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How Does the SECURE Act Affect Your Estate Planning?

The Setting Every Community Up for Retirement Enhancement (Secure) Act was signed into law by President Donald Trump on Dec. 20, 2019. This law has several key provisions that help workers build their retirement funds. If you’re feeling overwhelmed, you can work with an estate planning attorney Orange County to help you with the planning and processing.

Furthermore, the SECURE Act of 2019 implements a number of changes that impact the way investors and homeowners manage their assets so they can leave behind a good inheritance to their loved ones.

Here are Some Ways that the Secure Act Impacts your Estate Planning:

  • Higher Taxation 

Prior to the SECURE Act, beneficiaries of Individual Retirement Accounts (IRA) or other retirement accounts are eligible to stretch the withdrawal process throughout their lifespans. This allows a beneficiary to stagger withdrawal for as long as 80 years, and this significantly reduces the amount they pay in terms of Income Tax.

With the changes brought by the SECURE  Act, however, stretch provisions for certain beneficiaries are no longer available. This means that people who inherit retirement savings from the IRA of a deceased will only have 10 years to withdraw the entire amount in the fund, which is subjected to Income Tax.

This applies to anyone who is not an Eligible Designated Beneficiary (EDB), it includes:

  • The spouse of the participant
  • The child of the participant under the age of 18
  • The participant that is medically disabled or chronically ill
  • The  sibling of the participant who is younger than the participant by less than 10 years

With the exception of EDBs, all beneficiaries will no longer be eligible for tax deferral. In a span of 10 years, starting from the year after the death of the participant, beneficiaries will have to pay income taxes due on the IRA they inherit. 

This may not seem like a big problem because they’re essentially paying the same income taxes as before, only earlier. However, one has to consider the factor of tax brackets and the danger that accelerating the withdrawal process can put a beneficiary in a higher income tax bracket, which will result in their having to pay higher taxes overall.  

  • Diminished Inheritance

With the removal of the stretch provision for many IRA beneficiaries and the possibility of increased taxes, the amount of the inheritance a beneficiary receives can be significantly reduced.

If you’re someone building an IRA or a beneficiary of an IRA, then this is a huge consideration that would warrant some changes in your estate planning. 

Changes you can do to your Estate Planning

There are some options you can consider but make sure you discuss these with your Orange County estate planning lawyer before taking any action.

Each individual’s circumstances are unique and will require more comprehensive planning. To make sure your assets are well taken care of, you can work with an estate planning lawyer in Orange County and discuss if any of the following suggestions will be viable for your situation. 

First, you can consider putting your retirement fund in Irrevocable Living Trusts (ILT). This is especially beneficial for individuals with sizable IRAs or retirement funds.

If your beneficiary is not an EDB, then you can transfer your retirement funds into a trust account like an ILT. This is a trust account that takes effect even while the grantor is living. It is also a legal agreement that cannot be changed unless the beneficiary or beneficiaries agree.

Some of the advantages of ILT include avoiding taxes, protecting assets from creditors, and qualifying for income bracket dependent government benefits.

Some examples of the ILTs that allow grantors and beneficiaries to minimize tax expenses include:

  • AB Trust. This is a joint trust account used by married couples to minimize estate taxes. The moment one spouse dies, the trust divides into two, a survivor’s trust for the surviving spouse and a Bypass Trust for another beneficiary.

The death of the first spouse will invoke lifetime exclusion and allow the living spouse to defer estate taxes until his/her death.

  • Bypass Trust. When an AB Trust splits, a bypass trust is subject to an annual exemption limit and if the total amount does exceed the limit, then the beneficiary will not levy a Federal Estate Tax. 
  • Qualified Terminal Interest Property (QTIP) Trusts. This trust is used by individuals who, after their death, want to support their surviving spouse with an income; this income is subject to marital deductions so the value the spouse receives is not deductible after the death of the first spouse.

Then, when the surviving spouse dies, the remaining balance held in the fund will be distributed to the named beneficiary, if there are any.

  • Charitable Remainder Trust. In this trust, the donor gives any interest gained from the trust to a charity or group of charities or splits this between charities and beneficiaries for a certain time period.

For the duration of the trust, donors can qualify for federal income tax reduction based on the trust’s value. Once the period ends, the trust reverts to the beneficiaries with a significant reduction in estate taxes and gift taxes.

This is a good option for those who own highly appreciated assets like stocks. 

  • Grantor Retained Income Trust. In this trust, grantors will be able to secure assets in a trust, from which they can earn annual income, and they’ll receive the assets at the end of the trust expiration tax-free.
  • Qualified Personal Residence Trust. This trust allows a grantor to reduce gift taxes when transferring assets to beneficiaries by removing their home from their estate.

When the estate is passed on to the beneficiaries, the grantor retains ownership of part of the home so the gift value of the property will be lower than the fair market value, thereby also lowering gift taxes.

Second, if you’re investing in a traditional IRA, consider converting to Roth IRA.

Unlike the traditional IRA where you contribute before taxes and withdrawals are subject to tax deductions, that are based on the income bracket you’re in when you retire, Roth IRA allows you to contribute after taxation and your fund grows tax-free after 5 years.

This bodes well if you’re expected to be of a higher income bracket when you retire.

Third, you can purchase a permanent life insurance policy. When you avail of a permanent life insurance policy, you’ll be reducing taxes while you’re alive and when you die.

Permanent life insurance shelters your money so that you’ll qualify for income brackets dependent on government benefits like Medicare and Social Security.

It also allows you to transfer your assets to your beneficiaries later on tax-free.

Find the Right Orange County Estate Planning Attorney

To help make sure your estate planning is up to date and will not incur outstanding taxes, you can consult one of our Orange County Estate Planning Lawyers who will help ensure you get the guidance you need to manage your assets.

Contact us at McKenzie Legal & Financial today!

Thomas McKenzie Law
Estate Planning Attorney in California. Full-service law firm specializing in estate plans, wills and trusts, long-term care, and financial consulting. Thomas L. McKenzie received his Juris Doctor degree from Western State University College of Law, in Fullerton, California. While working full-time at night and attending full-time daily classes, Tom graduated law school with honors in 1993.

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