In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was launched. Among the changes introduced by the Act, one of the most notable developments is that stretch IRAs have been eliminated. “Stretch” IRAs let a beneficiary gradually withdraw the balance from an IRA throughout that person’s life. As such, the Act will result in substantial changes for people who want to pass on assets in retirement accounts to their children.
# 1 – Despite Tax Ramifications, Consider Roth Conversions
Due to the SECURE Act, many people are considering Roth conversions. This option is most suitable for people who earn high incomes. Roth conversions are worth consideration because, under traditional IRA models, distributions from these accounts are taxed as ordinary income at a high rate. Roth conversions, however, can also reduce the amount of an estate that is exposed to taxes. Roth conversions do not come without their risks. For example, Roth conversions are taxed on conversion, which can present a challenge.
# 2 – Revisiting the Role of Life Insurance
After the SECURE Act, many people have begun considering using distributions from an IRA to pay for insurance policies. The advantages of life insurance policies are that they are not included in a beneficiary’s income. Both whole life premiums and required minimum distributions from IRAs, however, are based on a person’s life expectancy. As a result, it is often possible for a person to obtain a death benefit from life insurance that approximates the value from an IRA. Most people also have the choice of increasing the premiums paid into the policy for an increase in the death benefit. As a result, life insurance policies often function comparably to stretch IRAs. If the benefactor is not insurable, this is often not an option. While using life insurance in this way is not a new concept, many people have begun to reconsider this strategy due to the elimination of stretch IRAs.
# 3 – Charitable Remainder Trusts
A third estate planning to be used now that stretch IRAs have eliminated is to fund charitable remainder trusts. This allows a person to establish an income stream for beneficiaries with assets from an IRA. The remainder will then pass to a charity or organization of that person’s choice. Trusts can grow tax-free, but any beneficiaries will still be required to pay income taxes on any assets received from the trust. Both charitable remainder annuity trusts and charitable remainder unitrusts can be used to achieve these goals. While charitable remainder annuity trusts distribute a fixed annual annuity and do not permit continued contributions, charitable remainder unitrusts distribute a fixed percentage of the assets and allow for continued contributions.
Contact a Skilled Estate Planning Attorney
Despite the changes introduced by the SECURE Act, it is still possible to achieve estate planning goals. If you need assistance navigating this process, you should not hesitate to speak with a knowledgeable attorney. Call or email Ettinger Estate Planning today to schedule a free case evaluation.