Do I Qualify as an Eligible Designated Beneficiary under the SECURE Act? – Annapolis and Towson Estate Planning

An eligible designated beneficiary (EDB) is a person included in a unique classification of retirement account beneficiaries. A person may be classified as an EDB, if they are classified as fitting into one of five categories of individuals identified in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill passed in December 2019 and is effective for all inherited retirement accounts, as of the first of this year.

Investopedia’s recent article entitled “Eligible Designated Beneficiary” explains that these people get special treatment and greater flexibility to withdraw funds from their inherited accounts than other beneficiaries.

With the SECURE Act, there are now three types of beneficiaries. It is based on the individual’s connection to the original account owner, the beneficiary’s age, and his or her status as either an individual or a non-person entity. However, an EDB is always an individual. On the other hand, an EDB cannot be a trust, an estate, or a charity, which are considered not designated beneficiaries. There are five categories of individuals included in the EDB classification. These are detailed below.

In most instances, except for the exceptions below, an EDB must withdraw the balance from the inherited IRA account over the beneficiary’s life expectancy. There is optional special treatment allowed only for surviving spouses, which is explained below. When a minor child reaches the age of majority, he or she is no longer considered to be an EDB, and the 10-year rule concerning withdrawal requirements for a designated beneficiary applies.

Here are the five categories of EDBs.

Owner’s surviving spouse. Surviving spouses get special treatment, which lets them step into the shoes of the owner and withdraw the balance from the IRA over the original owner’s life expectancy. As another option, they can roll an inherited IRA into their own IRA and take withdrawals at the point when they would normally take their own required minimum distributions (RMDs).

Owner’s minor child. A child who is not yet 18 can make withdrawals from an inherited retirement account using their own life expectancy. However, when he or she turns 18, the 10-year rule for designated beneficiaries (who are not EDBs) applies. At that point, the child would have until December 31 of the 10th year after their 18th birthday to withdraw all funds from the inherited retirement account. A deceased retirement account owner’s minor child can get an extension, up until age 26, for the start of the 10-year rule, if he or she is pursuing a specified course of education.

An individual who is disabled. The tax code says that an individual is considered to be disabled if he or she is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration.” A disabled person who inherits a retirement account can use their own life expectancy to calculate RMDs.

An individual who is chronically ill. The tax code states that “the term ‘chronically ill individual’ means any individual who has been certified by a licensed healthcare practitioner as—

  • being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least 90 days, due to a loss of functional capacity,
  • having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or
  • requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.”

A chronically ill individual who inherits a retirement account can use their own life expectancy to determine the RMDs.

Any other person who is less than 10 years younger than the decedent. This is a catch-all that includes certain friends and siblings (depending on age), who are identified as beneficiaries of a retirement account. This also excludes most adult children (who are not disabled or chronically ill) from the five categories of EDBs. A person in this category who inherits a retirement account is permitted to use their own life expectancy to calculate RMDs.

Reference: Investopedia (June 25, 2020) “Eligible Designated Beneficiary”

 

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How Do I Protect an Inheritance from the Tax Man? – Annapolis and Towson Estate Planning Attorneys

Inheritances are not income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source. Therefore, you must include the interest income in your reported income.

The Street’s recent article entitled “4 Ways to Protect Your Inheritance from Taxes” explains that any gains when you sell inherited investments or property are usually taxable. However, you can also claim losses on these sales. State taxes on inheritances vary, so ask a qualified estate planning attorney about how it works in your state.

The basis of property in a decedent’s estate is usually the fair market value (FMV) of the property on the date of death. In some cases, however, the executor might choose the alternate valuation date, which is six months after the date of death—this is only available if it will decrease both the gross amount of the estate and the estate tax liability. It may mean a larger inheritance to the beneficiaries.

Any property disposed of or sold within that six-month period is valued on the date of the sale. If the estate is not subject to estate tax, the valuation date is the date of death.

If you are getting an inheritance, you might ask that they create a trust to deal with their assets. A trust lets them pass assets to beneficiaries after death without probate. With a revocable trust, the grantor can remove the assets from the trust, if necessary. However, in an irrevocable trust, the assets are commonly tied up until the grantor dies.

Let us look at some other ideas on the subject of inheritance:

You should also try to minimize retirement account distributions. Inherited retirement assets are not taxable, until they are distributed. Some rules may apply to when the distributions must occur, if the beneficiary is not the surviving spouse. Therefore, if one spouse dies, the surviving spouse usually can take over the IRA as their own. RMDs would start at age 72, just as they would for the surviving spouse’s own IRA. However, if you inherit a retirement account from a person other than your spouse, you can transfer the funds to an inherited IRA in your name. You then have to start taking RMDs the year of or the year after the inheritance, even if you’re not age 72.

You can also give away some of the money. Sometimes it is wise to give some of your inheritance to others. It can assist those in need, and you may offset the taxable gains on your inheritance with the tax deduction you get for donating to a charitable organization. You can also give annual gifts to your beneficiaries, while you are still living. The limit is $15,000 without being subject to gift taxes. This will provide an immediate benefit to your recipients and also reduce the size of your estate. Speak with an estate planning attorney to be sure that you are up to date with the frequent changes to estate tax laws.

Reference: The Street (May 11, 2020) “4 Ways to Protect Your Inheritance from Taxes”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Social Security and Medicare and the Impact on Retiree Taxes – Annapolis and Towson Estate Planning

A 70% increase in Medicare premiums to $559 was a complete surprise to a woman who became a single taxpayer when her husband died. She felt like she was being punished for being a widow, she said in a recent article titled “Retirees, Beware These Tax Torpedoes” from Barron’s. With a 2018 modified adjusted gross income of $163,414, a combination of required minimum distributions, Social Security and her husband’s pensions, she went from being in the third-highest Medicare bracket into the second highest Medicare bracket. All it took was $414 dollars to exceed the $163,000 limit.

This is not the only tax trap awaiting unwary retirees. Lower- and middle-income taxpayers get hit by what is commonly referred to as “tax torpedoes,” as rising income during retirement triggers new taxes. That includes Social Security income, which is taxed after reaching a certain limit. The resulting marginal tax rate—as high as 40.8%—is made worse by a Medicare surtax of 0.9% on couples with taxable income exceeding $250,000. Capital gains taxes also increase, as income rises.

It may be too late to make changes for this tax-filing year, even with a three-month extension to July 15. However, there are a few steps that retirees can take to avoid or minimize these taxes for next year. The simplest one: delay spending from one year to the next and be extra careful about taking funds from after-tax accounts.

What hurts most is if you are on the borderline of a bracket. Just one wrong move, like selling a stock or taking a distribution, puts you into the next bracket. You need to plan carefully.

One thing that will not be a concern for 2020 taxes: required minimum distributions. While many retirees get pushed into tax traps because of taking large RMDs, the emergency legislation passed in response to the coronavirus crisis (the CARES Act) eliminated RMDs for this year.

However, the RMDs will be back in 2021, so now is a good time to start thinking about how to avoid any of the typical tax torpedoes. RMDs used to start at age 70½; the SECURE Act changed that to 72.

If you do not need the money from an RMD in 2021, one workaround is to take it as a qualified charitable distribution. That avoids triggering higher taxes or higher future Medicare premiums. The administrator of the tax-deferred account needs to be instructed to make a donation directly to a charity.

An even better strategy: take steps long before Medicare income limits or tax torpedoes hit. If you can, live on after-tax savings, Roth IRA accounts or inherited money. Spend that money first, before tapping into tax-deferred accounts. You can then take advantage of being in a lower tax bracket to convert money from tax-deferred money to convert to Roth IRAs.

Another story of a tax hit that was avoided: a man with an income of about $80,000 prepared to take $4,000 from a tax-deferred account for a vacation. The couple’s normal top tax bracket was 12%, but they hit the income limit on Social Security taxes. The $4,000 in additional income would have caused $3,400 in Social Security income to be taxed, making his marginal tax rate 22.2% instead of 12%. With the help of a good advisor, the couple instead took $3,000 from a Roth IRA and sold a stock position for $1,000, where there were practically no capital gains generated.

Incomes at all levels can be hit by these tax and Medicare torpedoes. A skilled advisor can help protect your retirement and Social Security funds.

Reference: Barron’s (July 6, 2020) “Retirees, Beware These Tax Torpedoes”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Tapping an Inherited IRA? – Annapolis and Towson Estate Planning

Many people are looking at their inherited IRAs this year, when COVID-19 has decimated the economy. The rules about when and how you can tap the money you inherited changed with the passage of the SECURE Act at the end of December 2019. It then changed again with the passage of the CARES Act in late March in response to the financial impact of the pandemic.

Things are different now, reports the article “Read This Before You Touch Your Inherited IRA Funds” from the News & Record, but one thing is the same: you need to know the rules.

First, if the owner had the account for fewer than five years, you may need to pay taxes on traditional IRA distributions and on Roth IRA earnings. This year, the federal government has waived mandatory distributions (required minimum distributions, or RMDs) for 2020. You may take out money if you wish, but you can also leave it in the account for a year.

Surviving spouses who do not need the money may consider doing a spousal transfer, rolling the spouse’s IRA funds into their own. The RMD does not occur until age 72. This is only available for surviving spouses, and only if the spouse is the decedent’s sole beneficiary.

The federal government has also waived the 10% early withdrawal penalty for taxpayers who are under 59½. If you are over 59½, then you can access your funds.

The five-year method of taking IRA funds from an inherited IRA is available to beneficiaries, if the owner died in 2019 or earlier. You can take as much as you wish, but by December 31 of the fifth year following the owner’s death, the entire account must be depleted. The ten-year method is similar, but only applies if the IRA’s owner died in 2020 or later. By December 31 of the tenth year following the owner’s death, the entire IRA must be depleted.

Heirs can take the entire amount in a lump sum immediately, but that may move their income into a higher tax bracket and could increase tax liability dramatically.

A big change to inherited IRAs has to do with the “life expectancy” method, which is now only available to the surviving spouse, minor children, disabled or chronically ill people and anyone not more than ten years younger than the deceased. Minor children may use the life expectancy method until they turn 18, and then they have ten years to withdraw all remaining funds.

There is no right or wrong answer, when it comes to taking distributions from inherited IRAs. However, it is best to do so, only when you fully understand how taking the withdrawals will impact your taxes and your long-term financial picture. Speak with an estate planning attorney to learn how the inherited IRA fits in with your overall estate plan.

Reference: News & Record (May 25, 2020) “Read This Before You Touch Your Inherited IRA Funds”

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How the CARES Act has Changed RMDs for 2020 – Annapolis and Towson Estate Planning

Before the CARES Act, most retirees had to take withdrawals from their IRAs and other retirement accounts every year after age 72. However, the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, has made some big changes that help retirees. Whether you have a 401(k), IRA, 403(b), 457(b) or inherited IRA, the rules have changed for 2020. A recent article in U.S. News & World Report, “How to Skip Your Required Minimum Distribution in 2020,” explains how it works.

For starters, remember that taking money out of any kind of account that has been hit hard by a market downturn, locks in investment losses. This is especially a hard hit for people who are not working and will not be able to put the money back. Therefore, if you do not have to take the money, it is best to leave it in the retirement account until markets recover.

RMDs are based on the year-end value of the previous year, so the RMD for 2020 is based on the value of the account as of December 31, 2019, when values were higher.

Remember that distributions from traditional 401(k)s and IRAs are taxed as ordinary income. A retiree in the 24% bracket who takes $5,000 from their IRA is going to need to pay $1,200 in federal income tax on the distribution. By postponing the withdrawal, you can continue to defer taxes on retirement savings.

Beneficiaries who have inherited IRAs are usually required to take distributions every year, but they too are eligible to defer taking distributions in 2020. Experts recommend that if at all possible, these distributions should be delayed until 2021.

Automatic withdrawals are how many retirees receive their RMDs. That makes it easier for retirees to avoid having to pay a huge 50% penalty on the amount that should have been withdrawn, in addition to the income tax that is due on the distribution. However, if you are planning to skip that withdrawal, make sure to turn off the automated withdrawal for 2020.

If you already took the distribution before the law was passed (in March 2020), you might be able to roll the money over to an IRA or workplace retirement account, but only within 60 days of the distribution. You can also only do that once within a 12-month period. If the deadline for a rollover contribution falls between April 1 and July 14, you have up to July 15 to put the funds into a retirement account.

For those who have contracted COVID-19 or suffered financial hardship as a result of the pandemic, the distribution might qualify as a coronavirus hardship distribution. Talk with your accountant about classifying the distribution as a COVID-19 related distribution. This will give you an option of spreading the taxes over a three-year period or putting the money back over a three-year period.

Reference: U.S. News & World Report (May 4, 2020) “How to Skip Your Required Minimum Distribution in 2020”

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What Should I know about Financial Powers of Attorney? – Annapolis and Towson Estate Planning

A financial power of attorney is a document allowing an “attorney-in-fact” or “agent” to act on the principal’s behalf. It usually allows the agent to pay the principal’s bills, access her accounts, pay her taxes and buy and sell investments. This person, in effect, assumes the responsibilities of the principal and can act for the principal in all areas detailed in the document.

Kiplinger’s recent article from April entitled “What Are the Duties for Financial Powers of Attorney?” acknowledges that these responsibilities may sound daunting, and it is only natural to feel a little overwhelmed initially. Here are some facts that will help you understand what you need to do.

Read and do not panic. Review the power of attorney document and know the extent of what the principal has given you power to handle in their stead.

Understand the scope. Make a list of the principal’s assets and liabilities. If the individual for whom you are caring is organized, then that will be simple. Otherwise, you will need to find these items:

  • Brokerage and bank accounts
  • Retirement accounts
  • Mortgage papers
  • Tax bills
  • Utility, phone, cable, and internet bills
  • Insurance premium invoices

Take a look at the principal’s spending patterns to see any recurring expenses. Review their mail for a month to help you to determine where the money comes and goes. If your principal is over age 72 and has granted you the power to manage her retirement plan, do not forget to make any required minimum distributions (RMDs). If your principal manages her finances online, you will need to contact their financial institutions and establish that you have power of attorney, so that you can access these accounts.

Guard the principal’s assets. Make certain that her home is secure. You might make a video inventory of the residence. If it looks like your principal will be incapacitated for a long time, you might stop the phone and newspaper. Watch out for family members taking property and saying that it had been promised to them (or that it belonged to them all along).

Pay bills. Be sure to monitor your principal’s bills and credit card statements for potential fraud. You might temporarily suspend credit cards that you will not be using on the principal’s behalf. Remember that they may have monthly bills paid automatically by credit card.

Pay taxes. Many powers of attorney give the agent the power to pay the principal’s taxes. If so, you will be responsible for filing and paying taxes during the principal’s lifetime. If the principal dies, the executor of the principal’s will is responsible and will prepare the final taxes.

Ask about estate planning. See if there is an estate plan and ask a qualified estate planning attorney for help. If the principal resides in a nursing home paid by Medicaid, talk to an elder law attorney as soon as possible to save the principal’s estate at least some of the costs of their care.

Keep records. Track your expenditures made on your principal’s behalf. This will help you demonstrate that you have upheld your duties and acted in the principal’s best interests, as well as for reimbursement for expenses.

Always act in the principal’s best interest. If you do not precisely know the principal’s expectations, then always act with their best interests in mind. Contact the principal’s attorney who prepared the power of attorney for guidance.

Reference: Kiplinger (April 22, 2020) “What Are the Duties for Financial Powers of Attorney?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What are the Taxes on My IRA Withdrawal? – Annapolis and Towson Estate Planning

Investopedia’s recent article entitled “How Much Are Taxes on an IRA Withdrawal?” explains that the withdrawal rules for other types of IRAs are similar to the traditional IRA, with some small unique differences. Other types of IRAs include the SEP IRA, Simple IRA and SARSEP IRA. However, each of these has different rules about who can open one.

Tax-Free Withdrawals Only with Roth IRAs. When you invest with a Roth IRA, you deposit the money post-tax. Therefore, when you withdraw the money in retirement, you pay no tax on the money you withdraw, or on any gains your investments earned. That is a big benefit. To do this, the money must have been deposited in the IRA and held for at least five years and you must be at least 59½ years old. If you need cash before that, you can withdraw your contributions with no tax penalty, provided you do not touch any of the investment gains. You should document any withdrawals before 59½ and tell the trustee to use only contributions, if you are withdrawing funds early. If you do not do this, you could be charged the same early withdrawal penalties charged for taking money out of a traditional IRA.

The Taxing of IRA Withdrawals. Money that is placed in a traditional IRA is treated differently from money in a Roth, because it is pretax income. Each dollar you deposit lessens your taxable income by that amount. When you withdraw the money, both the initial investment and the gains it earned are taxed at your income tax rate when withdrawn. However, if you withdraw money before you are 59½, you will be hit with a 10% penalty, in addition to regular income tax based on your tax bracket. If you accidentally withdraw investment earnings rather than only contributions from a Roth IRA before you are 59½, you can also incur a 10% penalty. You can, therefore, see how important it is to keep careful records.

Avoiding the Early Withdrawal Tax Penalty. There are a few hardship exceptions to the 10% penalty for withdrawing money from a traditional IRA or the investment-earnings portion of a Roth IRA before you reach age 59½.

Do not mix Roth IRA funds with the other types of IRAs. If you do, the Roth IRA funds will become taxable. Some states also levy early withdrawal penalties. Once you hit age 59½, you can withdraw money without a 10% penalty from any type of IRA. If it is a Roth IRA and you have had a Roth for five years or more, you will not owe any income tax. If it is not, you will have taxes due.

The funds put in a traditional IRA are treated differently from money in a Roth. If the money is deposited in a traditional IRA, SEP IRA, Simple IRA or SARSEP IRA, you will owe taxes at your current tax rate on the amount you withdraw. However, you will not owe any income tax, provided that you keep your money in a non-Roth IRA until you reach another key age milestone. Once you reach age 72 (with new SECURE Act), you will have to take a distribution from a traditional IRA. The IRS has specific rules about how much you must withdraw each year, which is called the required minimum distribution (RMD). If you do not withdraw your RMD, you could be hit with a 50% tax on the amount not distributed as required.

There are no RMD requirements for a Roth IRA, but if money is still there after your death, your beneficiaries may have to pay taxes. There are several different ways they can withdraw the funds, so they should get the advice of an attorney.

Reference:  Investopedia (Feb. 21, 2020) “How Much Are Taxes on an IRA Withdrawal?”

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What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption? – Annapolis and Towson Estate Planning

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you would be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments will not have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Massive Changes to RMDs from Stimulus Plan – Annapolis and Towson Estate Planning

Several of the provisions that were signed into law in the relief bill can be taken advantage of immediately, reports Financial Planning in the article “Major changes in RMDs and retirement contributions in $2T stimulus plan.” Here are some highlights.

Extended deadline for 2019 IRA contributions. With the tax return filing date extended to July 15, 2020 from April 16, the date for making 2019 contributions to IRA and Roth IRA contributions has also been extended to the same date. Those contributions normally must be made by April 15 of the following year, but this is no normal year. There have never been extensions to the April 15 deadline, even when taxpayers filed for extensions.

When this tax return deadline was extended, most financial professionals doubted the extension would only apply to IRA contributions, but the IRS responded in a timely manner, issuing guidance titled “Filing and Payment Deadlines Questions and Answers.” These changes give taxpayers more time to decide if they still want to contribute, and how much. Job losses and market downturns that accompanied the COVID-19 outbreak have changed the retirement savings priorities for many Americans. Just be sure when you do make a contribution to your account, note that it is for 2019 because financial custodians may just automatically consider it for 2020. A phone call to confirm will likely be in order.

RMDs are waived for 2020. As a result of the Coronavirus Aid, Relief and Economic Security Act (CARE Act), Required Minimum Distributions from IRAs are waived. Prior to the law’s passage, 2020 RMDs would be very high, as they would be based on the substantially higher account values of December 31, 2019. If not for this relief, IRA owners would have to withdraw and pay tax on a much larger percentage of their IRA balances. By eliminating the RMD for 2020, tax bills will be lower for those who do not need to take the money from their accounts. For 2019 RMDs not yet taken, the waiver still applies. It also applies to IRA owners who turned 70 ½ in 2019. This was a surprise, as the SECURE Act just increased the RMD age to 72 for those who turn 70 ½ in 2020 or later.

IRA beneficiaries subject to the five- year rule. Another group benefitting from these the rules are beneficiaries who inherited in 2015 or later and are subject to the 5-year payout rule. Those beneficiaries may have inherited through a will or were beneficiaries of a trust that did not qualify as a designated beneficiary. They now have one more year—until December 31, 2021—to withdraw the entire amount in the account. Beneficiaries who inherited from 2015-2020 now have six years, instead of five.

Additional relief for retirement accounts. The new act also waives the early 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for ‘affected individuals.’ The tax will still be due, but it can be spread over three years and the funds may be repaid over the three-year period.

Many changes have been implemented from the new legislation. Speak with your estate planning attorney to be sure that you are taking full advantage of the changes and not running afoul of any new or old laws regarding retirement accounts.

Reference: Financial Planning (March 27, 2020) “Major changes in RMDs and retirement contributions in $2T stimulus plan”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Should I Use Life Insurance in My Estate Planning? – Annapolis and Towson Estate Planning

With proper planning, insurance money can pay expenses like estate taxes. It will help keep other assets intact.

For example, Hector passes away and leaves his rather large estate to his daughter, Isabella. Because of the size of the estate, there is a hefty estate tax due. However, unfortunately, most of Hector’s assets are tied up in real estate and an IRA. Isabella may not be keen on a quick forced sale of the real estate to free up some cash for the taxes. If Isabella taps the inherited IRA to raise cash, she will have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

FedWeek’s recent article entitled “Using Life Insurance to Protect Your Estate” that in this scenario, Hector could plan ahead. Anticipating such a result, he could buy insurance on his own life. The proceeds of that policy could be used to pay the estate tax bill. Isabella can then keep the real estate, while taking only the Required Minimum Distributions (RMD) that are warranted by law from the inherited IRA. If the insurance policy is owned by Isabella or by a trust, the proceeds most likely will not be included in Hector’s estate, and the money will not increase the estate tax liability she has.

However, some common life insurance mistakes can sabotage your estate plan:

  • Designating your estate as the beneficiary. This will place the policy proceeds in your estate, which exposes the funds to estate tax and your creditors. Your executor will also have more paperwork, if your estate is the beneficiary. Instead, name the appropriate people, trust or charities.
  • Naming just a single beneficiary. Name at least two “backup” beneficiaries to decrease confusion, in the event the main beneficiary should die before you.
  • Placing your policy in the “file and forget” drawer. Review your policies at least once every three years, make the appropriate changes and get a confirmation, in writing, from the insurance company.
  • Inadequate insurance. In the event of your untimely death, if you have a young child, in all likelihood it will take hundreds of thousands of dollars to pay all her expenses, such as college tuition. Failing to purchase adequate insurance coverage may hurt your family. This also should not be a hardship with term insurance costs so low.

Reference: FedWeek (Feb. 6, 2020) “Using Life Insurance to Protect Your Estate”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys