Special thanks to Kurt Baker, host of the radio show “Master Your Finances,” for inviting me on his show to discuss how recent legal, economic and social changes, including the COVID-19 pandemic, can impact the finances of the elderly and disabled and their families, what you can do to protect your life savings. The segment aired on Sunday, September 13, 2020 at 9:00 AM on 107.7 FM TheBronc and is now available on demand on the Master Your Finances website.
Other topics we discussed during the segment on practical financial issues include:
How the SECURE Act really impacts your retirement plan and why it is very important to update estate planning for your tax-qualified retirement accounts (i.e., individual retirement accounts, 401(k)’s, 403(b)’s, 457(b)’s)
Why life insurance and long term care policies are important investments in your family’s future
Estate planning strategies you might not have thought of, including a ROTH IRA conversion
How to ensure that your estate plan accomplishes what you intended
Tips and traps for retirement income planning, including how the new individual retirement rollover rules affect your bottom line
Health insurance tips and traps (and how to avoid them) in the event of a job loss
How to protect your home and your life savings while getting your loved one the best long-term care
How to navigate the changes to the long term care and Medicaid application process landscapes brought about by the COVID-19 pandemic
How the COVID-19 pandemic is exacerbating the mental health crisis and the important steps you can take to protect yourself and your finances if you are faced with an involuntary commitment
Good things come when you least expect them, but for wealthy retirees and their children and grandchildren, the Setting Every Community Up for Retirement Enhancement (SECURE) Act (passed in the United States House of Representatives on May 23, 2019) may not be one of them.
Congress presently has until December 20, 2019 to balance the federal budget for fiscal year 2020. The SECURE Act could become law as part of the new budget package.
For most Americans, their home and their retirement accounts are their largest assets. Viewed from the vantage point of retirees with large individual retirement accounts or qualified retirement accounts hoping to transfer much of their wealth to future generations, the SECURE Act is Trojan horse.
The SECURE Act would change the existing IRA and qualified retirement plan distribution rules, derailing many existing estate plans which incorporate stretch-IRA planning. Stretch-IRA planning is a distribution strategy popular under the current federal income tax law because it facilitates deferred taxation of retirement account income well beyond the lifetime of the original account owner.
Take the example of Mr. Jones. Supposed Mr. Jones is age 70, has $500,000 in his individual retirement account and has not begun taking any minimum required distributions. Mr. Jones is married and his wife is five years younger. If Mr. Jones dies at 70, and has not begun taking any required minimum distributions, his wife can roll the entire $500,000 from her late husband’s IRA into her own IRA and name a new, younger beneficiary. Assume that the wife has enough assets and income outside of the retirement accounts to pay for her care. Assume also that she dies at age 65 and prior to her death, names her 37 year old daughter as the individual retirement account beneficiary.
The daughter is much younger and has a longer actuarial life expectancy. Now the daughter will be the “measuring life” for the retirement account and under the current tax law, the daughter’s required minimum distribution could be approximately $11,000 per calendar year. If the daughter chooses, she may leave the remaining funds in the inherited IRA and can expect the funds to grow tax-free within the account for many years. Let’s assume that the daughter takes only the minimum required distribution with a 4% rate of return until she reaches the age of 56. At that time, her minimum required distribution may be approximately $23,000 annually and she can expect the account value to have increased to over $600,000. Using the stretch-IRA strategy, the father, mother and daughter in this illustration are able to defer taxable income for many years.
The SECURE Act would curtail stretch retirement account planning for account owners who die before beginning to take their required minimum distributions by forcing their younger, non-spouse beneficiaries to take large distributions of income over a compressed ten year period of time beginning after the death of the original account owner.
If the SECURE Act were passed in its current form, and if the father and mother in the example above died after December 31, 2019, the daughter would have to distribute out the entire $500,000 from the retirement account within a ten year period. During this period, she could potentially be in her peak earning years and in a higher income tax bracket, than she might expect to be after her own retirement. This provision of the SECURE Act threatens to dramatically increase the collection of income tax dollars by forcing distributions from retirement accounts over a compressed period of time. The tradeoff for the repeal of the stretch IRA is the SECURE Act’s deferral of the required beginning date for taking required minimum distributions to age 72. The SECURE Act also facilitates the ownership of annuities within retirement accounts.
For retirees with large IRA’s or retirement accounts wishing to transfer their retirement account proceeds to their children, grandchildren or other non-spouse beneficiaries, it is very important to contact an estate planning attorney to review their options in light of the changes the SECURE Act will probably bring.
The silver lining is that retirees whose intended beneficiaries have special needs or chronic illness will have important planning opportunities under the new law.
Jane Fearn-Zimmer is an Elder and Disability Law, Taxation, and Trusts and Estates attorney. She dedicates her practice to serving clients in the areas of elder and disability law, special needs planning, asset protection, tax and estate planning and estate administration. She also serves as Chair of the Elder & Disability Law section of the NJSBA.
