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Tax and Estate Planning Tips Post-SECURE Act

Tax and Estate Planning Tips

These tax and estate planning tips can help you efficiently transfer your money to the next generation despite the SECURE Act’s elimination of the stretch IRA.

In December 2019, the Setting Every Community Up for Retirement Enhance­ment (SECURE) Act was signed into law by then-President Trump. In addition to a variety of retirement-related provisions, the SECURE Act included changes that may impact the estate plans of wealthy Americans.

Today, SECURE Act 2.0 is making headway in Congress. Meanwhile, many anticipate changes to the tax code as President Biden proposes tax hikes for the wealthy. Plus, many of the provisions included in the Tax Cut and Jobs Act are set to expire in 2025.

As these events unfold, now may be a good time to review your estate plan and look for possible tax planning opportunities.

Eliminating the “Stretch IRA”

The SECURE Act of 2019 made several notable changes to American retirement plans. Yet the elimination of the “stretch IRA” stands to meaningfully impact the estate plans of many affluent Americans.

Prior to 2020, a beneficiary who inherited a traditional IRA could stretch their required minimum distributions (RMDs) over their lifetime. Now, the SECURE Act gives non-spousal beneficiaries (with certain exceptions) a 10-year window to draw down the entire account balance. This can result in significant tax consequences for inheritors of large IRAs—especially those in the highest tax brackets.

The removal of the stretch provision eliminated a valuable estate planning strategy for many families. But there are other strategies you may want to consider building into your estate plan to minimize your heirs’ potential tax burden and preserve more of their inheritance.

Roth Conversions

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes on the amount you convert in a given tax year at your ordinary income tax rate. You can then make withdrawals tax-free if you’re over age 59 ½ and satisfy the five-year rule.

Since Roth IRAs don’t have RMDs, you can let your funds grow tax-free until you need them or transfer them to a beneficiary. However, inherited Roth IRAs do have RMDs.

Therefore, you may want to consider a second step to ease your beneficiaries’ potential tax burden—for example, creating a trust for the benefit of your heirs and naming it as the beneficiary of your Roth IRA. Just keep in mind that with some of these strategies, you may end up bearing the tax consequences instead.

Charitable Remainder Unitrusts

Another alternative to the stretch IRA is to use a charitable remainder unitrust (CRUT). Unlike a charitable remainder trust, a CRUT allows the owner to make additional contributions after the first year. Additionally, the CRUT beneficiary isn’t required to make withdrawals.

You can fund a CRUT all at once with your entire IRA distribution or over several years. While the IRA distribution is taxable, you can offset the tax consequences with the tax deduction you get from funding the trust.

The trust then pays income to your beneficiaries over a maximum period of 20 years, and these payouts are taxable. However, stretching them out over many years can make the annual tax liability more manageable. At the end of the period, any remaining trust balance transfers to a qualifying charity of your choice.

As an additional step, you can buy a life insurance policy within the CRUT once you fund it. The conversion is tax-free, as are distributions to the trusts’ beneficiaries.

Consult an Estate Planning Attorney and Wealth Manager for More Tax and Estate Planning Tips

The SECURE Act of 2019 may indeed warrant a review of your estate plan. Yet major changes may not be necessary depending on your goals.

In addition, the strategies mentioned above aren’t exhaustive and may not be appropriate for you and your family. There may be alternative strategies that make more sense. Be sure to consult an estate planning attorney and wealth manager to ensure your estate plan is aligned with your objectives.

Sherwood Wealth Management works with affluent individuals and families in the Roaring Fork Valley with a specialty in inherited wealth. If you’re looking for a fiduciary financial advisor to help you plan your legacy, please schedule a call.

4 Estate Planning Strategies to Minimize Taxes on Transferred Wealth

Estate Planning Strategies to Minimize Taxes on Transferred Wealth

Wealthy families may benefit from certain estate planning strategies to minimize taxes on transferred wealth. These strategies may include life insurance, Roth IRA conversions, lifetime gifting, and others.

The Great Wealth Transfer is underway. Over the next 25 years, nearly 45 million U.S. households will transfer approximately $68 trillion to the next generation, according to Cerulli Associates. In addition, many provisions of the Tax Cut and Jobs Act of 2017 will sunset in 2025. This raises questions about future tax rates—especially on the wealthiest Americans.

Indeed, tax laws are always in flux. However, it’s safe to assume that Uncle Sam will want his share, no matter when you transfer your estate. If you expect to leave significant wealth to your heirs, proper estate planning is key. Fortunately, there are strategies you can leverage to minimize your family’s potential tax burden.  

to minimize taxes on transferred wealth, consider the following estate planning strategies:

Strategy #1: Life Insurance

Depending on its size, your estate may owe federal and possibly even state taxes when it transfers to your heirs. Many wealthy families purchase life insurance policies to cover the potential tax liability and preserve the next generation’s inheritance.

Your beneficiaries can also use the payout to fund the expenses they incur settling your estate. A cash reserve can be helpful if most of your wealth is in illiquid assets like property and other valuables.

Strategy #2: Roth IRA Conversion

The SECURE Act of 2019 abolished the “stretch IRA” for most individual retirement account (IRA) beneficiaries. Previously, beneficiaries could stretch withdrawals over their lifetime to minimize their tax burden. Now, IRA beneficiaries must empty the IRA within 10 years of inheriting it.

This is especially problematic for traditional IRA beneficiaries, since withdrawals are taxed as ordinary income. If your heirs are high earners, the tax consequences can be significant. Not to mention, the required withdrawals can place them in an even higher tax bracket.

If you anticipate transferring a sizable account balance, a Roth IRA conversion may be an effective workaround. Roth IRA withdrawals are tax-free if the account has been open for at least five years. Meaning, your beneficiaries can keep the entire balance if transferred in a Roth.

Of course, a Roth IRA conversion doesn’t allow you to avoid paying taxes altogether. Instead, it’s a taxable event for you, the account owner. Therefore, it’s important to work with a financial planner to determine if a Roth conversion makes sense.

Strategy #3: Lifetime Gifting

In many cases, gifting is one of the simplest estate planning strategies to reduce taxes on transferred wealth. Each year, the annual gift-tax exclusion allows you to gift a certain amount (up to $15,000 in 2021) to as many people as you like without incurring the federal gift tax. Moreover, spouses can combine the annual exclusion to double the amount they can gift tax-free.  

Cash gifts are most common. However, you can also use the annual exclusion to transfer personal property or contribute to a 529 college savings plan. Alternatively, the IRS allows you to pay educational and medical expenses on behalf of someone else without incurring federal taxes. The only caveat is you must pay the institution directly.   

Strategy #4: Trusts

Trusts can be effective estate planning strategies to reduce taxes on transferred wealth. For example, a grantor retained annuity trust can be helpful if you’re transferring assets that are hard to value. In addition, lifetime credit shelter trusts allow you to maximize your annual gift-tax exclusion without immediately transferring your wealth.

Trusts are varied and complex. It’s important to consult your financial planner or estate planning attorney to determine if they fit within your estate plan.

Next Steps: Review these Estate Planning strategies With a Trusted Advisor

Your estate plan is a living document, meaning it will evolve as your family dynamics and financial situation change. Be sure to review it often to ensure it remains aligned with your wishes and identify additional strategies to reduce taxes on transferred wealth.

Sherwood Wealth Management specializes in the wealth management needs of sudden wealth beneficiaries. If you’ve recently inherited a windfall, we can help you develop a plan to protect and grow your newfound wealth and preserve it for future generations. To learn more, please schedule a call with our founder, Brian Littlejohn, CFP®, CFA®.