On Dec. 17, the House of Representatives approved the current appropriations bill which contains the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Senate is expected to approve the bill and send it to President Trump for his signature by Dec. 20 to prevent a government shutdown.
Some provisions will take effect as early as Jan. 1, 2020.
This is a significant piece of legislation that makes numerous changes to the retirement system. The goal is to make it easier for businesses to offer retirement plans and for individuals to save for retirement.
Among those changes are:
This last item, the change to inherited IRAs, is significant in that it essentially eliminates the “stretch IRA” strategy. Under current law, if an IRA or DC plan owner names a child or grandchild as beneficiary, once they inherit the plan, they can use their own life expectancy to calculate the required minimum distributions. For those with significant QRP assets, the “stretch” keeps RMDs low and thus maximizes the opportunity for tax-free growth.
Now, instead of a young beneficiary taking distributions over several decades, all the assets will be distributed (and taxed) within 10 years. In cases where the inherited IRA has a six-figure balance, the beneficiary may well be pushed into a higher income tax bracket as a result of the distribution.
In many cases, a more tax-efficient wealth transfer strategy will be for the IRA owner to use the after-tax proceeds of lifetime distributions to fund a life insurance policy. The life insurance death benefit is received by the beneficiary income-tax free and can partially or fully offset the IRD (income with respect to a decedent) tax liability on the remaining IRA balance. To eliminate the IRD tax, distributions could be increased to fund a policy giving the beneficiary the desired inheritance, and any remaining IRA balance can be left to a charity.
Note: Loss of “stretch distributions” also impacts those families who had planned to leave QRP assets in so-called conduit trusts. The language of such trusts will likely need to be revised.
As with any legislation, it will take time to fully understand the impact on our industry. Changes to the industry are part of why we exist. We're committed to providing you with multiple solutions, concepts and products through a consultative approach to case design. We help guide you, so you can effectively guide your clients.
If you have questions specific to your clients, please reach out to our Advanced Markets team. Whatever the question, whatever the need. Ash Answers.
As Senior Advanced Markets Consultant at Ash Brokerage, Steven Gates uses his analytical expertise to support advisors who serve high-net-worth clients, including business owners. Using customized modeling options, he helps create life insurance-driven strategies for wealth transfer, business protection and charitable leverage. In his consultant capacity, he will also identify other strategies that may be beneficial for the client while meeting the advisor’s objectives.
© 2018 Ash Brokerage LLC.