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Sure Enough, Congress Took Away Your Kids’ Stretch IRAs

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On December 20, 2019, President Trump signed into law the “Secure Act,” which eliminated the benefits of “Stretch IRAs” for non-spouse beneficiaries of IRAs, 401Ks, Thrift Savings Plans, and other qualified retirement plans.

Today, rather than being able to stretch annual required minimum distributions (RMDs) over their projected lifespans, nonspouse beneficiaries of inherited IRAs will be required to withdraw the entire amount of an inherited IRA within ten years. There are no specific RMD requirements within the ten-year period, but the entire balance must be distributed by the last day of the period.

This is bad news for beneficiaries in their peak earning years, when their marginal tax rates are likely to be at their highest. Limiting the period in which a beneficiary must take his or her distributions from an inherited plan means potentially magnifying the tax burden on those distributions.

On the plus side, the Secure Act increased the age at which an IRA owner/beneficiary must begin taking RMDs from the previous age 70-1/2 to age 72. Folks who turn 72 years old in 2022 will not need to make their first withdrawal until April 1, 2023. They’ll then have to take another RMD by December 31, and by every December 31 thereafter.

UPDATE: The “Cares Act” of 2020, enacted to ease the financial burdens of the Chinese coronavirus pandemic, allowed all retirees who would otherwise be required to take an RMD for 2020, plus all beneficiaries of inherited IRAs, to skip the RMD just for that year. The one-time RMD exemption has not yet been extended for tax year 2021.

[Updated: December 15, 2021]

Yes, Young (And Not-So-Young) Singles Actually Do Need Estate Plans

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In most cases, married couples can rely on each other, or their adult children, in case of accident or disability.

But if what if you’re single, with no family members close at hand? What would happen if you became disabled or died unexpectedly?

You’ll need people.

First, think about who should be your backup person in case something bad happens to you. Who would you trust to have access to your bank accounts, credit cards, and financial assets if it were necessary to pay for your hospitalization and to pay your bills until you were back on your feet? A parent or sibling living hours away might be able to handle your affairs from a distance, but only if he or she knew the details of your financial life. You might instead prefer to talk with a friend who lives close by about a “you help me and I’ll help you” arrangement. And such arrangements are best handled by a combination of a Living Trust and a Durable Power of Attorney for financial and personal matters.

Second, who would make immediate health care decisions for you if you were incapacitated and couldn’t make them for yourself? You would need to grant that person a Medical Power of Attorney and let him or her know your wishes in detail.

Finally, who would you name as Trustee of your trust and Executor of your Will, to carry out your wishes if you were to suddenly die?

You’ll need a plan.

Life PreserversAnd now that you have such a person in mind, what information should you give him or her now, and what should you possibly withhold until later, about your financial, medical, and personal affairs? Until this information is needed by your Agent, can it be kept safe and away from prying eyes?

The answer is yes, and there’s a logical, step-by-step process that we can go through to make your backup plans. Advising and assisting you about organizing your affairs, drafting the appropriate documents, and helping you work through the people and institutions who could help in case of emergency is my job as an estate and trust attorney. And I’d be happy to help.

Why put if off any longer? If now is not the time to get started, then when? Contact me and I’ll send you information, at no cost and with no obligation, about getting your planning started.

Congress is Coming for Your IRA

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Philip DeMuth writes in the Wall Street Journal (behind its paywall) that the “SECURE Act” now under consideration in Congress “would upend 20 years of retirement planning and stick it to the middle class.” It’s good reading, and explains how the proposed law’s authors believe that owner/beneficiaries of inherited IRAs (and 401Ks and Thrift Savings Plans) should no longer be permitted to withdraw plan funds over their actuarial lifetimes, but instead be forced to withdraw them within 10 years of the original owner/beneficiary’s death.

This is not a good deal, and would make inherited IRAs subject to higher taxes sooner. Folks hoping to keep inherited IRAs as nest eggs for their own retirements would instead be forced to withdraw the assets and pay taxes while still young.

DeMuth’s article is well-done and accurate in detail. For those without a WSJ subscription, a recent article in Barron’s, titled The Stretch IRA Is About To Snap Under the Secure Act, provides a broad summary.

7 Major Errors in Estate Planning – A Financial Advisor’s View

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These days, access to estate planning counsel and financial advisors is no longer restricted to the very rich.

(Well, there was never actually an exclusive club of rich folks who kept the secret rituals secret, but it used to cost a lot more than it does today. And in the good old days, only the very rich had to concern themselves with income taxes and death taxes.)

These can burn you.But even with the increasing democratization of trust and estate planning, there continues to be a large group who, somehow, just don’t get the word. Forbes Online contributor Rob Clarfeld posted an article ten years ago (but still relevant today) entitled “7 Major Errors In Estate Planning.” His top seven aren’t necessarily the same seven I’d pick (I’ll put up my own short list one of these days) but they’re awfully common nevertheless. Here are the bullet points in Rob’s list – his comments are at the link.

  1. Not having a plan at all (aside from the “plan” that legislators have written for you).
  2. Trying to do everything yourself.
  3. Failing to consider how IRA and life insurance beneficiary designations and improper titling of assets can affect your planning.
  4. Failure to understand the interplay between gift taxes, death taxes, and life insurance.
  5. Allowing your annual gift tax exclusions ($16,000 per recipient per donor) to go to waste.
  6. Failing to take advantage of the $12.06 million lifetime gift tax exemption amount scheduled to sunset on December 31, 2025.
  7. Leaving assets outright to adult children, rather than in well-designed “spendthrift” trusts that protect them from predators, creditors, and improvidently-chosen spouses.

Are you guilty of any of these planning sins? If you know you are (or even think you are), contact me for more information. You can use the form in the sidebar.

Congress Procrastinates Again on Tax-Free Charitable IRA Rollovers

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Once again, a special provision of the Tax Code offering older owners of individual retirement arrangements (IRAs) an advantageous way to make charitable donations, is scheduled to expire on December 31. For the remainder of 2013, a traditional IRA owner, age 70½ or over, may transfer directly, tax-free, up to $100,000 per year to an eligible charity, regardless of whether he or she itemizes income-tax deductions.

IRAs Only

Donation can and heartDistributions from 401Ks, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, if you hurry, you may be able to roll assets from those plans into IRAs and donate them before the giving deadline expires.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

The distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Charitable Rollovers Are MRDs

Amounts transferred to a charity from an IRA are counted in determining whether you have met the IRA’s required minimum distribution (MRD) requirement. And if you have made both deductible and nondeductible contributions to your traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions made to you.