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Estate Planning with IRAs: The SECURE Act and Beyond

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Estate Planning with IRAs: The SECURE Act and Beyond

Many estate planners consider the passage of the SECURE Act in 2019 to be the most significant retirement legislation of the past 15 years. However, Congress isn’t done, and the EARN Act, which further builds on the SECURE Act, and proposed treasury regulations are in the pipeline to further change laws surrounding retirement. How do these changes affect estate planning and how can individuals and families plan to optimize their IRA planning in light of these new laws?

Presenters

Len Garza
Principal
Garza Law

Transcript

- Hi, everyone. Welcome to today's presentation, Estate Planning with IRAs: SECURE Act and Beyond. I'm your presenter Len Garza, the founder and principal of GARZA, a law firm serving New Jersey, New York, Pennsylvania, Massachusetts, and Maryland. My practice focuses on estate planning and business law, primarily for small and mid-sized business owners and entrepreneurs. As a disclaimer before we get started with this presentation, this webinar is informational only and is not legal or tax advice. Anyone attempting to take a advantage of these strategies needs to be aware that the rules surrounding their implementation are complicated and the laws can change overnight. Prior to executing any of the strategies discussed in this webinar, you should do only after receiving sound advice from a qualified advisor, including state planning lawyer, CPA, and financial advisor. This program is about the SECURE Act that into effect in 2020. Actually, to be exact, on December 27th, 2019, a few days before 2020. It's also about other subsequent laws and regulations such as the EARN Act and proposed treasury regulations, and we'll get into those in a bit. But these regulations and changes to the SECURE Act are moving their way through Congress. I'll be particularly focusing on the area of estate planning involved with tax deferred retirement accounts, which we'll collectively refer to in this presentation as IRAs. So, these accounts that I'm referring to when I say IRAs are traditional IRAs, rollover IRAs, simple IRAs, S-I-M-P-L-E, SEP IRAs, most small business accounts, and most 401k and 403b plans. IRAs can really be a prime focus of estate planning for clients in large part because of recent changes in the law and the substantial increases in the federal estate tax exemption. So, for example, this year of the presentation it's in we're in 2022, the exemption is 12.06 million per individual, and for a married couple 24.12 million. But at the end of 2025, this sunsets to about half of that, so for the individual the exemption would be lowered to 6.01 million and for the married couple, roughly around 12 million unless, of course, tax law changes before then. Now, I think before we get into the nuts and bolts of the SECURE Act and the changes from the previous law, the way that it makes most sense is to briefly set the table and go over the history of, number one, the estate tax exemption and generally estate tax laws, and just where some of these provisions were and some of the terms were prior to the SECURE Act going in into effect, and how the SECURE Act changes those things. So, just at the outset, it's important to know when you're thinking about estate planning in the United States, federal or state, but specifically on the federal level, you realize that really over the past two decades tax rates and exemption levels have varied pretty dramatically. Prior to 2001, estate tax exemption was 675,000 scheduled to gradually increase to 1 million. Then in 2001 under EGTRA, the Economic Growth and Tax Relief Reconciliation Act of 2001, that act cut the estate tax, gift tax, and generation skipping tax sharply through the year 2010. EGTRA gradually phased out the estate and generation skipping tax and repealed both entirely for 2010, leaving only the gift tax at a reduced rate in effect for the year 2010. Then in 2010, we had the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated. This act reinstated the estate tax and generation skipping tax for 2010 and extended them through 2012 with a 5 million estate tax exemption indexed for inflation after 2011 and a top tax rate of 35%. So, already in 10 years we have an over 500% increase in the estate tax exemption amount. Back from just before 2001 it was under a million at 675,000, and now it's really, or at least up until 2010 it's really increased that exemption amount to 5 million, and we'll see it's only gonna increase more in the coming years after 2010. In 2012, the American Tax Payer Relief Act of 2012 extended the 2012 rules and increased the top tax rate to 40%. And then we move on to 2016, that's the TCJA, the Tax Cuts and Jobs Act, that effectively doubled the estate tax exemption from just above 5 million per individual to 11.18 million for individuals and 22.36 million for married couples starting in 2018 and ending in 2025. The top rate of tax remains 40%. And what's happened now with the estate tax exemption being so high actually now in this year, year 2022, it is per individual at over 12 million and per married couple it's over 24 million. So, essentially you will owe no estate tax upon your death, an individual or a couple will owe no estate tax upon their death unless their estate is above as an individual 12 million, or as a couple if you make certain elections on your tax returns as a couple would be over 24 million. So, right off the bat federal estate tax is off the table as an issue that families are concerned about in estate planning for all but less than about .1% of all Americans, so that's a pretty big difference. Now, as we said earlier in 2025, this exemption would revert back to 6.02 million per individual, around 12 million per married couple indexed for inflation. But as of right now, the estate tax exemption is at those very high previously mentioned amounts. So, what is this meant for estate planning? Well, with fewer estates having to worry about federal estate tax, for many advisors and estate planners focus has moved away from minimizing and structuring estate planning to avoid or minimize estate tax and they've moved to other areas in their client's portfolios. For example, IRAs, 401ks, and other retirement accounts. And for many, many Americans, these accounts actually are the largest portion of their estates, which brings us to the SECURE Act. What is it? Well, SECURE Act is an acronym standing for Setting Every Community Up for Retirement Act. And it was a 2019 bipartisan bill designed to aid Americans' ability to save for retirement. And the SECURE Act builds on previous legislation that was proposed, but failed to gain traction in the prior years before SECURE Act was passed. Specifically, this legislation was the Family Savings Act and multiple iterations of RESA, the Retirement Enhancement and Savings Act. Many of state planning practitioners consider the SECURE Act to be the most important piece of retirement legislation in the past 15 years. For many, the most significant provision of that legislation is its changes to the post death distribution rules for non-eligible designated beneficiaries of inherited retirement accounts. While the stretch IRA has long been an incredibly effective tool in the planner's arsenal, it's no longer applicable for most non-spouse beneficiaries. And we'll explain what can be the intricate and sometimes confusing rules behind that. Before we do, I think it's important to, again, focus on the SECURE Act and the environment around its passing, and why Congress felt it was so important to pass legislation like this. So, the rationale for the SECURE Act, the bill was drafted to address American's difficulty in saving and investing for retirement. One in five Americans have no retirement savings at all. One in three of those closest to retirement age have less than 25,000 saved. Many advisors recommend individuals having retirement savings of over 1 million for retirement accounts by the date one plans to stop working. This retirement savings problem has further been exacerbated by people living longer and the increasing rate of inflation. A big part of the problem has been attributed to the shift away from defined benefit plans, such as pension plans, in which an employer guarantees a payout to employees after they retire. And a shift away from this to defined contribution plans where employees save on their own retirement, often with the employer contributing a preset amount or match to the employee's retirement fund. Contributions to define contribution plans are most often deducted from an employee's paycheck. And the balance is allowed to grow tax free until withdrawal usually during retirement. Once they reach a certain age, retirement savers are required to withdraw set amount from their retirement savings vehicles each year in what's referred to as required minimum distribution, or RMD. So, what did the SECURE Act do? Well, SECURE Act is designed to ease the looming retirement savings crisis by doing a number of things, by making it easier for small businesses to offer their employees 401k plans, by providing tax credits and protections on collective multiple employer plans, by allowing retirement benefits for long-term part-time employees, by removing maximum age limits on retirement contributions formerly capped at age 70 and a half, by raising the RMD age to 72 from 70 and half. And as we'll touch on earlier, the EARN Act going through Congress is aiming to raise that even further from age 72 to age 75. By allowing penalty-free withdrawals up to 5,000 from retirement plans for the birth or adoption of the child, relaxing roles on employers offering annuities through sponsored retirement plans, allowing penalty-free withdrawals of up to 10,000 from 529 education savings plans for the retirement of certain student loans, revising components of the Tax Cuts and Jobs Act that raises taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans. Now, those are a lot of benefits to a lot of different groups, and all that's great, but how are we gonna pay for all this? Well, the SECTURE Act handles that too as it's estimated to raise an estimated 15.7 billion to pay for all these changes, by how? By removing, mainly by removing the stretch IRA estate planning strategy that permits non-spouse beneficiaries of IRAs to spread disbursements from the inherited money over a lifetime. The new limit will be within 10 years of death of the original account holder. Now, under the old rules, the pre-SECURE Act rules for inherited IRAs, we had what's called the stretch strategy, and that is still available for very specific beneficiaries as we'll go into detail later on in this presentation, but the key benefit of specialized retirement accounts are their tax preferences. Number one, you get the upfront tax reduction and tax preferenceed growth of an IRA or 401k, you get tax-free growth of Roth IRAs. And what's the purpose of these benefits? Well, it's to encourage and incentivize workers to save for retirement. However, if all the assets are not actually used for retirement, the retirement account must be unwound as eventually the federal government does want to collect its share. The Internal Revenue Code, specifically section 401a9 and 408a6 provide a series of complex rules to determine exactly how fast a tax preference retirement account must be liquidated after the death of the original owner, allowing the beneficiary in most cases to stretch out the tax impact over time, and this is what's called the stretch IRA strategy. Internal Revenue Code section 401a9b is the standard rule for inherited IRAs, and essentially says that any remaining IRA balance after the death of the IRA owner that is payable to a designated beneficiary shall be distributed over the life expectancy or over a time period not extended beyond the life expectancy of that designated beneficiary. Now, we find the definition for designated beneficiary in Internal Revenue Code section 401a9e. And it states that the beneficiary must take a required minimum distribution from the inherited IRA every year after the death of the IRA owner. Now, the beneficiary need not take a higher distribution than the RMD amount, and herein lies to potential for substantial tax savings, and this is what we call the stretch IRA strategy. Under the stretch IRA strategy, the beneficiary takes only the required minimum distribution amount for each distribution. This allows the beneficiary to stretch the inherited IRA account for years and often decades. There are special spousal rollover rules for inherited traditional and Roth IRAs. The reality for many couples, particularly single earner households, is that the retirement account assets may be in only one spouse's name, even though the savings intended to support the couple jointly in retirement. In recognition of this dynamic, the tax code provides unique preferential treatment for a spouse who's the beneficiary of a retirement account. The spouse beneficiary can rollover the inherited IRA account and treat it is his or her own. However, the special choices that spouses face have unique trade offs. On the one hand, leaving an inherited IRA for a spousal beneficiary obligates him or her to take post-death required minimum distributions potentially sooner rather than later, but avoids the impact of an early withdrawal penalty. The spousal rollover allows for the use of more favorable RMD tables, and may defer the onset of RMDs until even later while also providing more favorable treatment for subsequent beneficiaries, but it reintroduces the 10% early withdrawal penalty, and this may be problematic for younger spouse beneficiaries under the age of 59 and a half. Required minimum distributions, or RMDs. When you reach a certain age you're required to withdraw a certain amount of money from your retirement accounts each year, this is called the required minimum distribution. This does not apply to Roth IRAs. Roth IRAs, which are funded with after tax contributions don't require RMDs until after the owner dies. The deadline for taking RMDs is December 31st each year. Now, there's a penalty if you don't do this and the penalty steep, it's 50% of the amount not taken on time. In calculating the required minimum distribution, the amount you must withdraw is based on the value of your accounts at the beginning of the year for which you're required to take a distribution. That total is then divided by your life expectancy as determined by the IRS. One of three separate tables is used depending on your situation. The sole beneficiary is the owner's spouse who is more than 10 years younger than the owner. The second situation is when you have other beneficiaries besides your spouse or your spouse is not more than 10 years younger than you. And the third situation is when you're the sole beneficiary of the account. The five year rule applies to non-spousal beneficiaries and covers distributions from an inherited IRA. In short, if all inherited IRA funds are not distributed to the non-spousal beneficiary within five years, you'll pay a 50% penalty on whatever remains in the account. How do we measure the five years? RMDs and the time the IRA owner's death. If the IRA owner was already receiving required minimum distributions at the time of death, the beneficiary must continue to receive the distributions as calculated or submit a new schedule based on their own life expectancy. If the IRA owner had not yet reached the required beginning date or specifically had not reached age 72, the beneficiary of the IRA has a five year window to withdraw to funds, which would then be subject to income taxes. By December 31st of the fifth year, the end of the five year window, the recipient must have removed all funds from the inherited account. Now, there's a loophole for charitable giving, and that is the qualified charitable contribution. If you're charitably inclined and financially able, you're in a position to take advantage of a special charitable tax deduction. This strategy only works for IRAs, not 401ks and other plans. To do this you would need to direct your required minimum distribution be paid directly to the public charity, not to a private foundation or a donor-advised fund. You won't get a charitable deduction on your tax return, but your contribution will be excluded from your taxable income. You must direct your IRA custodian to make the check directly to the charity. This is very important. If it's made out to you, it'll be counted as taxable income even if you turn around and donate the money to the charity. You can use up to 100,000 a year from an IRA to give directly to charity and qualify for the exclusion. This is a really nice strategy for the charitably inclined. Now, with the currently historically high standard deduction for the year 2022, it's at 25,900, that means that many people can no longer deduct charitable giving because they aren't itemizing their returns anymore. If you donate from your IRA however, you'll still get the standard deduction and you'll exclude all of the IRA money you give to charity. The SECURE Act increased the year mandatory required minimum distributions must be withdrawn from 70 and half to 72. The EARN Act would increase this to age 75. The qualified charitable deduction was part of the old rules, the pre-SECURE Act rules as well. One strategy to maximize this benefit is if you're a charitably inclined individual and you normally give in increments throughout the year, instead of wasting deduction, the deduction you should consider bunching your giving and give in a lump sum as a qualified charitable deduction directly from your IRA. This way, you'll get the best of both worlds. First, you'll get a reduction in your adjustable gross income. And second, you can use the standard deduction without having to itemize because you're trying to take advantage of the charitable deduction. Another change the SECURE Act did was it permits IRA contributions even if you're older than 72. Under the old law, once you hit age 70 and a half you're no longer allowed to contribute to a traditional IRA, but under the SECURE Act, you're allowed to contribute to a traditional IRA regardless of age. Also, if you're still working and have a 401k, you are not required to take required minimum distributions from a 401k at that employer as long as you own less than 5% of the business that you're working for. Now, there's an exemption for early withdrawal from an IRA for the reasons of childbirth and adoption. Withdrawing from an IRA before retirement can trigger tax penalties. This depends on which type of IRA the withdrawal comes from and what the money's used for. When distributions made prior to age 59 and a half are made they're subject to a 10% early withdrawal penalty. However, the pre-SECURE Act law has many exceptions to this withdrawal penalty where there is no penalty if one of the reasons you are withdrawing is one of the following, higher education expenses paid directly to the school, first time home purchase up to 10,000, total and permanent disability of the IRA owner, death of the IRA owner, health insurance premiums paid while unemployed, unreimbursed medical expenses greater than 10% of adjust and gross income, distributions to military reservists called to active duty, and IRS levy, and substantially equal periodic payments. Now, under the SECURE Act, we add a new exemption, qualified birth or adoption distributions. This is defined under the code as any distribution up to $5,000 to an individual if made during the one year period beginning on the date on which the child of the individual is born or the legal adoption of an eligible adoptee is finalized. Each parent is entitled to receive a $5,000 distribution not indexed for inflation for the same child. If there are multiple births, each parent is entitled to receive $5,000 distribution for each child. This distribution is includeable in the individual's gross income, but the distribution is not subject to the 10% penalty. Non-spouse beneficiaries. Prior to the SECURE Act there were two types of beneficiaries, the SECURE Act introduced another and so now there are three. Before the SECURE Act we had a designated beneficiary and non-designated beneficiary. Now, after the SECURE Act we have the designated beneficiary, non-designated beneficiary, and now the new eligible designated beneficiary. You'll remember that the beneficiaries of inherited IRAs were able to stretch out distributions based on their own life expectancy. However, under the SECURE Act we have the 10-year rule. Now, most non-spouse beneficiaries must deplete their accounts within 10 years after the IRA owner's death. Using the three groups of beneficiaries, the SECURE Act changes to post death distributions rules are as follows. The old pre-SECURE Act rules for designated beneficiaries apply to the newly created group of eligible designated beneficiaries. These eligible designated beneficiaries are still permitted to use the stretch strategy. Any non-eligible designated beneficiary is subject to the new 10-year rule, and there are no direct changes to the rules for non-designated eligible designated beneficiaries. They would remain subject to the five years or decedent's life expectancy rule that already applied pre-SECURE Act. Designated beneficiaries. Under the 10-year rule, beneficiaries will no longer be permitted to stretch their inherited IRA distributions. Instead, they must fully distribute all IRA assets within 10 years of the date of death of the owner. Now, the silver lining to this change from life expectancy to the 10-year rule was that there are no requirements for distributions to be taken within the 10-year period. Thus, a non designated beneficiary could choose to take distributions rateably throughout the 10-year period in an effort to spread out the income from the inherited account as evenly as possible. Conversely, a non-designated beneficiary could choose to avoid taking any distributions during the nine years after death and instead take one giant distribution in the final 10th year following death. And of course, there are literally millions of distribution combinations in between. However, the EARN Act currently before Congress would change this to where annual withdrawals would now be required. For non-designated beneficiaries, the pre-SECURE Act law is the same as SECURE Act law. There are no changes for non-designated beneficiaries such as charities, estates, and non-see-through trusts. If the owner died prior to the required beginning date then the beneficiary must distribute all funds from inherited IRA by the end of the fifth year after the year of the owner's death, the five-year rule. If the IRA owner died after the required beginning date, distributions must be made over the remaining life expectancy of the IRA owner. For the new category of beneficiary, the eligible designated beneficiary, the good news for these individuals is although the group designation may be new, the pre-SECURE Act rules regarding stretch IRAs are not new and they apply to them, so they can still use the stretch IRA strategy. Eligible designated beneficiaries continue to be able to use the stretch distributions from inherited IRAs beginning of the year after death and calculated using their single life expectancy IRS table. Now, the bad news about the eligible designated beneficiaries is the list of who can qualify as this type of beneficiary isn't very long. An eligible designated beneficiary is a designated beneficiary who falls into one of the following five categories, the spouse of the decedent, and here the beneficiary must have been legally married to the decedent, domestic partnerships do not count, but same sex married would as long as it was legal where the ceremony was performed. The other benefits, and these have been unchanged by the SECURE Act, are that spouses can still rollover a deceased spouse's inherited IRA into their own IRA account. If a spouse chooses to remain a beneficiary by establishing and maintaining an inherited IRA or other inherited retirement account, they will not have to take required minimum distributions until the year that the deceased spouse would have reached age 72 Under the EARN Act, this age 72 would be raised to age 75. Naming a spouse outright or naming a conduit trust for the benefit of the spouse results in the same tax treatment as pre-SECURE Act. The surviving spouse should be able to take advantage of the delayed required beginning date and recalculation of life expectancy. Another type of eligible designated beneficiary is a disabled individual. An individual is considered disabled if they meet the rules outlined by Code Section 72m7. And this is a fairly restrictive definition of disability, which states and individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which can be expected to result in death or to be of long continued indefinite, actually strike that, make that indefinite duration. Thus, individuals who are only partially disabled or whose disability prevents them from engaging in previous employment, but would allow them to engage in other substantially gainful activity would generally not qualify. Another type of eligible designated beneficiary is a chronically ill person or persons. An individual will generally be consider chronically ill if they meet the rules outlined in Code Section 7702bc2. However, instead of the Code Section's requirements that an individual be unable to perform at least two of the six activities of daily living for a period of only 90 days, the SECURE Act requires that for purposes of being considered an eligible designated beneficiary such an impairment be considered an indefinite one which is reasonably expected to be lengthy in nature. The six activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Another type of eligible designated beneficiary are individuals who are not more than 10 years younger than the decedent. Anyone who is not more than 10 years younger than the decedent can continue to stretch distributions without regard to the SECURE Act's new 10-year rule. Beneficiaries who may be most likely to benefit from this provision include unmarried partners or siblings of the decedent, provided that they are not more than 10 years younger. And the last type of eligible designated beneficiary are minor children of the decedent. This group consists solely of minor children of the deceased owner, not grandchildren, not nieces or nephews. So, for example, minor grandchildren of the owner would not be part of this eligible designated beneficiary group and would be subject to the 10-year rule. Now, with this group, the unlike other eligible designated beneficiary groups, that status is not permanent. These types of individuals only have the eligible designated beneficiary status until they reach the age of majority. Once the child reaches the age of majority, they become a non-eligible designated beneficiary and trigger the 10-year rule. One of the big questions after the SECURE Act was first passed was what is the age of majority? The statute does not provide the age. If we go by state law, the age is different from state to state. Some states the age of majority is 18, others it's 19, some it's 21. Some states provide that the age of majority is graduation from high school if sooner than those ages, but even then determining the age of majority is not as simple and straightforward as just looking at one state, then the question becomes which age of majority? For example, the age of majority under the Uniform Trust for Minors Act is different than the age of majority in many states. For example, in New York, the age of majority is 18, whereas the Uniform Trust for Minors Act age of majority is 21. In Florida, the age of majority is 19, whereas there, the Uniform Trust for Minors Act age of majority is 21, but could be up to 25 if the transfer chooses. Now, this was all further complicated by the treasury regulations, specifically section 1.401a9-6, Q&A-15. In the answer to that Q&A, the regulations provided that for the purposes of a defined benefit plan, a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26. Many advisors would take the position that you could arguably reason that this applies to inherited IRAs as well and other defined contribution plans left to minor children of the deceased IRA owner. Thus, a minor who's continuing a specified course of education should be able to continue stretching distributions using the old pre-SECURE Act life expectancy method until they reach the age 26, regardless of the age of majority applicable in their state. Now, the IRS has proposed regulations that clarify this confusion and establish a majority age of 21 nationwide. Planning with trust in the SECURE Act and IRAs. It's not uncommon for the owners of an individual retirement account to designate a trust as the beneficiary. Why would we utilize a trust instead of simply transferring funds outright via a beneficiary designation form? Well, the main reason is control. By utilizing a trust, an IRA owner retains some degree of control over how assets are distributed after they die. For example, one of the children of the owner might be a drug addict or heavy gambler and they blow the money as soon as they got it. Passing it through a trust would give the trustee discretion on how and when to make those distributions. Another key reason to make the trust a beneficiary of an IRA is flexibility. The owner can earmark funds for specific purposes such as a beneficiary's education, buying a house, starting a company, or other reasons. The owner can choose any person or any entity as a beneficiary of an IRA. If the owner chooses a trust as a beneficiary, the trust beneficiaries rather than the trust itself are used to determine the classification of beneficiary of the IRA. Specifically, whether the beneficiary is designated beneficiary, non-designated beneficiary, or eligible designated beneficiary. Now, when we have trust as a beneficiary of an IRA, it's important to keep in mind the concept of a conduit trust versus an accumulation trust. Conduit trust is a type of trust that identifies specific beneficiary or beneficiaries to receive all withdrawals from the IRA. Importantly, there's no accumulation with this type of trust. The trust must not be able to accumulate any funds prior to dispersing the IRA withdrawals directly to the beneficiaries. Hence the trust name because it is a mere conduit to the beneficiaries and the trust's existence is ignored for the purpose of identifying a classification of the beneficiary. For example, if the beneficiary identified by the trust is a non-person entity, for example, an estate or a charity, the trust is treated as having no designated beneficiary. However, if the beneficiary identified by the trust is an individual, the IRA is treated as having either an eligible designated beneficiary or a designated beneficiary, and the respective rules apply depending on the classification and relationship to the decedent owner. An accumulation trust is a trust that can accumulate withdrawals from the IRA rather than dispersing them in the entirety to the beneficiaries. The trust disperses funds to its beneficiaries over time. Most accumulation trusts name estates or charities in some capacity as a beneficiary. Because those are not individuals, the trust is typically subject to either the five-year rule or the payout rule for non-designated beneficiaries. Under certain circumstances, conduit trusts and discretionary trusts can still take advantage of the stretch provision if the underlying beneficiaries can be considered eligible designated beneficiaries. But see-through trust will generally be subject to the 10-year rule if the underlying beneficiaries are non-eligible designated beneficiaries. Some strategies you can use with the help of your financial advisor, CPA, and estate planning attorney to maximize the post-tax value of inherited IRA funds left to a discretionary trust include you can do immediate Roth conversions of any distributions from the inherited IRA, especially when the account owner is in a lower tax bracket. If Roth conversions aren't possible, for example, if the income is too high to permit them, you can use distributions to fund a life insurance policy, but do this only if there's a relative certainty that the funds won't be needed during the account owner's lifetime. Other strategies that prevent distributions to be taxed at potentially lower individual income tax rates instead of the higher trust rates include give the trustee the freedom to time inherited IRA distributions and create a discretionary trust that allows a beneficiary to exercise a power of withdrawal over annual distributions made from the IRA to the trust. A charitable remainder trust is another option. There are many situations where your children would get more money and a steadier income if you named a charitable remainder trust as beneficiary of your IRA rather than if you named your children directly. The trust would provide your beneficiary, let's assume, your child with a distribution that has some, but not a complete correlation to the income of the trust. And then at the child's death, the amount remaining in the trust would go to the charity. The charitable remainder trust must be set up in a way that the charity receives 10% of the present value of the bequest at the owner's date of death, that still leaves 90% for your children. When you take into account the enormous tax benefits of the charitable remainder trust and the steep taxes your children would get hit with if you left the money to them directly, your children get much more value with the charitable remainder trust structure rather than the IRA money going outright to them. Applicable multi-beneficiary trusts. So, there's type one and type two multi beneficiary trusts. A type one trust provides that immediately upon the death of the IRA owner, the trust is divided into separate trusts for each beneficiary, and at least one of those beneficiaries is chronically ill or a disabled individual. A type two multi-beneficiary trust provides that immediately upon the death of the owner, only the disabled or chronically ill eligible designated beneficiary has rights to the IRA. And only after the death of all disabled and chronically ill eligible designated beneficiaries do any other beneficiaries have any rights to the IRA. Even though a type two multi-beneficiary trust may be an accumulation trust, you're still allowed to use the life expectancy of the disabled or chronically ill individual to stretch the IRA. Now, generally there's an all or nothing rule regarding multiple eligible designated beneficiaries. The general rule is that if there are multiple beneficiaries and not all of them are eligible designated beneficiaries, then the designated beneficiary will not be considered to be an eligible designated beneficiary. Now, this is the general rule, but the exception of this is where you have a type two multi-beneficiary trust. The EARN Act on June 23rd, 2022, the Senate Finance Committee advanced the Enhancing American Retirement Now, EARN Act. This bill has bipartisan support and builds on the SECURE Act. Next, the bill will go to the Senate floor where provisions in a separate bill, the RISE & SHINE Act, which is Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg may be included. The Senate has not specified a date when it will consider the EARN Act. Here are a few highlights of the EARN Act applicable to this presentation. Please note that there are many other highlights and provisions of the EARN Act outside of what I just mentioned here, but these are the ones most applicable to our topic of IRA planning. The EARN Act increases the required minimum distribution beginning date from age 72 to age 75 starting after December 31st, 2031. It also reduces the penalty for missed required minimum distribution from 50% penalty to 25% penalty. The penalty could be further reduced to 10% if the required minimum distribution is taken within the two-year correction period. Catch-up contributions. The EARN Act allows individuals who have attained ages 60, 61, 62, and 63 during the taxable year to make larger catch-up contributions to their retirement plans. So, for example, in 2022, the annual limit would increase from 6,500 to 10,000. For simple, S-I-M-P-L-E, plans the limit would increase from 3,000 to 5,000. This provision would be effective for taxable years beginning in 2024, both limits would be indexed beginning in 2025. There are also proposed treasury regulations on the table. In February 2022, the Department of Treasury issued proposed regulations relating to required minimum distribution rules. For the 10-year rule in situations where you have death of the owner after the required beginning date, where the designated beneficiary is not an eligible designated beneficiary, minimum distributions based on the life expectancy of the designated beneficiary must be taken for the first nine years following the death of the IRA owner. This is contrary to the potential strategy advocated by many advisors when the initial SECURE Act was passed, that you could bunch all of these distributions and distribute them as long as they were distributed by the end of the 10th year. If the designated beneficiary is older than the IRA owner, then the IRA owners remaining life expectancy would apply for this nine-year period. Distribution of the balance needs to be made at the end of the 10th calendar year following the year of the IRA owner's death. Another change by the proposed treasury regulations is the all or nothing rule related to designated beneficiaries and eligible designated beneficiaries. If the IRA owner has more than one designated beneficiary, and at least one of them is not an eligible designated beneficiary, then none of them are eligible designated beneficiaries. As a result, the 10-year rule applies. Specifically, the owner's interests must be distributed no later than the end of the 10th calendar year following the calendar year of the owner's death. Now, we've got two exceptions to this in the proposed regulations. These can get very confusing talking about in abstract hypotheticals, so we're gonna consider some real life situations and examples. These exceptions allow an eligible designated beneficiary to use stretch life expectancy rules, even if there is another designated beneficiary who is not an eligible designated beneficiary. One exception is if any of the owners' designated beneficiaries is a child of the owner who as of the date of the owner's death has not reached the age of majority. This exception would allow payments to continue based on the child's life expectancy until 10 years after the child reaches the age of majority, even though there are other designated beneficiaries who are not eligible designated beneficiaries. The second exception is if the see-through trust is a type two applicable multi-beneficiary trust. Thus, beneficiaries who are either disabled or chronically ill are treated as eligible designated beneficiaries, even though there are other designated beneficiaries who are not eligible designated beneficiaries. So, how does this work? Well, suppose if the owner has multiple designated beneficiaries who are born in the same calendar year, then full distribution of the owner's remaining interest is generally required by the 10th calendar year following the death of the oldest designated beneficiary. However, if the owner's beneficiary is a type two multi-beneficiary trust that only the disabled and chronically ill beneficiaries of the trust are considered in determining the oldest designated beneficiary. Thus, we disregard the ages of the other beneficiaries in determining the applicable denominator. And the death of the last of the disabled or chronically ill trust beneficiary triggers the 10-year payout rule. Let's take another example. If any of the owners eligible designated beneficiaries is a child of the owner who has not yet reached the age majority as of the date of the owner's death then in applying the requirement to make full distribution by the 10th year following the death of the oldest eligible designated beneficiary, only the owner's children who are designated beneficiaries and who are under the age of majority at the owner's date of death are taken into account. Thus, where one or more of the designated beneficiary children under the age of majority and one or more older designated beneficiary, the death of an older designated beneficiary will not result in a requirement to pay a full distribution before the oldest child attains age of majority plus 10 years. Disregarded beneficiaries of see-through trusts. A see-through trust beneficiary is not treated as a beneficiary of the owner if that beneficiary could receive payments from the trust that represent the owner's interest only after the death of another trust beneficiary whose sole interest is a residual interest in the trust. For example, if a see-through trust provides that if the owner's brother survives the owner, but precedes the surviving spouse, the amounts remaining in the trust after the death of the surviving spouse are to be paid to a charity. The charity is disregarded as a beneficiary of the owner because the charity could receive only amounts in the trust that are contingent upon the death of the owner's brother, whose only interest was a residual interest, that is an interest in the amounts remaining in the trust after the death of the surviving spouse. In contrast, the charity would be treated as a beneficiary of the owner if the brother could receive amounts from the trust not subject to any contingencies or contingent upon an event other than the death of the surviving spouse, such as the surviving spouse is remarried. The proposed regulations provide that if a see-through trust requires a full distribution of the amounts of the trust representing the owner's interest in the IRA to the beneficiary by the later of the calendar year following the calendar year of the owner's death and the end of the 10th calendar year following the calendar year in which that specified individual attains the age of majority, then any other beneficiary who's entitlement to distributions is conditioned on the unlikely event that the specified individual died before full distributions are required will be disregarded as the beneficiary. The proposed treasury regulations also address powers of appointment and situations where there's adding of beneficiaries. So, the situation would go like this. You have a beneficiary who's added who has not initially taken new account to determine the owner's beneficiaries. What do we do here? Well, the proposed regulations state that if the beneficiary is added after September 30th of the calendar year following the calendar year of the owner's death, then the determination of whether there's no designated beneficiary because of one of the owner's beneficiaries is not an individual, and the rules related to multiple designated beneficiaries must be applied taking into account the new beneficiary along with all beneficiaries that were taken into account before the addition of the new beneficiary. However, if the addition of the beneficiary would cause a full distribution of the owner's interest in the plan during the calendar year in which the beneficiary is added or in an earlier calendar year, then the proposed regulation provided the full distribution is not required until the end of the calendar year following the calendar year in which the beneficiary was added. The proposed regulations also provide that the beneficiaries will be deemed to be identifiable even if the trust provides an individual with a power of appointment with respect to a portion of the IRA. Specifically, the proposed regulations provide that if by September 30th of the calendar year following the calendar year of the owner's death, a power of appointment is exercised in favor of one or more beneficiaries that are identifiable or is restricted so that any appointment made after that date may only be made in favor of one or more identifiable beneficiaries, then all of those identified beneficiaries are taken into account as beneficiaries of the owner. If the power is not exercised by that September 30th in favor of one or more beneficiaries that are identifiable, and the power of appointment is not so restrictive, then generally each beneficiary that takes in default, that is each person who would be entitled to the portion subject to the power if that power is not exercised is treated as a beneficiary of the owner. The proposed regulations provide that if the designated beneficiary is the owner's minor child and that the child also is a disabled or chronically ill individual, the child continue to be treated as an eligible designated beneficiary after they reached an age or majority provided that the documentation requirements of the proposed regulations are timely met with respect to that child. This means that the documentation to establish a disability or chronic illness must be provided to the IRA custodian plan administrator no later than October 31st of the calendar year following the calendar year of the owner's death. The proposed regulations provide rules related to the establishment of whether an individual is disabled or chronically ill, and the advisors review these rules very carefully to make sure you have compliance. And as we close out here, a couple of trust drafting special considerations considering the new rules. Accumulation trusts are likely to be the norm going forward due to the fact that only eligible designated beneficiaries may receive life expectancy payments. Conduit trusts will still be important where we have eligible designated beneficiaries, like a spouse and minor children, where we wanna impose restrictions on the IRA assets and we're concerned that without a conduit trust other beneficiaries of the trust that take after the eligible designated beneficiary's death would trigger the 10-year rule. Thank you all for joining us for today's presentation. I have my contact information here. If any of you have any questions, or follow-up comments, or thoughts you'd like to get to me regarding this presentation, please reach out. Just make sure when you reach out that you mention that you viewed or attended this presentation, and we'll go from there. Thank you very much.

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