What Should I Know about the Secure Act of 2019 and IRAs? – Annapolis and Towson Estate Planning

New federal rules for IRAs will significantly add to the tax burden for some heirs by telescoping the permitted period for withdrawals. But this pain can be greatly reduced by converting regular IRAs to Roth IRAs before bequeathing them, explains CNBC’s recent article entitled “Here is a way to beat the tax burden for IRA heirs.”

Before the new legislation, all heirs could enjoy their entire life expectancy to take withdrawals from inherited IRAs. As a result, they were able to stretch out these accounts, and the tax on withdrawals, over decades. That is why they were given the nickname “stretch IRAs.”

But this changed in December of 2019 when Congress passed the Secure Act of 2019. The bill preserves the lifelong stretch period for surviving spouses, minor children, the chronically ill, and other individuals who are not more than 10 years younger than their benefactors (this group would include most siblings). However, for other heirs—including adult children—the new rules restrict the stretch period to a single decade. Beginning with the IRA bequests from benefactors who die in 2020, heirs must now take out all of the funds from these accounts within 10 years and pay ordinary income tax on each withdrawal.

With this accumulated wealth to heirs, adult children will also be saddled with a huge tax burden. This means more of a need for estate planning to address this. Without estate-planning expertise, these beneficiaries will likely withdraw 10% of the IRA’s assets every year for 10 years to lessen the tax impact.

A wise solution for some is to convert their regular IRA into a Roth IRA. Unlike regular IRAs, contributions to Roth IRAs are made solely with post-tax money. Though unlike regular IRAs, Roth IRAs carry no income tax on withdrawals, the Secure Act means they will now be required to drain the account within 10 years of inheritance.

Note that as you get near retirement, converting to a Roth has a few other advantages. Holders of regular IRAs must begin taking annual required minimum distributions (RMDS) at age 72 (before the new legislation in December, this age was 70½).

However, if you plan to keep working or are retiring with sufficient income from other resources, you may not decide to take withdrawals. Rather, you may want to allow these assets in your account grow intact rather than gradually weaning them for withdrawal. Converting to a Roth allows you to do this.

Depending on your situation, a Roth conversion might be a wise option if—not only to lessen your heirs’ tax burden but also to sustain the growth of your retirement nest egg.

Ask your estate planning attorney about a Roth IRA conversion and how it fits into your estate plan.

Reference: CNBC (Feb. 12, 2020) “Here’s a way to beat the tax burden for IRA heirs”

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

Alternatives for Stretch IRA Strategies – Annapolis and Towson Estate Planning

The majority of many people’s wealth is in their IRAs, that is saved from a lifetime of work. Their goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies that will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the state as well.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

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

For Immediate Release

Contact: Jane Frankel Sims

410-828-7775

Contact: Frank Campbell

410-263-1667

Sims & Campbell Estates and Trusts

Frankel Sims Law and Holden & Campbell
Merge to Form Sims & Campbell

Firm will offer comprehensive Trusts & Estates services through offices in Towson and Annapolis

TOWSON, Md. (April 26,2019)  Frankel Sims Law and Holden & Campbell have jointly announced the merger of their firms to create a boutique Trusts & Estates law firm providing comprehensive services in the fields of Estate Planning, Estate Administration, Trust Administration and Charitable Giving. The combined firm will be named Sims & Campbell and have offices in Towson, Md. and Annapolis, Md.  Jane Frankel Sims and Frank Campbell will lead and hold equal ownership stakes in the firm.

Sims & Campbell will have 9 attorneys and 15 legal professionals that handle every facet of estate and wealth transfer planning, including wills, revocable living trusts, irrevocable trusts, estate and gift tax advice, and charitable giving strategies.  The firm will focus solely on Trusts & Estates but will serve a wide range of clients, from young families with modest resources to ultra-high net worth individuals.  This allows clients to remain with the firm as their level of wealth and the complexity of related estate and tax implications change over time. 

“By joining forces, we have expanded our footprint to conveniently serve clients in Maryland, D.C. and Virginia” said Jane Frankel Sims.  We are seeing some of the greatest wealth transfer in our country’s history, and we want to continue to be on the leading edge of helping our clients maintain and enhance their family’s wealth.  In addition, we aim to serve our clients for years to come, and the new firm structure will allow Sims & Campbell to thrive even after Frank and I have retired.”    

“Jane and I have always admired each other’s firms and recognized the need to provide even greater depth and breadth of focused expertise to help families amass and protect their wealth from generation to generation,” said Frank Campbell.  “Now we have even greater capabilities to make a real difference for our clients.” 

The Sims & Campbell Towson office is located at 500 York Road, on the corner of York Road and Pennsylvania Avenue in the heart of Towson.  The Annapolis office is currently located at 716 Melvin Avenue, and is moving to 181 Truman Parkway in August, 2019.  For more information, visit www.simscampbell.law.