Benjamin Franklin was pointedly correct when he observed there are only two things which are certain – taxes and death. Understandably then, these two realties unite most Americans. We empathize with the passing of a person’s loved ones, and no one is particularly excited about paying tax. Despite the heated debates which will inevitably ensue with the upcoming presidential election, thanks (or no thanks) to a new law enacted on December 20, 2019, we can rejoice in our common dislike for tax!
Most adults remember the frenzy which ensued in the latter part of 2012, when the estate tax was supposed to “sunset” (or expire) on December 31, 2012. If Congress did not enact new law before the end of 2012, the gift and estate tax exemption would return to $1 Million, and the maximum rate for both taxes would be a whopping 55%. Americans scrambled to update their estate plans to avoid these significant tax implications, only to have the new law enacted retroactively in 2013. This year, a new law which will significantly impact the estate planning strategy of many individuals, was signed into law on December 20, 2019, giving Americans eleven days’ notice. Unlike the retroactive legislation in 2012/2013, however, this last-minute law will not be changing anytime soon (if at all).
For Americans who lived to ring in the New Year, our Individual Retirement Accounts (“IRA’s”) are the subject of some serious upheaval. Under the prior rules, a recipient of an IRA could stretch the account over his or her lifetime. This resulted in a longer, tax-deferred growth to accumulate family wealth, as well as preventing the IRA recipient from catapulting into a higher tax bracket. Under the new rules, an heir of an IRA is required to take (and be taxed on) all of the money within ten years. The only exception for the new ten-year rule is if the recipient is a spouse, minor child, or disabled or chronically ill.
The provisions under the new law are part of the Secure Act. Some of the changes to retirement rules are minor in nature: for example, mandatory distributions start at age 72 years rather than 70½, which is a modest change given the increasing lifespan of Americans at large.
The so-called “stretch-IRA” was an estate planning strategy which prolonged the tax-deferred status of an inherited IRA when passed to another person upon the original owner’s death. By using the stretch strategy, an IRA could pass on from generation to generation while beneficiaries appreciated the tax-deferred, or sometimes tax-free, growth. Non-spouse heirs must take required minimum distributions based on their life expectancy, so the younger the recipient, the more taxes which could be saved. For example, a fifty-year-old child who inherits an IRA from his deceased parent could stretch the IRA (and taxes thereon) over his life by only taking out the required minimum distributions (“RMD’s”). The younger the heir, the longer the IRA could be stretched, and the less taxes owed. Many people have named their grandchildren as beneficiaries of their IRA, banking upon the stretch rules which, as of December 20, 2019, are no longer.
While it makes sense an IRA would not outlive its owner by decades, consider elderly individuals who have meticulously saved and relied upon the stretch IRA as a means to leave something for his or her heirs. With this new law turning many estate plans upon their head, individuals would be wise to review their plans with an attorney sooner rather than later. In the meantime, as political advertisements swarm your television, social media, and dreams/nightmares, may you find comfort in our opinion of unity of death and taxes!
The information contained above is for informational purposes only, and is not legal advice or a substitute for legal counsel. You should not act or rely upon this information.