Estate Planning revisited for the SECURE ACT
If you haven’t heard, the SECURE Act was placed in the spending bill that should be signed into law shortly. While there are many provisions that affect financial and retirement planning, the tax driver in the bill is the elimination of the “stretch IRA.” Since there are so many benefits for retirement, the Government had to pay for it in some ways.
The elimination of the stretch provision forces non-spouse beneficiaries to withdrawal the funds over a ten-year period, essentially taxing those distributions, so the government receives its share. This creates a greater tax opportunity than the estate tax because most individuals’ wealth is either in their homes or their 401k’s/IRA’s.
The elimination of the stretch option of IRA’s for non-spouse beneficiaries applies to both Traditional IRA’s and Roth IRA’s. The challenge that is created in estate planning is those estate plans that have either accounted for stretching out the IRA withdrawals as part of the plan or those that have named trusts as beneficiaries will now be irrelevant.
Obviously, there are a lot of considerations with this new law. We know all the advantages of stretching out IRA distributions for beneficiaries other than spouses, but with this new law, revisiting this in estate planning is imperative. Individuals have a lot of money in retirement plans, so how that money is distributed is typically allocated in beneficiary designations within those accounts. To see if a stretch provision has been considered, check with the custodians who hold the assets and how the beneficiary designation has been set.
This all should go into effect by January 1st, 2020 which leaves little time to make adjustments. The real work comes in discussions with families about how this will affect future generations and their inheritances. The new law provides little opportunity to plan a different approach to distributing the funds in 10 years. One option is Roth conversions.
Converting traditional IRA’s and 401k’s to Roth IRA’s allows for some individuals to pay tax on the funds now, at a lower bracket so that when they are inherited, they are received tax-free. This would help those families who have planned for future generations to inherit these funds when those beneficiaries are at their highest tax brackets.
This law places a different burden on estate planning for financial advisors. Roth conversions are typically executed by financial advisors or the individuals themselves under someone’s guidance. Without proper planning or proper oversight, conversions may be done incorrectly, eliminating the opportunity. Advisors should understand this opportunity and take advantage of financial planning with the next generation. Working with families to understand the economic impact for future generations, making sure to take advantage of losses at the right time for conversions and how income tax bracket changes can help are all important planning considerations for advisors.
This is a tremendous opportunity for financial advisors who like to estate plan. It also provides a great opportunity to connect with that next generation of wealth. Take this opportunity to introduce this into your estate planning meetings in 2020.