INDUSTRY INSIGHT
P
ELDER CARE
SPONSORED CONTENT
DEATH OF THE STRETCH IRA:
A NOT-SO-SIMPLE R.I.P.
resident Trump recently signed a spending bill that
makes major changes to retirement plans. The new law is
designed to provide more incentives to save for retirement,
but it may also require individuals to rethink some of their
estate planning strategies.
The Setting Every Community Up for Retirement Enhancement
(SECURE) Act changes the law surrounding retirement plans in several
ways:
1. Stretch IRAs. The biggest change eliminates the so-called “stretch”
IRAs. Under the previous law, if you named anyone other than a
spouse as the beneficiary of your IRA, the beneficiary could choose
to take distributions over his or her lifetime and then pass what
is left on to future generations (the “stretch” option). The required
minimum distributions were calculated based on the beneficiary’s
life expectancy. This allowed the money to grow tax-deferred over
the course of the beneficiary’s life and to be passed on to his or
her own beneficiaries. The SECURE Act significantly changed this
planning method. Non-spousal beneficiaries of an IRA are now
required to withdraw all of the money in the IRA within 10 years
of the IRA holder’s death. In many cases, these withdrawals would
take place during the beneficiary’s highest tax years, meaning that
the elimination of the stretch IRA is effectively a tax increase on
YOUR SYMBOL OF PROTECTION
Are you worried about losing your home
or life savings to the cost of long term care?
Are you a veteran or spouse of a veteran?
If the answer is yes, we can help.
What's at risk?
Only everything you own
Protecting People, Property, & Life Savings
724-942-6200
PittsburghElderLaw.com
many Americans. This provision applies to those who inherit IRAs
starting from January 1, 2020.
2. Required minimum distributions. Previously, an individual would
have to commence taking IRA distributions beginning at age 70½.
Under the new law, individuals who were not 70½ at the end of
2019 can now wait until age 72 to begin taking distributions.
3. Contributions. Workers can now continue to contribute to an IRA
after age 70½, which is the same as rules for 401(k)s and Roth IRAs.
4. Employers. The tax credit that businesses get for starting a
retirement plan is increased and the new law makes it easier for
small businesses to join multiple-employer plans.
5. Annuities. It removes roadblocks that made employers wary of
including annuities in 401(k) plans by eliminating some of the
fiduciary requirements used to vet companies and products before
they can be included in a plan.
6. Withdrawals. It allows an early withdrawal of up to $5,000 without
a penalty in the event of the birth or adoption of a child. There
had been a 10 percent penalty for early withdrawals in most
circumstances.
As attorneys, it has been customary to prepare an estate plan
(i.e. Will or Trust) that utilizes a testamentary conduit trust as an IRA
beneficiary. The purpose of such a trust was so that the Trustee had
the power to direct the flow of income to the beneficiary and also
control and/or restrict access to amounts in excess of the annual
required minimum distribution (RMD). With this new change to the
law, a Trustee’s ability to control the flow of money to a beneficiary
is essentially eliminated under a conduit trust. Therefore, a
recommended revision may include an accumulation trust.
Under an accumulation trust, a Trustee is able to decide how much
and when the retirement funds are distributed to a beneficiary.
Instead of money passing through directly to a beneficiary, funds
are distributed to the trust and held. Within 10 years, the retirement
account must be completely depleted, but the Trustee controls the
trust money and can decide if a distribution to the beneficiary is
appropriate. The downside is the compressed tax rate applied against
such a trust. An IRA distribution that is retained by the trust will be
taxed at approximately 37% for any income over $12,950 per year.
In an accumulation trust, the Trustee determines whether it is in the
beneficiary’s best interest to distribute the funds and allow them to
be taxed at the beneficiary’s individual tax rate or to accumulate them
in the trust and pay taxes at the compressed trust’s tax rates.
Given these changes, individuals need to immediately reevaluate
their estate plans. To avoid costly mistakes, it is critical to seek
professional guidance to determine if your estate plan conforms to
the new rules.
Christine Brown Murphy is a partner with the elder law
firm of Zacharia Brown P.C. Zacharia Brown is one of
the oldest, most established elder law firms in western
Pennsylvania. The practice focuses on Medicaid eligibility,
Veterans Benefits planning, estate administration, and
estate planning including wills, powers of attorney, living
wills, and trusts. Pittsburgh-area office locations include
McMurray, McKeesport and Wexford.
Phone: 724.942.6200.
Website: www.pittsburghelderlaw.com.
E-mail: [email protected].
PETERS TOWNSHIP
❘
APRIL/MAY 2020
65