IRA Planning Under the SECURE Act:  the Good, the Bad, and the Ugly

IRA Planning Under the SECURE Act: the Good, the Bad, and the Ugly

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) into law.  This drastically changes the landscape for inherited IRAs and provides several other changes to current law.

The Good

            Under prior law, each account owner of their own IRA had to begin taking a “Required Minimum Distribution” by April 1st of the calendar year following the year in which they turned seventy and one-half (70.5) years old.  Under the SECURE Act, this now begins at age seventy-two (72), which allows for some additional deferral of income taxes.  The new rules only apply to individuals born on or after July 1, 1949.

The age limitation for contributing to a traditional IRA has been repealed entirely.  This means that as long as a person continues to have earned income, they may contribute to their traditional IRA.  This opens the door not only for additional contributions but also for other planning techniques, like the so called “back door Roth.”

The Bad

            Under prior law and with proper planning, a beneficiary of a decedent’s IRA could stretch the payments out over their life expectancy.  Many trusts were also created to take advantage of this rule.  The SECURE Act eliminates this rule, with only a few exceptions, providing instead only a ten (10) year window to withdraw the IRA funds completely.  The importance and impact of this change cannot be understated.  This will increase taxes payable by beneficiaries of IRAs and often push them into a higher tax bracket.  This rule also applies to 401(k) plans, defined contribution plans, and profit-sharing plans.

The exception to the new “ten (10) year rule” is that it does not apply to: a surviving spouse, a disabled beneficiary, a chronically ill beneficiary, a child who is a minor, or a person who is not more than ten (10) years younger than the decedent.

A surviving spouse may rollover an inherited IRA plan to be treated as if they were the owner.  Additionally, a surviving spouse may be the beneficiary of a “conduit trust” and receive payments over their life expectancy.  There is essentially no change from prior law for surviving spouses.

A disabled beneficiary has a very limited definition under the SECURE Act.  For example, the beneficiary must not be able to engage in any “substantial gainful activity.”  If a beneficiary qualifies, then they may receive payments over their life expectancy (including through an “accumulation trust”).

Likewise, a chronically ill beneficiary also has a very limited definition under the SECURE Act.  If a beneficiary qualifies, then they may receive payments over their life expectancy (including through an “accumulation trust”).

Careful consideration should be given to whether an intended beneficiary will qualify as disabled or chronically ill under the SECURE Act and also whether being the beneficiary of a “conduit trust” may be problematic from the standpoint of qualifying for means based governmental benefits in which case an “accumulation trust” may be desirable.

A beneficiary who is a minor at the time of the IRA owner’s death and is also their child, may receive payments over their life expectancy (including through a “conduit trust”) until they reach the age of majority, at which time they will be subject to the “ten (10) year rule.”

A person who is not more than ten (10) years younger than the IRA owner (who is also not a surviving spouse) may receive payments over their life expectancy (including through a “conduit trust”).

Under prior law, once you were receiving Required Minimum Distributions (after turning seventy and one-half (70.5) years old), you could contribute up to One Hundred Thousand Dollars ($100,000) per year directly to a charity and exclude that amount from your income.  The SECURE Act surprisingly did not change this age to seventy-two (72); but you would not see any benefit for such a gift until you had a Required Minimum Distribution (at age seventy-two (72)) to exclude the charitable gift from your income.  However, it did create a reduction on the amount that can be given to charity while receiving an exclusion from income.  The reduction is tied to the aggregate amount of any contributions to the IRA after age seventy and one-half (70.5) for which an income tax deduction is taken over the amount of any prior year reductions.

The Ugly

            There was so much certainty under prior law regarding inherited IRAs, that most people used a fairly standard approach for their beneficiaries to inherit IRA proceeds relying on a stretch payment (either over the life expectancy of each beneficiary or at least over the oldest trust beneficiary).  Nearly every estate plan with a revocable trust or “simple” Will includes the so called “conduit trust.”  Now, with the SECURE Act, any beneficiary of a “conduit trust” that does not fall into one of the exceptions discussed above may face real issues with complying with current law (and so will their Trustee).  That is because a typical “conduit trust” directs the Trustee to withdraw the Required Minimum Distribution each year and then distribute it from the Trust to the beneficiary.

The problem that arises is that for most beneficiaries there is no Required Minimum Distribution any longer.  Further, even if the Trustee used the old life tables to determine what it would have been under prior law, the amount withdrawn would not be sufficient to draw the IRA down in ten (10) years, as required under the SECURE Act.  Many “conduit trusts” prohibit the Trustee from withdrawing anything over the Required Minimum Distribution.  Without an update to the estate plan, compliance with current law will be difficult.

Conclusion

            Because there have been many changes under the SECURE Act, speak with an estate planning and tax attorney with significant experience in planning for IRA benefits.  You should not only review your estate planning documents, but also your beneficiary designations.  The good news is that there are several planning strategies that can be employed to address these changes (such as discretionary trusts and life insurance to provide for increased income tax liability), but there is not a one size fits all solution.

ShuffieldLowman Ranked as a Top Central Florida Law Firm in the Orlando Business Journal

ShuffieldLowman Ranked as a Top Central Florida Law Firm in the Orlando Business Journal

ShuffieldLowman has once again been ranked as a top law firm in Central Florida by the Orlando Business Journal. Every year, the publication recognizes the leading law firms ranked by Central Florida attorneys in the Lake, Orange, Osceola, and Seminole counties of Central Florida.

Last year, ShuffieldLowman was also named a 2019 Readers’ Choice Winner by the OBJ for Best Local Law Firm. OBJ readers were invited to submit votes in several categories in Orange, Seminole, Osceola, Lake, Brevard and Volusia counties for the 2019 Readers’ Choice Awards. Thousands of readers participated and then the top finalists in each category went head-to-head in an OBJ Business Pulse poll.

The results for the Central Florida Law Firm List is published in the January 17 weekly edition and can be found online on their website here: https://www.bizjournals.com/orlando/subscriber-only/2020/01/16/central-florida-law-firms.html.

ShuffeldLowman Names Daniel B. Harris and James C. Washburn as Firm Partners

ShuffeldLowman Names Daniel B. Harris and James C. Washburn as Firm Partners

Orlando, Florida – The law firm of ShuffieldLowman recently named attorneys Daniel B. Harris and James C. Washburn as firm partners.  Harris, with the firm since 2013, holds an advanced law degree LL. M. in Taxation.  His practice areas include Estate Planning & Probate, Planning for High Net Worth Families with Closely Held Business, Tax Advice & Controversy, Corporate Law, and Non-Profit Law.  Washburn, with the firm since 2014, is Board Certified by the Florida Bar as an expert in Construction Law.  His practice includes assisting those in the construction industry with contract drafting and negotiation, bid protests, scheduling, and construction defect claims, default terminations, licensing issues and lien and bond disputes.

Harris is a graduate of the University of Florida Levin College of Law, holding both an Estates & Trusts Practice Certificate, and an Environmental & Land Use Law Certificate. Harris has authored articles on taxation published by The Florida Bar, and he has served as a judge at the National Tax Moot Court competition sponsored by The Florida Bar Tax Section.  He is currently the Vice-Chair of Central Florida Hillel, Inc.

Washburn is a graduate of the University of Florida for both his undergraduate and law school degrees.  He is a frequent lecturer and author on topics concerning the construction industry, and he has received numerous legal awards including being named as both a Legal Elite and Super Lawyer.  He is an active member and past president of the Rotary Club of Altamonte Springs where he has received the “Service Above Self” award multiple times.

ShuffieldLowman’s four offices are located in Orlando, Tavares, DeLand and Port Orange. The firm is a 45 attorney, full service, business law firm, practicing in the areas of corporate law, estate planning, real estate, and litigation. Specific areas include tax law, securities, mergers and acquisitions, intellectual property, estate planning and probate, planning for families with closely held businesses, guardianship and elder law, tax controversy – Federal and State, non-profit organization law, banking and finance, land use and government law, commercial and civil litigation, fiduciary litigation, construction law, association law, bankruptcy and creditors’ rights, labor and employment, and mediation.