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PROTECTING YOUR RETIREMENT PLAN FROM THE NEW DEATH TAX PART 3

by: Begley Law Group

by Thomas D. Begley, Jr., CELA

This is the third in a series of articles on the SECURE Act. (Part 1) (Part 2) (Part 4)

STRATEGIES

  • It may make sense to withdraw money from a retirement account and make gifts.  Gifts can take many forms. 
  • The parent, if in a lower tax bracket, could take money from a retirement account at the parent’s lower tax rates and make outright gifts to children or grandchildren.  
  • Contribute to 529 Plan. A parent, if in a lower tax bracket, could make withdrawals from a retirement account and make a contribution to a 529 tax-deferred education account for the benefit of grandchildren, or even children, if appropriate.
  • Premiums on Life Insurance (Parent). A parent could make a withdrawal from a retirement account and make a gift to a child who would pay premiums on a life insurance policy on the parent.  The child would be the owner of the policy, so the proceeds would not be included in the estate of the parent.  The child would be beneficiary of the policy on death and those funds would replace the loss of wealth discussed in the example above.
  • Premiums on Life Insurance (Child). A parent could make a withdrawal from a retirement account and make a gift to a child who would pay premiums on a life insurance policy on the child.  The premiums on this policy would be much cheaper, since the child would be younger, and the beneficiary of the policy would be grandchildren.  The child would be the owner of the policy, so the proceeds would not be included in the estate of the parent.  This strategy makes sense if the goal is to provide a significant benefit to grandchildren.
  • Family Vacation. You only go around once.  Plan Participants might consider withdrawing funds from a retirement account and paying for a family vacation for parents, children and grandchildren.  That way the family can spend precious time together.  There still may be a tax saving, if the parent is in a lower tax bracket than the children will be at the time of the parent’s death and the child’s required distributions.
  • Social Security Deferral. By deferring your receipt of Social Security benefits, the benefit increases by approximately 8% per year.  Currently, individuals are eligible to begin Social Security payments at age 62.  However, these can be deferred until age 70.  For each year of deferral the monthly payment would increase by approximately 8%.  Plan Participants could take money out of the retirement account to make up for the lost income from Social Security and enjoy larger Social Security payments at age 70.
  • Continue IRA Contributions. If the individual or spouse of the individual is working, they can continue to make contributions to an IRA account even after attaining age 70.  This may make sense for many individuals.

ADVISORS

For many individuals a retirement account is their largest asset.  They have worked hard and lived sensibly and put money away in a retirement account.  Most individuals want to use these accounts to support themselves in retirement, but pass as much as possible on to future generations.  In many cases, the fix is simple.  In other cases, considerations are complex.  It is suggested that individuals wanting to protect significant retirement accounts seek the advice of:

  • Estate Planning Attorney. A competent Estate Planning attorney familiar with the SECURE Act should be engaged to discuss the alternatives and draft or revise the necessary documents and beneficiary designation forms.
  • A Certified Public Accountant may be helpful to assist with illustrations and advice as to appropriate strategies.
  • Financial Advisor. A Financial Advisor may be helpful to assist with illustrations and advice as to appropriate strategies.

In conclusion, the SECURE Act represents a large tax increase that affects many middle class Americans.  It is important for lawyers to familiarize themselves with the provisions of this law and advise their clients as to the impact it will have on their estate planning.  Current documents containing trust provisions should be carefully analyzed to determine whether they comply with the requirements of the new law or need to be modified.