New Legislation and Estate Planning

By: Anne B. Ruffer

New Legislation and Estate Planning

What is the buzz about the SECURE Act that keeps popping up in news reports, tweets and in your email account?  You are curious to find out but you’ve always been too busy to sit down and read about it. Take a few moments and read on.

The SECURE Act (“Setting Every Community Up for Retirement Enhancement” Act) is recently passed Federal Legislation.  One of the goals of the Act is to make it easier for you to save for retirement.  One of the effects of the Act is that it may expedite the payout of retirement savings faster than was otherwise required.  It makes some major changes to how your hard-earned retirement funds will pay out to your beneficiaries on those accounts.  Here’s how the Act may affect you:

1)  The Act repealed the provision of the Internal Revenue Code that prohibited individuals over age 70½ from contributing to IRAs for those individuals who still earn income from wages or self-employment. Congress wanted to remove barriers for older individuals working past retirement age from retirement savings. Note: A tax deduction taken for such a contribution to an IRA may reduce the allowable amount (maximum $100,000) for a non-taxable direct charitable qualified contribution from that individual’s IRA to a qualified charity.

2)  The ACT increases the age at which individuals must begin taking required minimum distributions (RMDs) from the year following the year they reached 70½ to 72 years of age. This change applies to individuals who turn age 70½ after 12/31/2019.

3)  Effective for most individuals who die after 12/31/2019 (except for participants in collectively bargained and governmental plans where this rule may be delayed), the Act also changes the post-death RMD rules for retirement accounts, i.e., the rules that affect how beneficiaries must start taking RMDs from those accounts. In most cases, the new rules speed up the withdrawal time that beneficiaries have to take the retirement account funds from the inherited account.  In other words, the time period which beneficiaries have to withdraw the balance remaining in decedents’ retirement accounts is shortened.  When account beneficiaries take out the retirement funds on a faster basis they are taxed more quickly than if they were otherwise able to stretch-out the withdrawals.

a.  The new general rule is that once a retirement account owner dies, the remaining account balance must be distributed to the decedent’s designated beneficiaries within 10 years from the date of death.

b.  Exceptions to the 10-year post-death distribution rule apply to the following eligible designated beneficiaries of the deceased retirement account owner:

i.  the surviving spouse;

ii.  a child of the decedent who has not reached majority;

iii.  a chronically ill individual;

iv.  any other individual who is not more than ten years younger than the decedent.

c.  Under the exception, following the retirement account owner’s death, the remaining account balance generally may be distributed according to the pre-Act rules which in most cases allow for a longer withdrawal time for most beneficiaries such as over the life expectancy of the eligible designated beneficiary, beginning in the year following the year of death.

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

e.  After a child of the deceased account owner reaches the age of majority, the balance in the account must be distributed within 10 years after that date.

f.  Where the 10-year rule does not apply, the prior RMD distribution rules apply and in most cases, the distributions can be stretched out beyond the 10 years depending on when the account owner died and the beneficiary’s age.

g.  For those beneficiaries who are not eligible designated beneficiaries, the stretch-out strategy is no longer available.

4)  The Act and Children:

a.  Of interest and not related to retirement accounts is the Act’s repeal of the most recent changes to the “kiddie tax.” Under recent tax legislation, the unearned income of certain children was taxed using the onerous and compressed fiduciary income tax rates. The Act changed that so the unearned income of minors, in most cases, is once again taxed using the parents’ tax rates if higher than the tax rates of the child.

b.  Parents can now withdraw up to $5,000 each from their retirement accounts after the birth or adoption of a child to pay for birth or adoption expenses. This must be done within the first year after the birth or adoption. Income will be due on the withdrawal but there will not be an early withdrawal penalty.

c.  If individuals have 529 monies left and owe student loans, 529 monies can now be used to pay off up to $10,000 of student loans.

Some Planning Opportunities:

Idea #1:  Convert your IRA, or some of it, to a Roth IRA.  You will not be subject to RMDs during your lifetime and your Roth IRA beneficiaries will not have the tax hit that your IRA beneficiaries will have.  If you have a taxable estate, paying the tax now will chip away at the size of your estate for estate tax purposes.  Also, you may be in a better position to pay the taxes than your beneficiaries.

Idea #2:  Make qualified charitable distributions (QCDs) from your IRA directly to charities. You can do this up to $100,000 annually once you now reach 72.  You will not have to pay the income tax you would otherwise have to pay on the amount withdrawn, particularly on the RMDs you otherwise would have to withdraw and pay taxes.

To discuss the new Act, how it may affect you and your beneficiaries and other planning opportunities, please contact me (aruffer@mackenziehughes.com or 315.233.8269) or any of the other Estates Department attorneys at Mackenzie Hughes LLP.