Updating Existing Estate Plans Under the SECURE Act
SECURE Act — 5 Part Special
- Updating Existing Estate Plans Under the SECURE (this podcat)
- Planning for Common Scenarios Under the SECURE Act – posted April 28, 2020
- Designing and Drafting Trusts in Light of the SECURE Act – posted May 5, 2020
- Disabled or Chronically Ill Beneficiaries Under the SECURE Act – posted May 12, 2020
- Charitable Planning and the SECURE Act – posted May 19, 2020
“Updating Existing Estate Plans Under the SECURE Act,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Travis Hayes, ACTEC Fellow from Naples, Florida. As a result of the recently enacted SECURE Act, practitioners will need to discuss with their clients about whether or not to update their existing estate plans. To give us more information on this topic, you’ll be hearing today from ACTEC Fellow Bob Kirkland of Liberty, Missouri. Welcome, Bob.
Thanks, Travis. So, we’ve all heard of the SECURE Act now; which I love the acronyms that Congress comes up with because the SECURE Act stands for, or purportedly stands for, Setting Every Community Up for Retirement Excellence. I am of the opinion it stands for sending everyone clamoring under reduced expectations. But in any event, it is the law now and we need to deal with it. This is indeed a sea change in estate planning for IRA benefits. Up until the end of this last year, our mission, most of the time for our clients, was to create a plan that made stretching distributions post-death possible, if not mandated.
Practitioner’s Communication to Clients Following SECURE
Well, so what do we tell our clients coming out of the gate? What our firm has done in mid-January was to send out a client alert to every estate planning client. Now, the key with that alert is to scare them into action because we believe every plan needs to be reviewed. Not every plan is going to need to be revised, but this is a sea change. And so, we crafted about a page and a half notice. You don’t want it to be too long so that they won’t read it, but you also want to give enough information so they feel like they better get in to see you tomorrow, and it was very effective.
I’ve had guesstimating since the first of the year, 60 to 70 meetings with clients that were purely driven by the enactment of the SECURE Act. So, we had great response. In fact, better response to this than we’ve had in similar client alerts for the last 20 years, including all of the estate and gift tax updates in 2001, 2012, 2017 with the Tax Cuts and Jobs Act. Another thing we’ve done is a more targeted calls/email to those clients that we see regularly – your high-net-worth clients. Usually, that entails having a high dollar IRA. So, you want to get those folks in as well.
Some other options – it depends on the database that your office uses for estate planning clients. We tend to organize that by plan. So, if you’re doing a more targeted search, you look for plans that involved tax planning or contingent tax planning, assuming that also means they have a high dollar IRA. We also search documents electronically for the words “conduit trust” because, as I’ll detail in a moment, those really need to be looked at right away. So whatever works in your office, however you have organized the database of your clients, you can usually use that database and target a search for those that you really want to talk to and get in right away.
So, what are some immediate concerns for our clients? Clearly, evaluating the appropriateness of existing designations of conduit trusts, I’ll explain that in a moment. I know practitioners who are smarter than I am that used to do conduit trusts for everyone. That was not my approach, but those people are busy because a lot of those conduit trusts need to be revised. And briefly, the reason is, a conduit trust basically said, the IRA gets paid out over the life expectancy of the beneficiary. It goes to the trust for that beneficiary and immediately gets paid out to the beneficiary from the trust; hence the word conduit trust.
Well now, if it’s only a ten-year period for most beneficiaries, then the conduit probably isn’t the best option for most beneficiaries because under the ten-year rule, they don’t have to get regular distributions. They could wait until the tenth year to take it all out, and that may be the game plan for some beneficiaries. So, you’re going to want to change those to accumulation trusts, in most cases; so then they have the option the beneficiary does to do their own tax planning. The next thing we want to cover with clients is the effective date provisions. There are some delayed effective dates for certain collectively bargained plans or governmental plans. Another target or high radar kind of thing – your antennae should be up – is with disabled and chronically ill beneficiaries or special needs trust that you’ve named as beneficiaries of an IRA.
So, what are we telling our clients if we get them in the door? There’s a lot of uncertainty with SECURE, and a lot of my colleagues are going to follow up this podcast with details of those uncertainties. So what are, sort of, the big-picture, 30,000 feet messages? Well, one of the few bits of good news in the SECURE Act is the beginning date for required minimum distributions has been changed from 70 1/2 all the way to 72. Not a big deal in my book, and the next message out of our mouths is thanks to the SECURE Act, the real value of the client’s IRA has been diminished. For example, if I died today, my 32-year-old son, had we not had SECURE, would have been able to stretch distributions over 50-plus years, and the continued growth inside the IRA tax-free would be tremendous. Now, he has ten years. So, the time value of that IRA has gone down significantly. He or the trust for him will be paying tax a lot quicker. That’s the whole purpose of SECURE. It’s a money grab. Congress needs to raise funds, and this was an easy, relatively easy way to do it.
Understanding the Tax Liability Under SECURE
So how will our clients pay for that tax liability? The life insurance industry has already targeted our clients, indicating that they, and rightly so, they should consider the old ILIT technique that we used to use for wealth replacement when estate and gift taxes were due. Now, we may want to replace that wealth that’s going to go for increased income taxes on distributions from the IRAs. For those who are charitably inclined, it’s always been important to consider using the IRA to satisfy that charitable inclination upon death. Under SECURE, it’s even more important, and Chris Hoyt is doing a separate podcast on these issues (Charitable Planning and the SECURE Act – May 29, 2020). For example, doing a charitable remainder trust, structured correctly with the right age of beneficiaries, could simulate the old stretch, but what they need to know is that a chunk will go to charity. So, for those who aren’t charitably inclined, it’s my view that technique is a non-starter; and in any case, you need to run the numbers to see if it really accomplishes the client’s objective.
Another thing we’re talking about with client’s, right out of the gate, is Roth conversions. If the client looks at the family as a one wealth unit, who has the lowest tax bracket? If it’s the client, as opposed to their three very successful children, then maybe they want to pay some of that tax before death, and pay the tax, convert it to Roth and leave the Roth to the children. If they’re in a high deduction year, if they’ve satisfied a charitable pledge or they have medical expenses, they should consider a partial Roth conversion at that point, again to absorb the tax liability, and the kids pay less.
One of the last things I’ll leave you with – and other speakers from my committee are going to give you more detail – there’s a new concept in SECURE called eligible designated beneficiaries. They are a spouse, a minor child – not just a minor beneficiary – it has to be a minor child, a chronically ill or disabled beneficiary or beneficiaries less than ten years younger than the owner. Those categories are eligible designated beneficiaries who can still do the stretch. One other key thing we’re telling spouses or telling clients is: your plan to leave your spouse as primary beneficiary is still a good plan. The spousal rollover and those benefits have not changed.
So, in closing, I would say there are three categories of clients that I have visited with; some are not affected at all:
- If their spouse is the primary beneficiary and their adult children – who are not chronically ill, not disabled within the meaning of the new law, and we’re leaving them as the outright beneficiary – that plan still works. Even though they’ll have to pay more tax and receive the IRA distributions more quickly, that plan still works.
- If they’re leaving all the IRA to charity, no need to change that. Others will need tweaks and usually the tweaks are involved if the beneficiary involved directing distributions to a trust. There’s some trust boilerplate we’re now inserting in every new trust that is dealing with the SECURE Act.
- Then, there is a third category who really need an urgent overhaul, and those are people who named conduit trusts for all their beneficiaries. Those who named a spousal income only trust as beneficiary; that will not get the stretch anymore. Those who have a special needs trust as beneficiary. That trust could qualify as an eligible designated beneficiary and still stretch, but it’s going to need to be tweaked in order to meet those new requirements. Trusts for minor children need to be reconsidered. Minor children are an exception from the non-stretch rule. They get to stretch till they reach the age of majority and then they opt for 10 years after that.
So, those are some brief messages. My colleagues will be sharing more details on the Eligible Designated Beneficiaries, charitable planning, etcetera. Thanks, Travis.
Thank you to Bob for educating us on what practitioners need to know about existing estate plans in light of the recent enactment of the SECURE Act.
Listen to our second SECURE Act topic: Planning for Common Scenarios Under the SECURE Act.
Visit actec.org/secure-act to find additional resources.
If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org.
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