much higher marginal tax rate significantly increasing the tax burden. Further, if there is a change in administration in Washington and Democratic proposals to increase the marginal tax rates are enacted, that burden could be magnified.

Might Roth conversions provide an offset to the new 10-year rule? Perhaps. Since there is no income tax consequence to a payment of a Roth IRA in a lump sum in year-10 the income tax bite of the 10-year rule might seem to be mollified. However, does that suggest that a plan holder convert a regular IRA to a Roth IRA today to achieve that benefit? Perhaps not. If a plan holder has a large IRA and converts it to a Roth IRA today, there will be a current income tax cost incurred now. A large conversion today might push the plan holder into similarly high income tax brackets that the 10-year rule might push a trust into in the future. Perhaps there may be a benefit to staging Roth conversions over several years to avoid the highest income tax brackets on a conversion. However, if the plan holder attributes a meaningful probability to a change in administrations to Democrat, and an increase in marginal income tax rates, converting before that occurs may prove the more prudent tax minimization step.

10-Year Rule – Beneficiary Imprudence, Divorce and Creditors

The SECURE Act requirement that a plan balance has to be paid out in approximately 10-years from the plan holder’s death has a second potentially negative consequences. It can result in a beneficiary receiving a large lump sum payment thereby exposing that payment to the beneficiaries financial irresponsibility, contrary to what the plan holder wanted.

This 10-year payout rule will cause many plan holders to revisit their planning since that deferral is much shorter then what was anticipated by the plan holder when that trust was created. That result could put a large IRA balance in the hands of an imprudent beneficiary much sooner than was anticipated. This is the precise worry that many articles have cautioned plan holders about since it could undermine their goals for the plan.

Certainly trust could be used to hold the plan assets after the plan has to payout after 10-years. While the economic value will be diminished by an income tax cost in that year, and further tax deferred growth will be lost after that point, the trust could still serve to do what trusts are designed to do: protect the beneficiary from the beneficiaries own fiscal imprudence.

The use of a trust, even with the reduced economic advantages in the wake of the SECURE Act may also serve to keep the assets character as a separate inherited asset intact which may be valuable if the beneficiary later divorces. A risk of the 10-year rule for not trusteed plan assets is that once distributed the former plan assets might face a greater likelihood of being commingled with marital assets and thereby lose their protected status if the heir later divorces.

A more nuanced analysis of the impact of the SECURE Act’s 10-year rule is necessary. If the named beneficiary falls into one of the five categories of EDBs (see discussion under the “Exceptions” below) they will continue to qualify for a life expectancy payout for their lifetime. Thus, for these categories of beneficiaries the existing estate/retirement/trust plan may still work largely as anticipated and the SECURE Act may have limited impact. Thus, as is so often the case with new tax laws, each taxpayer’s plan has to be reviewed in light of that taxpayer’s personal circumstances. Generalizations can be misleading.

Exceptions from the 10-Year Rule – Additional Thoughts

There are five categories of beneficiaries who can continue to withdraw inherited IRAs over their life expectancy instead of the likely much shorter 10 years mandated under the SECURE Act.  The exceptions are for a surviving spouse, chronically ill, disable, minor child, or person 10-years or less younger then the plan holder. These folks are called “eligible designated beneficiaries,” or” EDB (because everyone needs another tax acronym). A conduit trust for one of these beneficiaries will generally qualify for the longer life expectancy payout under the SECURE Act.

Also, when the surviving spouse, chronically ill beneficiary or disabled beneficiary, or 10-year or less younger beneficiary, dies, and another beneficiary inherits, or when the minor beneficiary reaches the age of majority, the new SECURE Act 10-year rule will apply. So if a surviving spouse is an EDB of a conduit trust, on that spouse’s death any remaining plan balance will have to be fully distributed by the 10^th anniversary of that spouse’s death.

Each of these EDBs will be examined in more detail then the prior article.

EDB – 1:- Surviving Spouse

A surviving spouse can rollover the IRA just as under prior law. The SECURE Act does not change that. If a conduit trust is used to hold the plan balance that can be withdrawn over life expectancy. The distributions under pre-SECURE Act law had to have begun in the year the deceased spouse would have attained age 70 ½ now it’s the year the deceased spouse would have attained age 72 since the SECURE Act deferred the time to begin Required Minimum Distributions (“RMDs”).

EDB - 2: Disabled Beneficiary

A disabled heir is defined in Code Section 72(m)(7): “For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.” This definition is quite limited. An heir that a plan holder wants to benefit may have substantial health challenge and have limited earning capacity because of it. However, if the heir can engage in “any substantial gainful activity” even if very limited, that heir will not qualify for this benefit. Thus, the terminology in the definition alone will restrict the applicability of this provision.

EDB – 3: Chronically Ill Beneficiary

A chronically ill heir is defined in Code Section 7702B(c)(2) with certain modifications. This Code Section provides: “(A) In General - The term “chronically ill individual” means any individual who has been certified by a licensed health care practitioner as— (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, (ii) having a level of disability similar (as determined under regulations prescribed by the Secretary (in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or (iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. Such term shall not include any individual otherwise meeting the requirements of the preceding sentence unless within the preceding 12-month period a licensed health care practitioner has certified that such individual meets such requirements. (B) Activities of daily living For purposes of subparagraph (A), each of the following is an activity of daily living: (i)Eating. (ii) Toileting. (iii) Transferring. (iv) Bathing. (v) Dressing. (vi) Continence.”

The above definition suffers from the same overly restrictive terms as the definition of “disabled” above. Many intended heirs are living with challenges that may limit or even prevent gainful employment but they are no so severely incapacitated as to meet the requirements of chronically ill according to the above definition. Yet, these same people who need the protections of a trust, and who may desperately need the economic benefits from the plan assets to be bequeathed, will be forced to have the plan balance distributed in 10-years and lose the continued tax deferred growth, etc.

Any plan holder planning on an heir meeting the requirements of being “disabled” or “chronically ill” to qualify as an EDB under the SECURE Act should carefully evaluate the stringent requirements involved.

EDBs - Additional Rules for Chronically Ill or Disabled Beneficiaries

There is additional leniency permitted to chronically ill or disabled beneficiaries.

A trust can be created for their benefit that has multiple beneficiaries. If on the death of the plan holder that trust is divided into separate trusts for each beneficiary, the post-division trust for the chronically ill or disabled beneficiary will qualify as an EDB for life expectancy payout treatment. Without this change each of those separate trusts for each beneficiary would have to have separately been indicated to be a beneficiary.

Also, in contrast to a spouse or minor child who require a conduit trust to qualify for the special life expectancy payouts as EDBs, a chronically ill or disabled heir can be the beneficiary of an accumulation trust as well. Even though the accumulation trust may name beneficiaries on the death of the chronically ill or disabled beneficiary the chronically ill or disabled beneficiary will be permitted to withdraw pursuant to the life expectancy rules rather than the 10-year payout.

EDB – 4: Minor Children

Minor children are also considered eligible beneficiaries so that the 10-year payout will not apply to them. The SECURE Act specifically limits this to a child of the IRA plan holder. It is not applicable to any minor beneficiary. Act Section 401(a)(2)(E)(ii)(II): “…subject to clause (iii) [for disabled EDBs], a child of the employee who has not reached majority…”

The age of majority, i.e. when the child is no longer a minor, would seem to be 18 or 21 depending on state law, but some have suggested that other rules might apply to lengthen that period. And that remains the rub of the SECURE Act, many parents will not wish to have a child receive their plan balance in full by age 28 or 31. But even a greater concern with the explosion of alternative family arrangements and relationships (the “modern” family) is that many plan holders will bequeath IRA assets to young beneficiaries who are not “children” as restricted by the SECURE Act so that those young beneficiaries will not qualify as EDBs (i.e. a conduit trust that was created for them will not qualify for life expectancy payout) and they will have to receive the full distribution of the plan balance by the 10-year SECURE Act date regardless of age.

EDB – 5: Beneficiary Not More than 10-Years Younger

A beneficiary who is not more than 10-years younger than the plan holder. This will permit a life expectancy payout for the named beneficiary but the application of this EDB exception is likely quite limited. The plan holder would have to name a friend or family member that is only 10 years younger, which certainly will exclude children and other typically named beneficiaries. Example: Plan holder is age 80 and has an unmarried partner (so the spouse EDB exception will not apply) who is age 70 who if named will qualify as an EDB under this exception and be permitted to withdraw the plan balance over life expectancy. However,

Planning For Young Beneficiaries

The problem illustrated above for minor children who might inherit an IRA is obvious. Too much money might have to be distributed to the beneficiary at age 28, or earlier if the minor is not a child of the plan holder. Many plan holders (parents, or other benefactors) will not want that result.

So the answer for some plan holders will be to revise their estate planning documents and substitute an accumulation trust in place of the conduit trust. But the result will be that after the 10^th year the entire IRA plan balance will have to be distributed to the trust bunching that income into a single high trust tax year. Since trusts face compressed income tax brackets much of that income may be pushed into the highest tax bracket.

One partial solution might be to take distributions during the 10 year period (not defer them all until the 10^th year) to spread out the income tax into hopefully lower tax years.

Another approach might be to coordinate life insurance with the tax that is estimated to be due. A simple Irrevocable Life Insurance Trust (“ILIT”) might be set up to hold life insurance on the plan holder that would be collected on the plan holder’s death and be held in that ILIT to pay the income tax due on the 10^th year anniversary when the distribution of the plan balance is required. That same ILIT might be used to fund estate tax costs on the plan if the Democrats win in 2020 or 2024, etc. and lower the estate tax exemption substantially. But creating both an accumulation trust and an ILIT, and funding an insurance plan, is complex and costly and not a solution some plan holders will accept.

Another approach might be to use plan assets to benefit different beneficiaries in light of the SECURE Act changes and make other bequests to the intended minor beneficiary.

Example: Taxpayer had $1 million in her estate and $1 million in her IRA. She is single and has a child age 35 from a prior marriage. Her second and most recent spouse had a child who is now age 5 who was never adopted by her, so that minor will not qualify as her child and hence will not qualify as an EDB under the act. Under pre-SECURE Act law she named the minor as sole beneficiary of a conduit trust to get a long stretch on the IRA payment. She named her adult child as beneficiary under her estate for an equivalent amount. Post-SECURE Act perhaps flipping her estate plan might suit her goals. The 35 year old adult child can be named as beneficiary of her IRA as a payout in year 10 might not be as concerning. The minor can be named as beneficiary under her will so that those assets can be held in a longer term trust without the issues that a 10-year payout to an accumulation trust might trigger. This plan is also subject to various issues. For example, how should the tax effect of the change in dispositive scheme be factored into the planned distributions.

Pre-SECURE Act Rules Continue to Apply

Under prior law, if the IRA plan holder named a beneficiary who qualified as a “designated beneficiary” that beneficiary could withdraw the plan balance in annual increments over their life expectancy. If a trust was named as the beneficiary the life expectancy of the oldest beneficiary of that trust could be used to determine withdrawals, if the trust met the requirements of being a conduit or so-called “see-through” trust. If the named trust did not qualify as a conduit or see-through trust then the rules in the following paragraph would have applied.

If the beneficiary did not meet the requirements of a designated beneficiary, e.g. a non-conduit trust or the estate of the plan holder, then the funds had to be distributed over a mere 5 years if the plan holder died before their required beginning date (“RBD”). If the plan holder died after their RBD, then over the plan holder’s life expectancy (which would generally be much shorter then the beneficiary’s life expectancy had the beneficiary been a “designated beneficiary.”). These rules continue to apply post-SECURE Act.

Since the SECURE Act rules apply to IRAs inherited after 2019, it would seem that beneficiaries of those plan holders who died before 2020, would be exempt from the new 10 year real. Well, kinda but not entirely because if the beneficiary dies the 10-year rule will then apply.

Conduit Trusts Post-SECURE ACT

A common trust used as a receptacle for plan benefits is the so-conduit trust. This trust requires that the trustee distribute IRA distributions the trust receives to the trust beneficiary right away. Prior to the SECURE Act (and for EDBs under the SECURE Act) the plan payout over life expectancy often resulted in a modest payment through the conduit trust to the beneficiary each year.

Following is an excerpt from a conduit trust provision based on language used by Interactive Legal: “Conduit Trust Provisions…with respect to the Grantor's interest in any Retirement Benefits which are payable (either directly or by reason of the provisions above) to the Trustee thereof: 1. Each year, beginning with the year of the Grantor's death, the Trustee of such trust shall withdraw from any such Retirement Plan the Minimum Required Distribution for such Retirement Plan payable to such trust for such year, plus such additional amount or amounts as the Trustee (excluding, however, any Interested Trustee) deems advisable in the Trustee's sole discretion. All amounts so withdrawn (net of expenses) shall be distributed to the Beneficiary… free of trust... 2. The following definitions shall apply in administering these provisions relating to such trust. The Minimum Required Distribution for any year shall be, for each Retirement Plan: (a) the value of the Retirement Plan determined as of the preceding year end, divided by (b) the Applicable Distribution Period; or such greater amount (if any) as the Trustee shall be required to withdraw under the laws then applicable to such Retirement Plan to avoid penalty.”

The above illustrative provision suggests that when the 10-year SECURE Act distribution requirement applies, the trustee of a conduit trust will receive the distribution of the IRA balance and then distribute it out to the conduit trust beneficiary. This outright distribution will be a concern for many plan holders.

Trust Drafting Considerations

Given that the SECURE Act is so new, commentators will refine planning recommendations over time, and there is so much uncertainty in the tax system, plan holders revising estate planning documents (e.g. a revocable trust that includes conduit trust provisions for plan assets) might consider including in the revised trust a trust director (also called a trust protector). This person is often granted specified powers in the instrument to provide for flexibility, e.g. to change the situs and governing law of the trust. The same trust protector might also be given powers to modify the terms of any trust indicated to receive IRA assets. In some instances it appears that it may be beneficial to convert a conduit trust into an accumulation trust to provide protection after the 10^th year. Perhaps the protector can be given the express power to transform a conduit trust into an accumulation trust and vice versa. In that way, if circumstances change or the preferable planning approach becomes clear, the trust protector may exercise the express authority to change these trusts. Example: Plan holder has a revocable trust that includes a conduit trust for a named beneficiary. The idea was that the beneficiary would be able to benefit from a long stretch of the payout of the IRA when the plan holder dies, and the conduit trust would provide for protection of the beneficiary from claimants or divorce as well. After the SECURE Act the plan holder feels that the protection of an accumulation trust may be more useful. The simple approach might be to revise the revocable trust and substitute an accumulation trust provision for the conduit trust provision. But what if the beneficiary is later disabled or subject to a chronic illness. In that case having a conduit trust which would benefit from the life expectancy payout as the beneficiary would be and EDB might be preferable. Incorporating the flexibility into the trust instrument may permit that type of change. If this type of provision is included consider whether the trust protector is designed in the trust as acting in a fiduciary capacity, or whether state law requires that characterization. If so, it may be preferable to designate another person to hold these powers who expressly is not acting in a fiduciary capacity in order to facilitate that power holder to make those changes.

Conclusion

The SECURE Act includes a number of other provisions that are relevant to estate and related planning. The SECURE Act provisions discussed above are complex and many nuances and interpretations are still being considered. So proceed with caution, but do proceed because many estate plans, trusts and beneficiary designations will require rethinking and revision.

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2019-12-29 18:40:24Z
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What Putting $10,000 in These Assets Would Have Returned in 2019 - Bloomberg

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What Putting $10,000 in These Assets Would Have Returned in 2019  Bloomberg
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2019-12-29 16:01:00Z
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Tax-Free Portfolio Yielding 10% - Seeking Alpha

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1. Tax-Free Portfolio Yielding 10%  Seeking Alpha
2. Retirement 2020: What to Watch for in the New Year  Barron's
3. Can I Retire Securely by Saving Only in an IRA?  The Motley Fool
4. This new law will change the rules when it comes to retirement savings | Money Smart  KENS 5: Your San Antonio News Source
5. Sweeping Changes to Retirement Savings Rules on Tap for 2020 | Rossi  nj.com
6. View full coverage on Google News

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2019-12-29 15:00:00Z
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The Bedrock of Ultra-Low Yields Is at Risk - Bloomberg

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The Bedrock of Ultra-Low Yields Is at Risk  Bloomberg
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2019-12-29 12:00:00Z
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Can I Retire Securely by Saving Only in an IRA? - The Motley Fool

There's a reason 401(k) plans are regarded as a valuable retirement savings tool: Their generous annual contribution limits make it feasible for workers to retire with more than enough money to live on for decades.

Currently, the annual contribution limits for 401(k)s are $19,000 for workers under 50, and $25,000 for those 50 and older. In 2020, these limits are increasing to $19,500 and $26,000, respectively. Plus, employers that sponsor 401(k)s often match worker contributions to varying degrees, which means those who save in a 401(k) can often sock away more than what the annual limits allow for, since employer contributions don't count toward them.

There's just one problem with 401(k)s, though: Not everyone has access to one. In fact, an estimated 49% of private sector workers did not have the option to save in a 401(k) in 2014, as reported in 2018 by the National Institute on Retirement Security.

IMAGE SOURCE: GETTY IMAGES.

If you don't have the option to save for retirement in a 401(k), you may be wondering if an IRA will suffice. The annual contribution limits for IRAs are much lower than those of 401(k)s: just $6,000 for workers under 50, and $7,000 for those 50 and over. And, those limits are holding steady going into 2020, so workers won't get an added opportunity to save in the coming year. The good news, however, is that if you manage your IRA wisely, you could potentially retire quite comfortably with that money alone.

Maximizing your IRA

If you're limited to saving for retirement in an IRA, financial security could very well be yours if you do three key things:

1. Start saving at a young age.
2. Max out every year.
3. Invest your savings wisely.

Many people delay their retirement savings for years after entering the workforce, largely because they graduate college with debt, but also because they figure they have plenty of time to save for their golden years. But if you start funding your IRA at age 22, and you retire around age 67, you'll have a solid 45 years to invest your savings for added growth. And if you're willing to live frugally so you can max out year after year, you'll wind up socking away quite a bundle.

Now, let's talk investments. Loading up on stocks in your IRA is generally the way to go, because that's where you'll usually be looking at the most aggressive growth. With an IRA, you can choose to invest in individual stocks, or in mutual funds that are stock-based. A mix of both could serve you well, but if you're not well-versed in vetting individual companies, mutual funds may be the way to go. That said, opting for index funds over actively managed mutual funds is a great way to keep your investment fees to a minimum, thereby getting to retain more of your returns.

Assuming you stick to this plan, there's a good chance your IRA will manage to generate an average annual 7% return over a 45-year period, since that's a bit below the stock market's average. Now, let's assume that you max out your account for 45 years at the current annual contribution limits between the ages of 22 and 67. When we apply that 7% return, you're left with -- wait for it -- $1.75 million. That's certainly enough for a decent retirement, because if you withdraw from that amount of savings at an annual rate of 4%, which many financial experts recommend, you'll be looking at $70,000, and that doesn't include the money you get from Social Security or other sources.

So there you have it: An IRA is enough to buy you financial security during your golden years. You just need to make sure you fund it for as many years as possible, contribute as much as you can, and invest it wisely.

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2019-12-29 11:36:00Z
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