December 17, 2019 / 10:51 PM / a month ago

YOUR MONEY - Don't die yet: new U.S. law will muddle estate plans

NEW YORK (Reuters) - It is not often that a spending bill in Congress will make regular Americans run to their financial planners for emergency help before the holidays. But the Senate is poised to pass a spending bill on Friday that includes a huge swath of long-anticipated retirement changes, collectively referred to as the SECURE Act.

FILE PHOTO: The U.S. Capitol is seen during a rainstorm in Washington, U.S., December 16, 2019. REUTERS/Tom Brenner/File Photo

So time is ticking to make sure all of your estate planning is updated before the end of the year.

“Don’t die before you review your beneficiary forms and your trusts,” said Jeff Levine, CEO and director of financial planning for BluePrint Wealth Alliance in New York.

What matters most right away with the new provisions is who you will inherit your Individual Retirement Account (IRA) and what restrictions there are on how that money is to be distributed to them after you die, said Jamie Hopkins, head of retirement research at Carson Group, based in Philadelphia.

The new rules, delayed since late May, eliminate what was known as the “stretch IRA,” which allowed heirs to inherit money from an IRA and take required mininum yearly distributions on it during their own lifetimes. Under the previous rules, a 5-year-old who inherited money could get a birthday check every year, while the principal kept growing. Tax would be due only on the yearly check.

But with the change, if that same child inherited, say, $1 million, he or she would have only 10 years to empty out the whole account. When that child turned 15, he or she would receive a huge tax bill, possibly on an amount more like $1.5 million.

The remaining money would have to be reinvested in a different account.

“Once you factor in state tax, you’re losing 40-50% of it. It’s a disaster,” Levine said.

In addition, if the IRA was in a trust with common provisions that specify the yearly minimum distribution to be paid out, the money might be tied up for the nine previous years and all the money would come out at the end.

“That’s a scary thing,” Hopkins said. “Some of those trusts need to be reformed and changed. A lot of people are not in contact with their attorneys.”

Once a person dies, a trust cannot be amended or changed, amplifying the urgency to fix the trusts as soon as possible - nearly an impossible feat to do before Jan. 1 in the estate planning world.

For those without trusts, checking the beneficiary still matters because you want to choose the most tax-efficient way of passing along your assets.

“People are historically slow to change their beneficiaries - or anything to do with estate planning. It means contemplating their own death,” Levine said.

Without the “stretch” IRA, you might want to change your plan. Instead of leaving everything to a spouse, you might want to leave just half, allowing children or grandchildren to inherit the rest.

If you leave everything to a spouse, when that person dies, it would be one large account that has to be distributed within 10 years.

NO HALFSIES ANYMORE

The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. Another key change in the bill that affects people immediately: required minimum distributions will start at 72 instead of 70-1/2.

If you are near that age, you need to pay close attention to what you need to do. Half birthdays have always been hard for people to figure out with these distributions.

Experts like Levine and Hopkins are working through the final wording of the act to figure out the rules. As with the tax law changes in 2018, which is still getting sorted out, it may take some time.

For the moment, it seems that those who turned 70 1/2 before the changes take effect in 2020 have to take their required minimum distributions.

In the meantime, it is worth asking for help from a tax or financial professional because the cost of getting it wrong is steep - starting at 50%, with other fees and penalties.

“You can literally get to situations where the cost will be more than 100%,” Hopkins said.

Follow us @ReutersMoney or here Editing by Lauren Young and Dan Grebler

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