Dean P. Weseli
Over the past six months, Congress has passed two new laws that affect retirement, charitable giving, and estate planning.
The new laws known as the SECURE (Setting Every Community Up for Retirement Enhancement) Act and the CARES (Coronavirus Aid, Relief, and Economic Security) Act present changes and opportunities for some common planning concerns. In this paper we discuss a few of the laws’ changes and provide suggestions for actions that may be beneficial to your own financial plan.
Changes to Required Minimum Distributions (RMDs)
The SECURE Act raised the starting age for RMDs from qualified retirement accounts from 70 ½ to 72 for anyone born on or after July 1, 1949.
The CARES Act suspended required minimum distributions for 2020. This change applies to nearly all types of qualified IRA accounts as well as 401(k), 403(b), and Governmental 457 plans.
RMD Changes That Make Roth Conversions More Attractive
A Roth conversion is when an investor converts assets from a Traditional IRA to a Roth IRA. The value of a Roth conversion is threefold. First, all earnings are tax-free and qualified distributions are not taxed upon withdrawal. Second, Roth IRAs also pass to beneficiaries free of income taxes. And third, owners of Roth IRAs are not subject to required minimum distributions. The combination of income-tax free inheritance and no required minimum distributions make Roth IRAs powerful estate planning tools.1
With the starting age for RMDs being pushed back to 72, investors have more time to convert qualified IRA assets to Roth IRA assets. This can be especially beneficial to retirees who are under the RMD age and are able to support their living expenses outside of their IRAs.
Further, because the CARES act suspended RMDs for this year, converting traditional IRA assets to Roth IRA assets has become less burdensome, particularly from a tax perspective. For example, if you are normally subject to RMDs, you might consider converting to a Roth IRA an amount equivalent to what would have been your 2020 RMD. Through this conversion, you will enjoy tax-free future earnings on the monies converted while paying no more in taxes for this year than if RMDs had not been suspended.
Changes to Inherited IRAs That Affect Estate Planning
The SECURE Act eliminated the “stretch” IRA. In the past, a non-spouse beneficiary who inherited qualified assets could choose to take the RMDs over his or her lifetime. For younger beneficiaries, this meant that RMDs could be taken over a long period of years, allowing beneficiaries to stretch the remaining life of the IRA, and its tax-deferral benefit, for years into the future.
Under the new legislation, non-spouse beneficiaries no longer face RMDs. Instead, beneficiaries must withdraw the entire account within 10 years of the inheritance. This represents a large change to a “stretch” IRA and has tax implications for beneficiaries.
The new 10-year distribution rule also diminishes the impact of naming a conduit trust as beneficiary. Many investors have used conduit trusts to protect qualified assets from beneficiaries’ creditors, as well as to require that beneficiaries receive RMDs over a full lifetime instead of allowing the option to withdrawal the account balance immediately. By requiring that all funds are withdrawn within 10 years, the SECURE Act reduced the “stretch” benefit of a conduit trust
The SECURE Act also reinforces the value of a charitable remainder unitrust (CRUT) as an estate planning tool.
Because the SECURE Act reduced the benefit of naming conduit trusts as beneficiaries, investors should consider another strategy to accomplish estate planning goals with an added charitable feature. To enact this strategy, one would name a charitable remainder unitrust (CRUT) as an IRA beneficiary. Upon the death of the IRA owner, the IRA assets move into a CRUT, and the estate receives an estate tax deduction for the present value of the remainder interest. An income beneficiary is also named. The beneficiary would then receive lifetime income from the trust, and assets would be protected from creditors. The charitable factor comes into play at the end of the beneficiary’s lifetime. At that point, the residual assets from the trust pass to a qualified charity.
Changes for Charitable Giving
The CARES Act contains two provisions that are beneficial to charitable donors:
Charitable contributions of up to $300 can be taken as an above-the-line deduction. This means that even taxpayers who do not itemize deductions on their federal tax return can claim this deduction.
The act also eliminates the cap (50% of adjusted gross income) on charitable contributions paid in cash. This change allows taxpayers to offset up to 100% of their 2020 taxable income through charitable donations.
It is important to understand how changes within the SECURE and CARES Acts affect your current planning. In this paper, we have highlighted just a few of them. We look forward to working with you, your CPA, and your estate planning attorney to help you benefit from these recent legislative changes.
1Converting pre-tax IRA assets to a Roth IRA is taxable as income and is important when considering a Roth conversion.
Goelzer Investment Management, an Indianapolis based firm advising on assets in excess of $2 billion, provides highly tailored asset management and investment advisory services to institutional and high-net-worth private clients. The firm manages discretionary and non-discretionary portfolios that can be customized to meet client-specific investment goals. Goelzer’s proprietary investment and wealth management research has helped the firm focus on building long-lasting client relationships and delivering successful results.
Our team looks forward to helping you Dream, Invest, and Live.
You can expect a call or email response from us very soon.