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June 2020 Newsletter

The Farner & Perrin law firm is transitioning to reopening our offices. We have limited staff on site daily, with most of us working remotely. Be assured we continue to be operational and ready to serve your trusts and estates needs. However, in the interests of everyone’s health and safety we are not conducting in-person meetings at this time.  

 

January 2020 Newsletter
Should We Feel Insecure about the Secure Act?

Congress passed the Secure Act in the final days of 2019, effective as of January 1, 2020. This is a transformational tax law in terms of post-death income tax on inherited IRAs.

To provide context, the Investment Company Institute estimates there is almost $6 trillion in 401(k) assets and almost $10 trillion in IRA assets, as of 2019. So it is not really a surprise that Congress would seize on an opportunity to tax these assets sooner rather than later, as the aging of the population continues and the impending generational transfer of this wealth looms large.

And that is the main thrust of the Secure Act. Seniors will enjoy somewhat greater income tax deferral, but their heirs will encounter quite a compressed time frame for recognition of the income tax on what they inherit from an IRA or 401(k).

Channeling Clint Eastwood, allow us to share The Good, Bad and the Ugly.

The Good

·    Old law required the IRA owner or 401(k) participant (the “owner”) to start minimum required distributions (“MRDs”) by reference to attaining age 70 ½. The Secure Act allows the owner to delay MRDs until April 1 after attaining age 72.

·    Beginning in 2021, new tables of longer life expectancies are incorporated into the law, providing even better potential for the income tax deferral for the owner (and owner’s spouse).

               
·    The favorable spousal IRA rollover rules were left unaltered, providing the owner’s spouse with handsome deferral opportunities if named as the beneficiary of these accounts.

·    The age for taking a qualified charitable distribution (up to $100,000 annually) from an IRA remains at 70 ½.

The Bad

·    For owners dying after 2019, their designated beneficiaries will be required to liquidate the entire IRA by the end of the 10th year following death. For example, if husband passes his IRA to wife and then she dies and passes it to their children (or qualifying trusts for their children), at the second spouse’s death, the 10-year compressed taxation period starts.

·    Note that these rules do not apply for inherited IRAs where the owner died before 2020, except when a beneficiary of such an inherited IRA dies, in which case the 10-year rule then applies.

·    Also note that some beneficiaries are exempt from the compressed 10-year rule, being spouses, disabled beneficiaries, chronically ill beneficiaries and minors (with the 10-year compressed period merely postponed until adulthood).

 

The Ugly

·    Old style “see through” trusts were drafted with a view toward the prior statute, which allowed a “stretch” of the income tax over the heir’s life expectancy. These same trusts need to be reviewed and reconsidered, given the Secure Act. Some considerations follow.

·    If a single owner dies in their 70’s, their old style trusts may restrict their heirs to 10 years. Under the Secure Act, we would now prefer to use the owner’s longer (ghost) life expectancy and can do so if we update the trust planning.

·    Any “conduit” type trusts in an (old law) estate plan would allow the beneficiary to receive the IRA funds over their life. Under the Secure Act, a conduit trust requires that the beneficiary receive all the funds in 10 years. This may be too soon for that access to funds.

·    Trust income tax rates reach the highest marginal rate at roughly $13,000 in income, so this needs to be considered, given the 10-year compressed time frame for liquidation of an IRA.

 

And finally, the Farner & Perrin way forward

·    Considering the magnitude of this tax law change, there is no substitute for attentiveness to updating your estate plan. Give us a call to determine what changes you may wish to make to your particular plan.

·    Analyze the advisability of a [partial] Roth IRA rollover, depending on relative tax rates of you and your heirs (and likely timing of death).

·    Give thought to the attractive alternative (for some) of having your IRA pass to a “charitable remainder trust,” which can mimic the old style “stretch IRA” for your heirs, leaving the remainder at their deaths to charity.

Bottom line is we have immersed ourselves in this new tax law and are standing by, ready to help you react when you are ready.

 

“Go Ahead, Make My Day”

We are proud to announce that January 20, 2020 was a momentous day for Farner & Perrin, marking the Firm’s 20th anniversary.

Of note, our combined years of experience approximate that of Clint Eastwood’s storied career.