Proposed IRA Rules and Their Effect on Stretch IRAs.

New IRA rules make retirement funds better for retirees, but not necessarily for their beneficiaries.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act proposes a number of changes to IRA rules and other retirement rules.  The Act passed in the House of Representatives by a 417-3 vote and is expected to be passed in some form by the Senate. Some of the changes appear to be common sense, like broadening access to IRAs and 401(k)s, changing the required minimum distribution (RMD) age from 70½ to 72 and providing different investment options for these programs. However, with these changes come potential limitations with Stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” An IRA shelters investments from tax which leaves investors with more money for the same investment performance because usually no tax is usually paid as it grows. Your distributions can also be tax-free if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over the life expectancy of the beneficiary. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes which allows the investment to grow tremendously.

Even better, current estate planning techniques allow an investor to leave an IRA to a trust and still get “stretch” treatment.  For more information, see our website.  https://galligan-law.com/life-stages/planning-for-retirement/   Current Treasury Rules permit trusts to receive “stretch” treatment if the beneficiary of the trust is readily identifiable. This enables investors to leave their retirement assets to trusts for their individual beneficiaries and receive the investment advantage of the “stretch” as well as the benefit of the trust, such as tax planning and divorce or creditor protection for the beneficiaries.  One such trust is called a “conduit trust” where only RMD’s are paid out to the identifiable beneficiary based upon his or her life expectancy.

However, the SECURE Act could change that.  The proposed IRA rules and other retirement rules instead require funds to be distributed over a 10 year period instead of the beneficiary’s lifetime. That’s a big change for estate planning and the value of assets passed to the next generation.

There are some exceptions to the 10 year time period, including retirement left to a surviving spouse, minor children and some persons with disabilities or chronic illnesses.  However, aside from the spouse, these beneficiary groups are limited and will be most harmed by this change.  For example, a disabled beneficiary would likely not receive the retirement funds directly because receiving the retirement funds would affect their government benefits.  Instead, the retirement will pay to a special kind of trust, called a Supplemental Needs Trust, that will receive the retirement funds and accumulate them for the beneficiary’s use.  However, that form of a trust will presumably not qualify for the 10 year exception because remainder beneficiaries (those who survive the disabled beneficiary) will be brought into the analysis and likely won’t be minors or disabled beneficiaries to make the trust eligible for a 10 year exception.  For someone in that case, a 10 year payout will accelerate tax and greatly reduce the legacy left to the beneficiary with a disability, and he or she is the one who needs it most.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the  proposed IRA rules and retirement rules under the SECURE Act change almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree during their lifetimes.  However, for investors with large investment funds to pass to beneficiaries, the proposed IRA rules may greatly reduce the legacy left to their loved ones.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

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Do You Need a Pet Trust in Your Estate Plan?

Consider a pet trust to make sure your pets are cared for after you are gone.
Consider a pet trust to make sure that your pets are cared for after you are gone.

Many of us consider our pets to be part of our family. So it’s only natural that we want to make sure that they are taken care of after we pass away. In addition to providing for our human beneficiaries, an estate plan can include provisions to protect the well-being of our beloved companion animals, says The Balance in the article “Estate Planning for Fido: How to Set Up a Pet Trust.”

Texas now has a law governing the creation and use of pet trusts. Knowing how these trusts work and what they can and cannot do will be helpful, if you are considering having a pet trust included in your estate plan.

When you set up a trust, you have the authority as creator of the trust to direct how you want the assets in the trust to be managed for yourself and any beneficiaries of the trust. The same principal holds true for pet trusts. You set up the trust and name a trustee. The trustee oversees the money and any other assets placed in the trust. Because under Texas law a pet cannot be considered a beneficiary of the trust, you would name a “caretaker” as beneficiary. The caretaker would be charged with the responsibilty of using the funds in the trust for the  pet’s care and related expenses. These expenses can include:

  • Regular care by a veterinarian,
  • Emergency veterinarian care,
  • Grooming, and
  • Feeding and boarding costs.

A pet trust can also include directions for end of life care and treatment for pets, as well as burial or cremation arrangements for your pet.

Creating a pet trust is like creating any other type of trust. An estate planning attorney can help with drafting the documents and advise you on selecting a trustee and caretaker. 

Here are some things to consider when setting up your pet’s trust:

  • What’s your pet’s current standard of living and care?
  • What kind of care do you expect the pet’s new caregiver to offer?
  • Who do you want to be the pet’s caregiver, and who should be the successor caregivers?
  • How often should the caregiver report on the pet’s status to the trustee?
  • How long do you expect the pet to live?
  • How likely your pet is to develop a serious illness?
  • How much money do you think your pet’s caregiver will need to cover all pet-related expenses?
  • What should happen to the money, if any remains in the pet trust, after the pet passes away?

The last item is important if you want to avoid a conflict of interest which might occur if the funds in the pet trust go to the trustee or caretaker after the pet passes away. For that reason many people choose a charity, often a charity that relates to animals, as the beneficiary of any assets left in the trust at the pet’s death. Another option is to direct the trustee to divide the funds remaining in the trust among the human beneficiaries named in your will.

Another point: think about when you want the pet trust to go into effect. You may not expect to become incapacitated, but these things do happen. Your pet trust can be designed to become effective, if you become incapacitated.

Make sure the trust clearly identifies your pet so no one can abuse its terms and access trust funds fraudulently. One way to do this is to have your pet microchipped and record the chip number in the pet document. 

You can also leave specific instructions regarding the care of your pet.  If there are certain types of foods that you use, list them. If there are regular routines that your pet is comfortable with and that you’d like the caregiver to continue, then detail them. The more information you can provide, the more likely it will be that your pet will continue to live the same way as when you were caring for your pet.

Finally, it’s always a good idea to let the caretaker and the trustee know that you are trusting them with the responsibility of caring for your pet after you are gone. That way you’ll know if they have any reservations about taking on this role and you can make other arrangements, if necessary. 

Reference: The Balance (March 27, 2019) “Estate Planning for Fido: How to Set Up a Pet Trust”

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Special Estate Planning Considerations for a Blended Family

Blended families create special estate planning issues.
It is important to address the special estate planning issues involved in a blended family situation.

There are a number of special estate planning considerations that affect those in a blended family. Remarriages are on the rise. According to the article “Estate planning documents for second marriages” from the Cleveland Jewish News, half of previously married seniors have married again.  And the issues are compounded if each spouse has one or more children from a previoius marriage.

We’ve all heard the horror stories of what happens when there is inadequate or no estate planning done to address these issues. Take, for example, a couple each of whom had children at the time of their marriage. Twenty years after the marriage, the husband dies. He had wanted to provide for his second wife, so his will stated that all his assets went to his wife. He may have assumed that anything left would go back to his children after her death, but nothing was put in place to make that happen.

What actually occurred was that his wife lived a long time after he passed, and she simply combined their assets. When she died, her will left all of the assets to her children, and her husband’s children received nothing. The husband’s children didn’t believe that he meant to do that, but because of the lack of planning, that’s exactly what happened.

What were the alternatives? He could have set up a marital trust to hold the assets for his second wife on his death, but upon the wife’s passing, would have gone back to his children. He could have named his wife as trustee to control the trust assets, or, if he wanted extra insurance that the assets remaining at his wife’s death would pass to his children, he could name an independent person or a trust company as trustee to oversee the trust.

Another horror story involves the couple in a second marriage who do not have wills or any other estate plan. Absent a will stating otherwise, Texas law provides that, if the surviving spouse is not the parent of all of the deceased spouse’s children,  a deceased spouse’s share of community property goes to the deceased spouse’s children. As a result, many surviving spouses are shocked go find out that they own their home and other property acquired during the marriage with their step children.

Anyone involved in a second marriage, especially if they have children from a previous marriage, needs to review their estate planning to make sure that their wishes will be carried out and not left to chance or the dictates of Texas law. Not only should they review their wills, but also insurance policies and retirement accounts to make sure that their beneficiary designations say what they want. For more information on what to consider if you are in a blended family situation see https://galligan-law.com/life-stages/blended-families/

There’s no “set it and forget” plan for estate documents, so before you walk down the aisle a second time, or shortly after you do so, speak with an estate planning attorney to clarify your goals and put them into the appropriate estate planning documents.

Reference: Cleveland Jewish News (May 7, 2019) “Estate planning documents for second marriages”

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