If 2020 wasn't enough with the negative effects of COVID-19 on our economy, many consumers are likely to change some aspects of their legacy planning based on the SECURE Act (Setting Every Community Up for Retirement Enhancement), which was enacted last year.
The SECURE Act eliminated some post-death provisions for beneficiaries in estate plans – including one philosophy nicknamed the "stretch IRA." Before 2020, the stretch IRA allowed non-spouse beneficiaries to extend retirement plan payouts – and tax deferral on those payouts – over the non-spouse beneficiaries' lifetime.
The SECURE Act replaced the lifetime expectancy of taking distributions with a 10-year rule. Most assets can pass onto a spouse without facing taxes until the living spouse dies. However, all inherited IRA assets by a non-spouse beneficiary, with limited exceptions (including those who are minor children or disabled), must be distributed within 10 years of the IRA owner's death.
For your planning, you'll need to take into consideration the SECURE Act's effect on trusts, which is designed to protect funds when multiple beneficiaries are involved. Without the stretch IRA philosophy used frequently in trusts, beneficiaries could find themselves paying more taxes on distributions, or if the funds remain in the trust, higher tax rates on the trust.
How could the SECURE Act changes affect your legacy for non-spouse beneficiaries? These assets will frequently become a deferred tax liability since those ultimately inheriting the funds may see the assets taxed at very high marginal rates.
A potential solution, permanent life insurance, would be helpful for funding your estate plan or trust instead of an IRA. Permanent life insurance has some very good options and guarantees.
- Life insurance is income tax-free to non-spouse beneficiaries
- Increased flexibility and control of payments to beneficiaries when a trust is involved
- No worries about complex tax rules, and beneficiaries do not need to take RMDs
- A tax-free death benefit can be provided to beneficiaries in lieu of an account that could be taxed at high marginal rates
A permanent life insurance policy could assist your retirement strategy. Still, we will want to review your current situation to see if this solution could work toward your legacy goals.
If you would like some support materials about the SECURE Act or more information on how a life insurance policy could help provide some security, reach out to us at 717-790-2171.
Originally published by AIP Marketing Alliance. Information is provided for informational purposes only and is not, and should not, be considered a solicitation to buy or sell any products mentioned. The information should not be used as the sole basis for any financial decisions, nor should it be construed as advice applicable to your specific financial situation. Please consult your personal financial, tax and/or legal professional(s) for guidance on your specific financial situation and decision-making.
