The Hidden Money Grab In The SECURE Act

On May 23, 2019 the House of Representatives overwhelmingly passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). A more appropriate name for the bill would be the Extreme Death-Tax for IRA and Retirement Plan Owners Act, because it gives the IRS carte blanche to confiscate up to one third of your IRA and retirement plans.  In other words, it’s a money grab.

The SECURE Act is wrapped with all kinds of goodies that are unfortunately of limited benefit to most established IRA and retirement plan owners.  But if you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax efficient manner after you are gone, you need to be concerned about one provision in the fine print that could cost them dearly. Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw the money from its tax-sheltered status, but the current law allows them to minimize the amount of their Required Minimum Distributions by “stretching” them over their own lifetimes.  This is called a “Stretch IRA”.  Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be.   The bad news is that the government wants their tax money, and they want it sooner than later.  The ticking time bomb buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions from Traditional IRAs that they have inherited and pay the tax over their lifetimes,  virtually cementing “the death of the Stretch IRA.” (The provisions of the SECURE Act also apply to Inherited Roth IRAs, but the distributions from a Roth IRA are not taxable.)

If there is any good news about the SECURE Act, it’s that it does not require your beneficiary to liquidate and pay tax on your entire Traditional IRA immediately after your death.  For many people, that would be a costly nightmare because they would likely be bumped into a much higher tax bracket.  Under the provisions of the SECURE Act, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years.   (There are some exceptions for minors and children with disabilities etc.) If you leave a Roth IRA to your child, they will still have to withdraw the entire account within 10 years of your death, but again, those distributions will not be taxable.  But any way you look at it, the provisions of the SECURE Act are a huge change from the old rules that allow a non-spouse heir to “stretch” the Required Minimum Distributions from a Traditional Inherited IRA over their lifetime and defer the income tax due.

See James Lange , The Hidden Money Grab In The SECURE Actl, Forbes, June 11, 2019.

The Important of Beneficiary Designations – The case of Life Insurance paying to an Ex-Spouse

A recent California Case highlights the importance of making sure you review your estate plan and beneficiary designations every couple of years. The beneficiary listed on retirement plans and Life Insurance policies supersede anything your write in your Will or Trust. This was reinforced in a recent case where an Ex-Spouse received the life insurance proceeds of her former spouse after his death because he never took her name off of the policy, even though he wrote in his Will that he didn’t want anything to pass to her. Be sure to check your beneficiary designations to ensure they are up-to-date with your current intent.

Focus on Stepped-Up Basis after the Tax Cuts and Jobs Act

The new tax law did not change the rules relating to a “step-up” in basis for appreciated assets included in an individual’s estate on death. Accordingly, such assets will continue to be entitled to a new basis equal to their fair market values at the individual’s death, even if no estate tax is imposed on those assets. Thus, the step-up in basis eliminates the taxable gain inherent in appreciated assets that existed at the time of death. As a result, individuals need to consider the pros and cons of either retaining or gifting property, taking into account both the increased federal exemption amounts and the scheduled sunset of the increased federal exemption amounts. Individuals now below the exemption threshold who have made lifetime transfers of appreciated assets so as to remove them from their estates might consider strategies that would cause any such appreciated property to be includible in their gross estates and thereby obtain a step-up in basis in the property. In light of the scheduled sunset of the increased federal exemption amounts, however, any such planning must be carefully weighed against the risk that the current exemption will have reverted to a lower amount at death by reason of either sun-setting or subsequent legislative action.

Top 5 Reasons that Seniors Should Avoid Sharing a Joint Bank Account with an Adult Child

Older citizens often believe that adding one of their adult children to their bank account will make paying recurring bills and managing finances easier, but the reality is that it often has dire consequences. Once the account becomes a jointly owned bank account, the funds belong to both account holders equally. This means bank employees do not need to get the permission of both owners to transfer or withdraw all the funds.

Here are 5 reasons adding an adult child to your bank account if not a good idea:

  • Unintentional Disinheritance
    • When one account holder dies, the money in a jointly owned account automatically belongs to the other account holder without passing through probate. If the parent had wanted to disburse those funds between all their children, this could have the opposite effect.
  • Risk of Intentional Loss
    • For even the best child, the temptations of a windfall of money is too great. Once they are added to their parent’s account, they may feel that there is no true harm by taking some “early.”
  • Risk of Unintentional Loss
    • Adding a child to a bank account may also expose the parent’s hard earned money to that child’s creditors.
  • Risk of Meddling “Outlaws”
    • If a parent does not like or trust their adult child’s spouse, being on a join bank account with that child could have unfortunate results. If the child’s spouse has Power of Attorney of that child, they would have access to those funds if they had to act in the child’s place.
  • Unexpected Risk
    • If the child needs to apply for public benefits after being added to the bank account, the funds may need to be spent before the child can qualify. The child would not be able to remove his or her name from the bank account because most programs for public benefits would consider this transaction an uncompensated gift or transfer to the parent that would otherwise create a period of ineligibility for the child to receive any benefits.

See Kara Gansmann, Top 5 Reasons that Seniors Should Avoid Sharing a Joint Bank Account with an Adult Child,, April 20, 2019.

Differences between a Charitable Gift Annuity and a Charitable Remainder Trust

There are some situations where either a charitable gift annuity (CGA) or a charitable remainder trust (CRT) would be appropriate, and other situations where one or the other is clearly preferable. Funding amount – A gift annuity can be an effective gift at a much lower funding amount than a CRT. Number of payment beneficiaries – A gift annuity can have one or two annuitants. No more. A CRT can have any number of beneficiaries. Control – When a donor funds a gift annuity, he transfers assets to the charity and has no say over who invests them or how. With a CRT, in contrast, a donor names the trustee, who can be the donor or a trusted advisor. More than one charitable beneficiary – A CRT can split its remainder among any number of charities based on instructions in the trust agreement. In contrast, the contribution for a gift annuity becomes the property of the issuing charity. Read this article to learn more:

What Every Spouse Needs to Know About Inheriting IRAs

Inheriting an individual retirement account (IRA) can have some unforeseen pitfalls, and a few of the potential mistakes (and steps to avoid them) depend on if the beneficiary is a surviving spouse or another type of beneficiary. There are several solutions to this problem, depending on the tax or retirement goals of the individual inheriting the IRA.

An often unattractive option from a tax planning perspective, a person can distribute all of the IRA assets within five years of the original IRA owner’s death. The distributions will be included in gross income and taxed in the same way they would have been to the original owner, but if there is a need for cash, it needs to be considered.

A more appealing option for some is that of establishing an inherited IRA. This is accomplished by changing the legal name of the IRA and having the title include the name of the original owner, the fact that the original owner is deceased, “for the benefit of,” and the name of the inherited owner. Each custodian may have its own particular wording, so be aware. For non-spousal beneficiaries, the required minimum distributions (RMDs) must begin by December 31 of the year following the original IRA owner’s death. For spouses, it can wait until the deceased spouse would have turned 70 1/2, or the surviving spouse can use their life expectancy.

Surviving spouses have the option of using the spousal rollover. In essence the spouse can distribute all of the assets of the deceased spouse’s IRA into their own IRA or a new IRA for that purpose. The IRA is treated as if the surviving spouse was the original owner.

See Bob Carlson, What Every Spouse Needs to Know About Inheriting IRAs, Forbes, September 18, 2018.

5 Questions to Ask Your Estate Planner After the New Tax Law

An estate plan is like a car or a house: It needs regular maintenance to function as intended. Yet unlike your car or home, external events can create the need for adjustments. Among such events is legislation like the tax bill Congress passed in late December.

So this is an important time to schedule a meeting with your estate planner and be certain your plan is up-to-date. Even if your estate plan won’t be affected by the new tax law, it’s smart to confer with your estate planner periodically to be certain your current wishes are reflected in your estate planning documents.

During this checkup, you may find that your plan no longer meets all of your needs because of changes in your life and the lives of your heirs. Or you may find that your plan didn’t cover your needs from the get-go. In my experience, many clients leave their estate planner’s office with a thick folder of documents and fail to read them carefully or discuss them in detail with their planner before signing.

When you meet with a professional for a thorough evaluation and possible updating, you might ask some key question to assure your plan documents fully support your interests and those of your heirs, including these five

1. Will the new federal law affect my estate tax picture?

Estate tax is the tax that estates pay governments upon death; when it applies, there’s less left for your heirs. The federal government exempts a certain amount of an estate’s value from this tax and Congress just doubled that amount, known as the exemption. The new law eliminated tax on estates for many wealthy families.

Read More at: 5 Questions to Ask Your Estate Planner After the New Tax Law, by David Robinson, CFP, Jan. 29, 2018, accessed 10/16/2018.

California Homeowners Pass Low Property Taxes to Their Kids and is Highly Profitable to an Elite Group

California is the only state to provide a tax break that extends the Proposition 13 advantages of strictly limiting property increases to inherited property, including income that is solely used for rental income. The extension was enacted 8 years ago and had the intention of helping adult children not lose their family home when their parents passed away. But instead of helping the middle class the law is allowing a wealthier class of citizens take greater advantage of their predecessors investments.

In Los Angeles County, as many as 63% of homes inherited under the system were used as second residences or rental properties last year, and the trend continues in other counties along the coast. And n Los Angeles County alone, the tax benefit cost schools, cities and county government more than $280 million in revenue last year. Proposition 13 and the inheritance tax law place no limits on how many levels of descendants may take advantage of the tax break, and the homeowner is not required to live in California.

The author of the law, Thomas Hannigan, did not predict this result 8 years ago. “I tried to do the right thing. Obviously, it had unintended consequences.

See Liam Dillon & Ben Poston, California Homeowners Get to Pass Low Property Taxes to Their Kids. It’s Proved Highly Profitable to an Elite Group, Los Angeles Times, August 17, 2018.

Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally

If you have minor children, you most likely would want them to be provided for in case something terrible happens to you and your spouse.  How would you split your assets between them?

At first glance, your natural tendency is probably to respond, “equally, of course”.  For the most part, we love our children equally, and so logic dictates that they should receive equal amounts.

But consider this — Do you know for certain that you spend equal amounts on each child?  Or do you rely on faith that as extra-curricular activities, doctor visits, gifts, etc. come up throughout your kids’ lives, everything kind of washes out?  Most would answer yes to the latter and not the former question.

On the other hand, pure equality can be a harsh mistress.

Do you deny your son a doctor’s visit if he has already gone three more times than his sister in the last six months?  If you spent a little bit extra on your daughter’s birthday party, do you skip this year’s dental check-up?  If your son broke his arm and went to extensive physical therapy for several months, do you then send your daughter to a special acting camp to compensate?

Or do you simply dole out money for your children as the need arises?

The Common Pot Trust

The Pot Trust takes this concept of spending for your minor children as needed and applies it to your trustees.  Instead of your will or trust passing your estate into separate, equally funded trusts for each child, the whole “pot”, is combined into one trust that benefits all the children together until they all reach adulthood.

See Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally,, July 26, 2018


Distribution Planning: Another Perspective on How to Distribute Assets

How to Leave Assets to Adult Children

When considering how to leave assets to your adult children, first decide how much you want each one to receive. Most parents want to treat their children fairly, but this doesn’t necessarily mean they should receive equal shares of your estate. For example, you may want to give more to a child who is a teacher than to one who has a successful business. Or you may want to compensate a child who has taken care of you during an illness or your later years.

Some parents worry about leaving too much money to their children. They want their children to have enough to do whatever they wish, but not so much that they will be lazy and unproductive. Well, no one said you have to give everything to your children. You may prefer to leave more to your grandchildren and future generations through a trust, and/or make a generous charitable contribution.

Next, decide how you want your children to receive their inheritances. You have several options from which to choose.

See, How to Leave Assets to Adult Children, July 23, 2018