In order to be successful as an estate planning lawyer, I must break down complex topics to manageable teaching points. Here are a couple examples:
There are 3 tools in the estate planning toolbox for transferring assets upon death:
1- Beneficiary designation
There are no more tools.
Every estate plan will use a combination of these tools and each has its advantages and disadvantages. My job is to determine which tool is best suited for each asset, while making sure the client is comfortable using the tool.
There are 3 ways to leave inheritance to a beneficiary:
The outright approach is simple and everyone understands it.
The restrictive approach is useful when the inheritance would be subject to an identifiable clear and present danger (spendthrift habits, special needs, susceptibility to undue influence, need to maintain beneficiary's qualification for government-sponsored health benefits or supplemental income benefits).
The protective approach is useful when there is a desire to protect the inheritance from future threats (lawsuits, divorce, debt collectors).
I have found these teaching points to be very effective in explaining key concepts in estate planning.
The SECURE Act, signed into law on December 20, 2019, is the most impactful legislation to affect estate planning in decades. Although the SECURE Act includes many positive changes in regard to tax-deferred retirement accounts, it no longer permits most non-spouse beneficiaries (e.g., children) to withdraw an inherited retirement account over the beneficiary’s life expectancy (aka “stretch IRA”). Instead, the default law now requires the entire account to be withdrawn and liquidated by the end of the 10th year after the death of the account owner (“10-year liquidation rule”). This change has major implications when considering whether to name an individual or trust as beneficiary of a retirement account.
The 10-year liquidation rule results in the acceleration of income tax due, possibly causing a beneficiary to be bumped into a higher income tax bracket and receiving less of the funds contained in the retirement account than under the prior law. However, the SECURE Act does provide a few exceptions to the usual rule that are available to surviving spouses, beneficiaries less than 10 years younger than the account owner, minor children, and disabled individuals. But these exceptions only complicate the analysis because your estate planning objectives likely include more than just tax considerations. For example, you might be concerned with protecting a beneficiary’s inheritance from future creditors and ex-spouses or preventing your spouse from disinheriting your children upon the spouse’s remarriage. All these issues should be considered simultaneously when naming beneficiaries of a retirement account.
If your estate plan currently names a trust as primary or secondary beneficiary of a retirement account (e.g., IRA, 401k, TSP), then you should reconsider whether this is still appropriate after the SECURE Act, and if yes, determine what type of trust to use. As a courtesy, I have written an article, “Decision Tree for Naming Retirement Account Beneficiaries after the SECURE Act” which provides a structured analysis, i.e., a decision tree, for determining the answers to these questions. This article is available on my website.
In some cases you may discover the reason you named a trust as beneficiary of a retirement account is no longer applicable, which permits you to name individuals as beneficiaries instead of a trust (although a trust restatement may still be appropriate in case circumstances change).
But in most cases the solution will be to integrate SECURE Act compliant provisions into your will or revocable living trust by restating it.
Arizona law provides a mechanism called a “decanting power” that gives your trustee a tool to fix the trust in the event you die before updating your estate plan. But relying on this mechanism invites an unnecessary hassle for your trustee. Doing nothing is a careless approach.
By integrating SECURE Act compliant provisions into your will or revocable living trust, we will accomplish the following:
While in-person office meetings are always preferable in the estate planning context, video conferencing is available through the Zoom app if you need to use this option. Please let the receptionist know that you prefer video conferencing when you schedule the appointment.
My new article regarding how the SECURE Act affects your estate plan is now available. Here it is:
"Decision Tree for Naming Retirement Account Beneficiaries after the SECURE Act."
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020, is the most impactful retirement legislation of the past decade. It increases the age for required minimum distributions from retirement accounts from 70 ½ to 72 years of age. However, among the many provisions in the new law involving retirement accounts, the most significant for clients with retirement accounts is the elimination of the “stretch” option for non-spouse designated beneficiaries who inherit a retirement account.
According to the SECURE Act, most non-spouse beneficiaries—with a few exceptions for beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals—are now required to withdraw the balance of the inherited retirement account within ten years. Without prompt and proper planning taking the new law into account, this change could significantly increase the tax bill for non-spouse beneficiaries. Previously, beneficiaries of inherited retirement accounts could take distributions over their life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will likely result in the income tax due being accelerated and possibly causing the beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than originally anticipated.
Keeping an eye on tax consequences and asset protection needs, there are several strategies that are available to address this new paradigm.
Revocable Living Trust (RLT) or Stand-Alone Retirement Trust (SRT)
Now that most beneficiaries are required to withdraw the entire balance of a retirement account within ten years of the owner’s death, an RLT or SRT might be the best estate planning tool for these unique assets. We should, however, reconsider the use of “conduit” trust provisions because they require any required minimum distributions (RMDs) to be distributed directly to the beneficiary through the trust. Under the SECURE Act, the balance of the account would have to be distributed directly to the beneficiary at the end of year ten, which is an outcome our client might want to avoid. Now, an “accumulation” trust provision may be more beneficial. This provision allows the trustee to receive the RMDs from the retirement account as often as required by law but allows the trustee to exercise discretion as to when and how much of the funds are distributed to or used for the benefit of the beneficiary. Although the trust will pay income tax on any of the distributions from a retirement account that are not distributed to the beneficiary, for many beneficiaries, it is equally or more important to protect the money from the beneficiary’s creditors, divorces, or lawsuits.
If you named your RLT or SRT as beneficiary of a retirement account, you should have your estate plan reviewed now. If the trust contains “conduit” provisions, an amendment to the trust may be appropriate. I can help with this.
Charitable Remainder Trust (CRT)
For charitably inclined clients, a charitable remainder trust may be the right solution to plan for the disposition of their retirement accounts. Such a trust would allow the client, as the grantor, to name beneficiaries to receive an income stream from the retirement account for a period of time, with the remainder going to a charity named in the trust agreement.
When the trust is created, the net present value of the remainder interest must be at least ten percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon the plan participant’s or account owner’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust, and the distribution from the retirement account to the CRT is not taxed. However, distributions from the CRT to the beneficiaries will be subject to income tax. Another benefit to this strategy is that the distributions to the beneficiaries will be smaller and therefore subject to less income tax liability.
It is important to note that this strategy is best for individuals who are already charitably inclined. This strategy may not result in the beneficiaries getting more than they would have utilizing other estate planning strategies, but if you already wish to provide for a charity, this may achieve your goals in a more tax favorable way.
Irrevocable Life Insurance Trust (ILIT)
Due to the new ten-year mandatory withdrawal rule, there will be an acceleration of the beneficiaries’ income tax on inherited retirement accounts, potentially moving them into a higher income tax bracket. The new rule may also result in the amount of cash available to beneficiaries being less than the client originally anticipated. In order to help offset this shortfall, you may want to consider using funds from your retirement accounts during your life to purchase additional life insurance and transfer ownership of the policy to an ILIT. The ILIT will help protect the insurance funds from the beneficiary’s creditors and, if desired, can be designed so that the proceeds from the life insurance policy are not includible in your estate.
Multi-Generational Spray Trust
Any number divided by a large number results in a smaller number. The same philosophy is true with distributions involving retirement accounts. While the distributions must be made within ten years, by distributing the retirement account to multiple beneficiaries at the same time over the ten-year period, the RMDs received by each beneficiary will be smaller, and the resulting tax liability per beneficiary will be reduced.
For asset protection purposes, it is always advisable that the distributions be made to a trust for the benefit of a beneficiary instead of directly to the beneficiary.
 If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. § 1.401(a)(9)-3, Q&A (4)(a)(2) and 1.401(a)(9)-5, Q&A (5)(b).
Congress passed the SECURE Act this week and it goes into effect 1/1/2020. The SECURE Act includes a major law change that affects anyone who chooses to name a trust as beneficiary of a retirement account. Although I already have my own ideas, the financial and estate planning industries are already in teh process of interpreting and responding to the law change. I will post updates on both this blog and the "recent development" page on my website. Stay tuned.
The SECURE Act is expected to pass the Senate and be signed by President Trump by the end of this month. I am closely monitoring this news because it is expected to have a major effect on any existing plans that name trusts as beneficiaries of IRAs. Stay tuned for updates.
Effective July 1, 2019 all county recorder offices in Arizona have a uniform fee schedule for deed and affidavit recording. The new fee is $30 and it includes the return postage fee.
Recently a past client informed me that his NFA gun trust document, which I drafted, was kicked back to him by an ATF examiner. The issue resulted from a novel interpretation of who the document identified as "responsible persons" under the trust. My first response was to find out whether any rules had changed that I did not know about. Although I confirmed there have been no rule changes since 2016, I did learn that ATF counsel was taking a new, stricter approach to the definition of responsible person for a trust. Although my client's situation was perhaps just an anomaly due to an overzealous examiner, I used this opportunity to carefully review and edit the software templates I use when drafting NFA gun trusts. The updated document tightens the wording in a few key provisions in order to eliminate the offending language. While I disagree with the ATF's interpretation, I also want to minimize the possibility of ATF examiners kicking back a Form 4 to a past client of mine. My update also includes a minor change in wording to the trustee declaration form and to the provisions allowing for appointment of a trust protector.
If you are a past client who wants to update your trust document to include my recent changes, please contact me.
Today the House of Representatives passed legislation that would affect IRA distribution rules. The key change that affects estate planning is the provision that would limit the duration of post-death required minimum distributions to 10 years for most non-spouse beneficiaries.
I will continue to monitor whether the bill passes the Senate and gets the President's signature. The bill has bipartisan support, so it is definitely something to pay attention to.
Thomas J. Bouman