Bet to Die? Or Bet to Live? What the SECURE Act does to estate planning....

Have you heard of the SECURE Act? There’s been a lot of chatter about it lately. It went into effect on January 1, 2020 and it has turned the world of estate planning for retirement benefits upside down.

If you’ve been listening to your financial reps or reading about it in the newspaper, the greatest takeaway you may have is that you don’t have to start taking distributions (required minimum distributions or “RMDs”) until you are 72 and you can contribute to an IRA as long as you want (so long as you are generating earned income).

You may have heard that Roth conversions are more desirable now (they may be… or not).

And you could have heard that inherited IRAs cannot be stretched longer than 10 years now.

That? Is the biggest change that affects estate planning. And it’s a doozy.

Figuring out what is best for you and your situation is something that can’t be done just by reading a couple of articles (most people spend more time researching car purchases and vacations than their financial decisions, btw...). It takes more than that. Otherwise, you may as well just let a monkey decide the plan....

Making that determination is very, very fact dependent. You really can’t make decisions based on generalizations that you read in the paper or see online.

In the world of retirement benefits planning, there are some super important issues that you should be aware of. Some of them create a sense of urgency for certain individuals and are a reason to take action ASAP to update, implement, or create an estate plan that embodies your wishes for your own assets to pass to your family.

And in some situations, leaving things as is could be the right answer.

Here are the top 3 things to know now:

1) Inherited IRAs can now be stretched only 10 years (not the life expectancy of the beneficiary)

This is a HUGE change and if you did an IRA trust before in part to ensure that retirement assets stayed as retirement assets for your kids or grandkids, that option is now gone – at least in the form of an inherited IRA or in the type of IRA trust we did before the SECURE Act. Now, those retirement assets have to be distributed to a beneficiary who inherits them within ten years (plus a bit, depending on the date of death), with some limited exceptions.

Those exceptions are:

- Surviving spouse (an inherited IRA will be treated just as if it is the spouse’s own IRA)

- Your children who are under the “age of majority” (what that means is open to debate currently and may be determined by state law) for the time that they remain under that age (the 10-year clock starts once they reach majority)

- Disabled individuals

- Chronically ill persons

- Individuals who are less than 10 years younger than you (for example, siblings, cousins, friends to whom you leave an IRA)

2) A common type of trust that was created for IRAs prior to the SECURE Act may not do what you wanted it to

The “conduit” trust – a very common planning trust used for retirement benefits – will not allow the assets to be held for more than the 10-year period implemented under the SECURE Act. That means your kids/grandkids (or whomever you leave your IRA to) are going to have to withdraw all by the end of the 10 years (which starts at the age of majority for your kids). If your desire is/was to keep those assets in trust for your beneficiaries (as opposed to having them exposed to creditors or available to support bad life choices), then you will need to revise your trust. Sorry, that’s the bad news.

And if you are leaving assets to a disabled or chronically ill individual, then you need to take a look at your trust ASAP to make sure they have the right structure in place to take advantage of the 10 year exception I mentioned above.

3) There are lots of options to use for planning, but the financial analysis is COMPLICATED.

What if you want to make sure your kids pay as little tax as possible once they receive your traditional IRA, which is chock full of deferred taxable income? Or what if you want to make sure those assets you work so hard to save and leave for them are used for “good” and not for a new indoor pool complex?

There are some options. The right one for you and your situation is best determined only after working through the choices (and the math).

Don’t take this lightly. Don’t DIY unless you feel VERY secure in your math skills (see what we did there?). And don’t assume that one magic bullet solution your friend told you about that he saw online is going to do the trick.

Here are a few possible strategies to reduce the tax consequences of the new 10-year rule:

- IRA relocation to a state with more favorable state tax treatment (such as NH)

- Roth conversions – paying taxes sooner rather than later may be a great strategy to save your kids/grandkids money down the road. It will depend on how you are paying the taxes at the time of conversion and what you think is likely to happen (this is a “Bet to Live” strategy).

- Life insurance – in some very limited situations, taking your assets out of your IRA and and purchasing a life insurance policy to be held in a special irrevocable life insurance trust may be a desirable answer. In general, I’m a fan of not buying things you don’t need and I'm not a fan of locking up assets without good reason, so be clear about whether you need/desire the insurance to begin with and understand how it all works. This can be an effective strategy for the right situation, but there may be other alternatives that are just as good or better. Don’t just go buying (or being sold) life insurance you don’t want or need. BTW, this is the "bet to die" situation. Just in case you were wondering.

- Charitable Remainder Trusts – one expert describes the right charitable remainder trust strategy as “spinning straw into gold.” It can be a really effective tax reduction strategy for your family if you have a legitimate charitable intent. That is an essential part of any CRT and not something you can really fake. It can also help keep those assets held in trust (without having to incur a big taxable event first) to help ensure they are used for the right purpose (and not the indoor pool).

Now, if you have a pretty modest retirement account, it may not make sense to implement any of these strategies and just allow your beneficiaries to be grateful they are receiving something and deal with the taxes when that day arrives. Also, some of these strategies are irreversible and that means if Congress makes changes down the road that make the big, irreversible changes no longer desirable, you may not be able to do anything about it.

If you have substantial retirement savings and are at a point in your life where you want to figure out a better tax situation and/or ensure your hard-earned money is used for “the right” purposes, then determining the best planning strategy should be high on your list.

Because not doing anything is a choice, too, but not necessarily the one you want to make. The best advice we can give now is sit down with a financial and estate planning professional to figure out the right answer for you (which may be doing nothing other than checking your beneficiary designations).

If you would like to talk about your situation, reach out to schedule a time to connect. We’ll be happy to walk you through where you are now, what your options are, and help you get plan changes done if you need them.