Category Archives: Estate Planning

Legislative Updates 2020: Secure Act Changes Impact Retirement Account Beneficiaries

SECURE ACT: CHANGES IMPACTING YOUR RETIREMENT ACCOUNT BENEFICIARIES

On December 20, 2019, the SECURE Act was signed into law, triggering potential implications for your estate planning.  In particular, the SECURE Act impacts retirement benefits and beneficiary designations in the following significant ways:

1.                The Good:  RMDs and Contributions.  The Act postpones the age at which a plan participant in an IRA or other qualified retirement account must begin taking required minimum distributions (“RMDs”) from age 70½ to the year in which a plan participant turns 72.  For those not yet taking RMDs, this change means that you will have a few more years without mandatory distributions.  For those already taking RMDs, this change will not impact you.  In addition, the Act has repealed the “age cap” on contributions to a traditional IRA so that participants can make tax-deductible IRA contributions without age restriction.

2.                The Bad:  Elimination of Stretch IRA for Non-Spouse Beneficiaries.  Under the prior law, when a non-spouse beneficiary inherited an IRA, the beneficiary had the option of stretching out the RMDs from the IRA, and the corresponding income tax burden, over the beneficiary’s life expectancy.  For example, a 50-year old beneficiary inheriting an IRA in 2019 had 34.2 years to stretch out RMDs.  Under the new law, the deferral is much more limited.  Now, non-spouse beneficiaries will have to withdraw IRA proceeds within just ten years, imposing potentially higher tax brackets and the loss of tax deferral.  A few comments about the RMD change:

  • Spouses. There is no change in the law for surviving spouses.  A surviving spouse still has the ability to roll the deceased spouse’s IRA into his or her own IRA, and treat the IRA as if it is the surviving spouse’s own for purposes of taking out RMDs.  A spousal trust will also continue to qualify for a lifetime stretch out so long as appropriately drafted.
  • Trusts. A non-spouse beneficiary includes any trust listed as a beneficiary, other than a trust for a surviving spouse or excepted beneficiary listed in (c) below. Under the previous version of the law, if a trust qualified as a “see-through trust,” then the life expectancy of the beneficiary could be used for purposes of stretching out the RMDs.  This once favorable strategy no longer works for all trusts.  RMDs have to be distributed to the trust within the 10- year time period unless an exception applies.  To the extent that the trust retains the distributions from the IRA, those distributions will be treated as ordinary income. Moreover, given a trust’s higher tax brackets, the trust will pay significantly more income tax on that income as compared to an individual beneficiary.  In sum, naming a trust as a beneficiary under the new law, particularly as a primary beneficiary, could have unintended, adverse outcomes.  You should review all your beneficiary designations, particularly if you named a trust as a beneficiary (often the case for younger beneficiaries or beneficiaries with financial management issues).
  • Exceptions to the Ten-Year Payout Rule.  There are exceptions to the 10-year payout rule for children who are minors and for disabled or chronically ill beneficiaries.  For minor children, the life expectancy payout rules apply until the child reaches the age of majority and then the 10-year rule begins.  The life expectancy payout rule applies to a disabled or chronically ill beneficiary (and an accumulation trust for their benefit, which is an important change for special needs beneficiaries). When the disabled or chronically ill beneficiary dies, the remainder of the account passes pursuant to the 10-year rule.
  • Timing of Distributions.  Under prior law (allowing lifetime stretch out), a beneficiary had to begin taking distributions in the year following the plan participant’s death. Under the new 10-year rule, a beneficiary can defer any and all distributions until the end of the period.  Such a deferral would allow for continued tax-deferred growth in the account but must be calculated with care as a larger, later distribution could increase the tax payable (depending on the amount of the distribution and the beneficiary’s tax brackets).

3.                Planning Strategies.  Naming a surviving spouse the primary beneficiary of a retirement account remains the most favorable income tax option (though other factors, such as a second marriage, could complicate the decision).  For contingent beneficiaries, the planning environment has become much more complex.  In some instances, conversion to a Roth might be advisable in order to soften the income tax consequences of the new rules.  For those who have named trusts as beneficiaries, the trust provisions will need to be altered to avoid unintended consequences and to maximize flexibility for the trustee and the beneficiaries.  For those who are charitably inclined, a retirement account could name a Charitable Remainder Trust as a “remainder” beneficiary in order to stretch out distribution for an individual beneficiary longer than the 10-year period (up to the lifetime of that beneficiary), with the understanding that the remainder of the account will be distributed to charity at the individual beneficiary’s death.

We recommend that you review your beneficiary designations and the provisions in your estate planning documents to confirm that your beneficiary designations are up-to-date and still the most appropriate option given the recent changes to the law.  If you would like us to assist you with this review, please contact us to schedule an appointment.

Estate Planning is for Everyone

Most Americans are generally aware that they need to have an estate plan, but – according to a recent nationwide survey – most still do not even have a Will. One common misconception is that there is no need for an estate plan unless the estate is large or complex. In reality, most of the reasons to plan apply to all estates, large or small. Some issues you should consider:

1. Incompetency. What if you become incompetent prior to your death? With a comprehensive estate plan, you can pick the successor manager of your affairs using a trust, power of attorney, or other tools. Without an estate plan, expensive court intervention may be required in order to appoint a fiduciary who will then be required to annually report to the court.

2. Blended Families. In any second or later marriage an estate plan is particularly important. Without a plan, children from different marriages may be treated very differently or even left out of inheritance entirely, depending on how assets are titled. With a plan, you can insure that your priorities will prevail. For example, by using a marital trust you can provide support for a surviving spouse and then, upon his or her death, direct the disposition of the assets to the children of a prior marriage.

3. Minor Children. If you have minor children, a properly drafted estate plan will allow you to nominate the guardian or guardians of your choice – the single most important estate planning step parents can take. Without an estate plan the courts will be forced to designate a guardian without the benefit of your insight or the knowledge of your preferences. In addition, your assets will be distributed to minor children at their 18th birthday unless your estate plan provides otherwise. With a plan, you can designate a trustee to manage the estate’s assets until your children reach an appropriate age that you determine.

4. Special Needs Children. If you have a child who qualifies for government benefits, those benefits may be lost if the child receives an inheritance outright. The inheritance itself may also be spent improvidently if the child does not have the capacity to manage the assets. However, a trust for such a child can hold assets so that the child will remain qualified for government benefits and have the benefit of appropriate management and distribution. Similarly, if you have a child who struggles with drug addiction, poor money management, or other negative behaviors, you can tailor a trust that meets the needs of that child – if you plan in advance.

5. Beneficiary Designations. If you have life insurance, IRAs, annuities or other assets which designate a beneficiary, your current beneficiary designation may not effectively reflect your current wishes – particularly if the beneficiary designation was made some time ago. The rules and options relating to beneficiary designations have undergone significant change in recent years and will continue to do so. Your estate plan should integrate your beneficiary designations with the overall plan for all of your assets and ensure that you and your beneficiaries can take maximum tax advantage under complex distribution rules.

6. Business Transition. If you own a business, your death may also spell the death of that business if you neglect a business transition plan. With a transition plan, you can help to ensure that the business will either be transitioned to the appropriate family members or be continued pending a sale so that its value can be preserved for your family.

7.Probate and Probate Avoidance. Without a plan, your estate will pass via intestacy, meaning, in effect, that the State of Oregon will have written your Will for you. If you plan your estate, you can decide who will manage the estate, who will inherit it, and whether various methods to avoid probate entirely are appropriate. For example, a common method of avoiding probate is the creation of a revocable trust that takes title to your assets prior to your death. During your life you serve as your own trustee. Upon your death, your successor trustee is able to manage and distribute the assets per your wishes without probate.

8.Taxes. For most estates, taxes are not a concern. However, there is an Oregon Estate Tax on estates above $1,000, 000 and a Federal Estate Tax on estates above $5,340,000 (2014 exemption, indexed annually for inflation). For both Oregon and Federal tax, a married couple can fairly easily double the amount they can leave to their heirs tax free – but only with the appropriate estate planning.

Most estates, large or small, would greatly benefit from intentional planning. At a minimum, every adult should have a Will, Power of Attorney and Advance Directive to Physicians (for medical decisions) – all of which you can obtain at a cost far lower than the cost you or your family will incur from failing to plan.

The Top 12 Reasons It May Be Time To Review Your Estate Plan

I am frequently asked, “when should I review my estate plan”? My answer (in true lawyer fashion) is “it depends.” Circumstances change. A birth. A death. A divorce. Your intentions for how you want your assets distributed will evolve over time. The following is a list of the Top 12 Reasons it may be time to review and update your existing documents with your estate planning attorney:

Size and Composition of Estate Assets
1. The value of your estate has changed since the time your estate plan was prepared. This may include receiving an inheritance, obtaining a significant amount of life insurance, etc.

Health & Family
2. There may be a significant change in your health or the health of your spouse.
3. A child or other beneficiary has suffered from a life altering illness or injury.
4. A new child or grandchild has been born.
5. There has been a divorce or separation in the family.

Business
6. You have bought a new business.
7. You have entered into a buy-sell agreement.
8. You would like to sell your existing business or transition your closely held business to the next generation.

Bequests & Fiduciaries
9. You would like to change who is serving as a fiduciary (personal representative, executor, trustee, agent, guardian) in your plan.
10. You would like to remove or add an individual or charitable beneficiary.
11. You would like to change the percentages or dollar amounts that a beneficiary receives.
12. You would like to change the beneficiaries on your retirement plans or life insurance policies.

The first step in the process of reviewing your plan it to meet with your attorney. If you do not have a current attorney, and would like to speak with someone about updating your estate plan in Oregon, please feel free to contact me at [email protected] or 541.382.3011.