5 Estate Planning Strategies in Light of the SECURE Act

By Sharif A. Muhammad, CPA, Unlimited Financial Services LLC – September 8, 2020
5 Estate Planning Strategies in Light of the SECURE Act

On Dec. 20, 2019, the Setting Every Community Up for Retirement Enhance­ment Act of 2019 (SECURE Act) was signed into law as part of the Further Consolidated Appropriations Act of 2020. In a partial summary, the SECURE Act promulgates the following changes to retirement plans (particularly IRAs):

  • The age at which required minimum distributions (RMDs) begin changed from 70½ to 72.
  • Contributions to traditional IRAs can now occur after the age of 70½ to match the unlimited age limit on ROTH contributions.
  • Qualified charitable contributions (QCD) are offset by post-70½ tax-deductible IRA contributions. Without getting into the minutiae of calculations, QCDs can be made at 70½ instead of 72 with one caveat — the contributions no longer avoid tax recognition to the extent of cumulative post-70½ IRA contributions made by the taxpayer.
  • Prior to the SECURE Act, IRA bene­ficiaries were allowed, if they chose, to “stretch” RMDs from inherited IRAs over their respective lifetimes. Under the new rules, with certain exceptions, the stretch provision is now replaced with a 10-year window for completely distributing the contents of the account.

With the changes to the stretch provisions for traditional IRAs, a valued strategy that many families relied upon as part of their estate plans was essentially erased with the stroke of President Trump’s pen. Many clients are now wondering what actions should be taken to ensure that the estate plans they developed prior to the SECURE Act are still effective. With a focus on inherited IRAs and the dissolution of the stretch provision, following are five potential estate planning strategies.

1. Accelerate Roth Conversions

One strategy that can be utilized is to begin converting traditional IRA holdings into a ROTH IRA and bequeath it outright, or name an accumulation testamentary trust as the beneficiary of the ROTH (for the benefit of the designated beneficiary), and through such trust, dictate tax-free distributions per the deceased owner’s wishes. The IRA owner can use the IRS life expectancy tables to create their own stretch IRA for the trust beneficiary (or beneficiaries, if applicable).

2. Utilize a Charitable Remainder Trust (CRT)

Another strategy for consideration involves the tax free, lump-sum distribution of an inherited IRA into an irrevocable CRT that names designated beneficiaries as income beneficiaries and a charitable organization as the remainder beneficiary. Conceptually, the CRT will make distributions to the beneficiaries of an IRA for up to 20 years (or the life of the beneficiary, whichever is shorter) with the remainder going to the charity named as the remainderman. There are complexities in structuring the CRT and maintaining its IRS compliance (i.e., the 10-percent remainder test) as well as potential drawbacks such as 1) distributions being limited to income (principal distributions not permitted) and 2) the disinheritance of successor beneficiaries due to the mandatory payment of the trust assets to the charity upon the death of the beneficiary.

3. Multi-Beneficiary Trusts

Multi-beneficiary trusts can be utilized to allow designated beneficiaries to potentially benefit from inherited IRAs bequeathed to both them and an eligible designated beneficiary, such as a disabled or chronically ill person. The structures could be in one of the following forms:

  • A bifurcated trust, where the conduit trust (and stretch portion) pays out to the eligible designated beneficiary, and the accumulation trust pays out to the designated beneficiary under the 10-year rule
  • A sequential trust, where payments are made first to the eligible desig­nated beneficiary under the stretch provisions and then to the designated beneficiary under the 10-year rule upon the death of the first beneficiary

4. Life Insurance

Generally, life insurance can be used to act as a hedge against the adverse effects of the SECURE Act. By taking distributions and using part of those proceeds to pay life insurance pre­miums on permanent life insurance (which can be housed in an irrevocable life insurance trust) with a face amount that covers, at a minimum, the account size set aside for bequeathment, the IRA owner can not only gain peace of mind with the fact that the asset won’t fluctuate in value, he or she will also be pleased that such an asset is being passed on to heirs without the burden of taxes.

5. Keeping the Status Quo

In some situations, things might be just fine with the new rules in place. The 10-year rule might work as an alterna­tive to the stretch provision of the IRA, and certain alternative planning may work for clients for one or more of the following reasons:

  • Many IRA beneficiaries do not stretch their inherited funds.
  • For those that do stretch their IRAs, many exhaust their accounts within 10 years anyway.
  • Given the size of the account, taxes and expenses of certain strategies, the status quo is considered to be the path of least resistance.

Regardless of the strategy chosen, it makes sense to sit down with clients to ensure that their plans contemplate all relevant variables and make sense in light of their financial goals, wishes and financial situation.

Sharif A. Muhammad

Sharif A. Muhammad

Sharif Muhammad, CPA, MBA, MST, CFP, is the founder and chief executive officer of Unlimited Financial Group Inc. He is a member of numerous NJCPA committees and interest groups.

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This article appeared in the September/October 2020 issue of New Jersey CPA magazine. Read the full issue.