Why The IRA Trust May No Longer Work
July 8, 2019
Beneficiary Tax Benefit Multiplier
Naming several beneficiaries can also greatly lessen the tax impact of a 10-year payout. For example, three beneficiaries who inherit can each spread post-death IRA distributions over the 10 years, taking advantage of the lower brackets on 30 different tax returns (3 returns each year, over 10 years). That could dramatically reduce the tax hit even on a large IRA. But still, after the 10 years the funds are all distributed to the beneficiaries and are no longer tax-sheltered.
3. Roth IRA Conversions
Roth IRAs have no lifetime RMDs, but the elimination of the stretch IRA will also apply to inherited Roth IRAs. Advisors will have to evaluate if a paying the tax on a Roth conversion will be worth it as an estate planning strategy if the funds must all be distributed in 10 years after death.
The Roth conversion tax benefit will depend on the projected tax rates when IRA funds would be withdrawn, if not converted. If the tax rates will be higher in retirement or for beneficiaries who would have to withdraw all of the funds in 10 years, a Roth conversion might pay. The Roth conversion could help avoid the accelerated income tax to the beneficiaries, since the inherited Roth funds would be received tax free.
Roth IRA conversions would work well when a trust is the beneficiary, because it would remove the potential trust tax problem addressed above. Even if the inherited Roth IRA funds would have to be all paid out to the trust after 10 years, the funds could still be held and protected in the trust for as long as the client (or trustee) desires without having to worry about the high trust tax rates. The Roth funds that are paid to the trust would be tax free, but additional annual earnings would be taxable.
Roth conversions can still work well when the spouse is the beneficiary since a spouse can do a spousal rollover and keep the Roth funds growing tax free over her lifetime, with no RMDs. In addition, the surviving spouse can have a source of tax-free income, keeping taxable income low.
4. Life Insurance
By far, life insurance would be the optimum strategy to replace the stretch IRA, especially for the largest IRAs where more IRA funds would be left to beneficiaries resulting in big tax bills. Life insurance could remove that tax problem, plus provide more funds to beneficiaries and more post-death control with trusts. The stretch IRA elimination would make IRAs less desirable estate planning vehicles and life insurance a better choice.
This would work best for IRA funds that will not be needed during lifetime, where the plan is to get as much to the beneficiaries as possible with maximum control and minimum tax.
« Previous Article
| Next Article »
Login in order to post a comment
Comments
-
I see the highly respected Ed Slott omitted the "qualified annuity contract" SECURE Act exemption from the non-spousal Beneficiary RMDs discussion from what would have been a thorough discussion of this proposed legislation. I don't get it. What is it with these experts and annuity contracts? Is it just some anti-annuity bias? I have now read dozens of SECURE Act summations by some every prominent authors Jamie Hopkins Esq., LLM, CFP®, ChFC®, CLU®, RICP®Ed Slott, CPA , etc. and all skip the qualified annuity contract exemption the SECURE Act explicitly provides for. Either they didn't read the entire act or they read the entire act and didn't understand the annuity exemption or they just plainly hate annuities. And why aren't the Home Offices weighing in here? Too busy mainlining FIAs and VAs to bother with the annuities exempted by the SECURE Act? Frustrated in the sticks, all I hear is crickets. All you estate planning attorneys out there, the annuity door is still open for business. https://www.linkedin.com/pulse/stretch-ira-conundrum-golden-spia-opportunity-gary-mettler/
-
I think rather than just post on how to cope with this proposed change in IRA distributions, it is our responsibility to contact our elected representatives and encourage them NOT to pass this change in the law. This is not a done deal and there is always the possibility it will be rethought--even if the only change is to change the 10 year period to 20 years. This is how we can attempt to protect our clients who will be impacted by the change. It should not be assumed to pass!
-
This is a good article right up until the suggestion that money should be transitioned into cash value life from the IRA. Life insurance for death benefit is fine (traditional IRA rescue), but it is a mathematical loser to move money from an IRA to cash value life in hopes of receiving more after-tax money in retirement. Go check out www.stopirarescue.com.