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legacy planning

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.

3 Ways to Make a Greater Impact with Your Wealth

3 Ways to Make a Greater Impact with Your Wealth

If you’re the beneficiary of a windfall, a prudent first step is to develop a financial plan to ensure you can meet your day-to-day financial obligations and long-term goals. However, affluent individuals and families often have more altruistic goals for their wealth, as well. Fortunately, there are many ways you can effect change by strategically directing your money to organizations and businesses that share your values. Whether your objective is to change the world, shape your legacy, or simply lower your tax bill, here are three ways to make a greater impact with your wealth.

#1: Support Local Businesses

Shopping local is a great way to strengthen your community by boosting the local economy and providing jobs for residents. In fact, for every $100 spent at small businesses, $48 is put back into the local economy, according to data from Intuit Mint. Furthermore, the Small Business Administration reports that small companies create 1.5 million jobs annually and account for 64% of new jobs created in the United States.

In addition, shopping local can help reduce reliance on larger chains with less commitment to their communities. These larger corporations may also have less responsible business practices than the businesses in your community. If you want to make a greater impact with your wealth, supporting local businesses is a great place to start.

#2: Give Strategically

Americans tend to be very charitable. Indeed, charitable giving accounted for 2.3% of gross domestic product in 2020, according to National Philanthropic Trust. Moreover, 86% of affluent households maintained or increased their giving in 2020 despite uncertainty about further spread of COVID-19.

Despite our charitable tendencies, most of us fail to measure the impact of our gift after writing the check. Fortunately, you can make a greater impact with your wealth by giving more strategically.

For example, donor-advised funds (DAFs) are an effective and easy way to financially support the causes most important to you. DAFs have exploded in popularity in recent years. In 2020, assets totaled $142 billion, according to the 2020 Donor-Advised Fund Report. DAFs are set up within a charitable organization such as a community foundation. Among other benefits, they offer increased flexibility and efficiency over many other charitable giving methods.

#3: Invest with a Purpose

Environmental, social, and governance (ESG) investing is becoming increasingly mainstream among investors who want to do well by doing good. According to research from Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. 

There are many ways to invest with a purpose. Impact investing, socially responsible investing, and green investing are just a few examples. These strategies allow investors to support companies with responsible business practices while earning a positive return.  If you wish to make a greater impact with your wealth, aligning your investment dollars with your values can help you achieve this goal without sacrificing financial gain.

A Trusted Advisor Can Help You Make a Greater Impact with Your Wealth

Wealth can help you achieve many goals, from providing financially for loved ones to effecting meaningful societal change. If you would like to make a greater impact with your wealth, a trusted financial advisor can help you develop a plan to ensure your efforts are effective.

Sherwood Wealth Management specializes in the unique financial planning needs and objectives of sudden wealth beneficiaries. If we can help you develop a plan for your newfound wealth, please do not hesitate to schedule a call. We’d love to hear from you.