4 Planning Opportunities if the SECURE ACT Passes

August 5, 2019

The U.S. House of Represented passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE ACT) on May 23, 2019. The SECURE ACT has strong bi-partisan support and is intended to help working Americans contribute more to retirement plans in two ways: 1) offering businesses incentives to offer the plans, and 2) expanding features of the plans to accommodate the fact that people are living longer. The Senate will now vote on the bill.

4 Planning Considerations if the SECURE ACT passes:

1.    Roth Conversions may make more sense.  To take advantage of the lower tax rates under the 2017 Tax Act, clients have been more inclined to convert their traditional IRA account to a Roth IRA to hedge against the potential for higher taxes in the future—as the tax cuts are due to expire in 2026. By paying taxes on pre-tax accounts currently, clients can minimize taxes at retirement. For legacy planning purposes, clients who do not need their IRAs for retirement, have also taken the approach to convert their traditional IRAs to ROTH IRAs so their heirs receive the accounts as an inheritance that will continue to grow tax-free. However, under the SECURE ACT, beneficiaries who receive an inherited IRA must distribute the whole balance by year 10, making this legacy planning approach less appealing from a tax perspective. One‘ work-around’ the ‘stretch’ limitation under the ACT  is to take distributions from the ROTH IRA and purchase life insurance. Since some life insurance policies are not correlated to market returns, this strategy will create (if not guarantee) a‘ floor’ to a client’s legacy, while increasing the ultimate amount that transfers to heirs on a tax-free basis.

2.    Repositioning the Traditional IRA. Due to the loss of the “stretch”, it may be helpful for clients who will not need the IRA or qualified plan assets for retirement-- and who are intending on transferring the asset to heirs-- to consider a repositioning strategy in which life insurance is purchased with annual taxable withdrawals from the IRA. Because the inherited IRA must be distributed within 10 years under the ACT, this approach (referred to as the IRA/Qualified Plan Max strategy) may provide a larger tax-free legacy for heirs, while minimizing the income taxes due by the beneficiary on the death of the account owner.

3.    Accomplishing Charitable Objectives through a CharitableRemainder Trust (CRT).  Consider that it is possible to name a testamentary CRT as beneficiary of the retirement assets in order to mimic what the ‘stretch’ would have looked like for the children.  That is, the account owner can plan on having the retirement assets distributed to the CRT at his/her death, and the trust will then make an annual distribution to the account owner’s children (as non-charitable income beneficiaries of the trust), each year for their respective lifetimes. At the death of the lifetime trust beneficiaries, the remainder of the CRT balance will then transfer to charity. Although the assets will be included in the owner’s estate at death, he/she will receive a charitable contribution deduction based on the federal 7520 present value rate and the ages of the children at that time. While the children will owe taxes on the distributions they receive from the CRT during their lifetimes, the CRT assets will continue to grow tax deferred. During life time, the account owner may be able to carve out a portion of the IRA income to purchase life insurance to replace the value of the IRA balance transferring to charity.

4.    Review IRA Trust Planning in Place. Because the ‘stretch’ option in an IRA may be eliminated under the SECURE ACT, trusts drafted in the past to receive IRA assets on behalf of beneficiaries should be carefully reviewed. That is, currently IRA assets transferring to non-spousal beneficiaries generally need to be distributed within five years after the death of the account owner. By having these retirement assets transfer to a‘look-through’ trust instead--with the children as beneficiaries of the trust—clients set up trusts so they would ‘stretch’ distributions over the life expectancy of the oldest trust beneficiary. However, these trusts may not make a lot of sense any longer under the SECURE ACT since the stretch’ would be eliminated. Moreover, the fact that the assets will need to be distributed over a ten-year period under the ACT, the benefits of using such a trust likely does not outweigh the high tax rates that come with the arrangement.