How the SECURE Act Impacts Your Estate Plan

The SECURE Act made major changes to beneficiary distributions you should consider in your estate plan.

The SECURE Act has made big changes to how certain retirement plans, such as IRAs, 401(k)s, and 403(b)s, distribute after death. Anyone who owns such a retirement plan, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.  Our firm has mentioned the SECURE Act in past blogs, such as here:  https://galligan-law.com/proposed-ira-rules-and-their-effect-on-stretch-iras/ on Kevin’s Korner and will address the impact of these changes in the future, but today I wanted to focus on some key issues as mentioned in the article.

First, the SECURE Act means changes to some existing estate plans, especially ones including provisions creating conduit trusts that had been created to hold retirement plan death benefits and preserve the stretch benefit, while the retirement plan owner was still alive.  Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust or to evaluate possible plans.

This first change will apply to many, many clients.  A typical client who may be affected by the SECURE Act is a parent creating a trust for their children’s inheritance.  These types of trusts typically serve to provide creditor or divorce protection for their beneficiaries while maximizing the tax benefits of stretching the retirement.  Now that the stretch benefit may not apply to a beneficiary, it may make sense to alter the trust to maximize asset protection instead of the tax savings that are no longer available.  If you have this situation, you definitely want to review your plan.

Another potential strategy for clients who are including charities in their estate plan be making a charity the beneficiary of the retirement account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation to heirs.

One more creative alternative is to pay the retirement account balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.  This is a more complex strategy, but may be effective for charitably minded clients.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the stretch treatment for beneficiaries inheriting retirement plans after 2019. Most beneficiaries who inherit a retirement account after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch retirement payments out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the retirement account continued to grow tax free.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the retirement assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many retirement account owners to bequeath a large retirement balance completely to their heirs. Others, with larger retirement accounts, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, disabled heirs and some individuals not less than 10 years younger than the account owner. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the retirement plan and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. If you believe these changes affect you, contact our office at 713-522-9220 to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

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A Will is the Way to Have Your Wishes Followed

Individuals often do not make or appropriately update wills because they wrongly believe they aren’t necessary, but the will is the place for your wishes.

A will, also known as a last will and testament, is one of three documents that make up the foundation of an estate plan, according to The News Enterprises’ article “To ensure your wishes are followed, prepare a will.”  Two other very important documents are the Power of Attorney and a Health Care Power of Attorney. These three documents all serve different purposes, and work together to protect an individual and their family.  Today I’ll focus on the will and its important for conveying your wishes for your assets.

In our practice, we often encounter situations where a person passes away either without a will or without updating their existing will, both of which can lead to tragic results.  Assets will often go to unintended beneficiaries with far greater cost, difficulty and time.

There are a few situations where people may think they don’t need a will, but not having a will or updating it properly can create complications for the survivors.  Here are a few instances where people mistakenly believe they do not need a will.

First, when spouses with jointly owned property don’t have a will, it is because they believe that when the first spouse dies, the surviving spouse will continue to own the property. However, with no will, the spouse might not be the first person to receive any property that is jointly held, and it is especially true that the spouse may not be the first person to receive individually jointly owned property, like a car.  Even when all property is jointly owned—that means the title or deed to all and any property is in both person’s names –upon the death of the second spouse, an intestate (meaning no will) proceeding may have to be brought to court through probate to transfer property to heirs.

We frequently encounter situations where an executor will say that the decedent told them what they want, and that it does not match the will.  Or even worse, a decedent will have an old will that no longer reflects their wishes, such as not updating a will after getting married. In these situations, the will controls the property, even though the wishes are now wrong. It is critical to update your will with changes to make sure that the will conveys your estate to the beneficiaries you want.

Secondly, any individuals with beneficiary designations on accounts transfer those accounts to the beneficiaries on the owner’s death, with no court involvement. The same may apply for POD, or payable on death accounts.  In Texas you can even go so far as to name a beneficiary specifically on your deed or car title.  If the beneficiary named on any accounts has passed, however, their share will go into your estate, forcing distribution through probate.  Beneficiary designations also don’t adequately plan for successors, incapacity of beneficiaries and sometimes don’t allow many beneficiaries.   Clients often try to avoid probate on their own by the use of beneficiary designations, but we often have to open estate administrations where they are incomplete or ineffective for the above reasons.

Third, people who do not have a large amount of assets often believe they don’t need to have a will because there isn’t much to transfer. Here’s a problem: with no will, nothing can be transferred without court involvement. Let’s say your estate brings a wrongful death lawsuit and wins several hundred thousand dollars in a settlement. The settlement goes to your estate, which now has to go through probate.

Fourth, there is a belief that having a power of attorney means that they can continue to pay the expenses of property and distribute property after the grantor dies. This is not so. A power of attorney expires on the death of the grantor. An agent under a power of attorney has no power, after the person dies.

Fifth, if a trust is created to transfer ownership of property outside of the estate, a will is necessary to funnel unfunded property into the trust upon the death of the grantor. Trusts are created individually for any number of purposes. They don’t all hold the same type of assets. Property that is never properly retitled, for instance, is not in the trust. This is a common error in estate planning. A will provides a way for property to get into the trust, upon the death of the grantor.  This is called a pour over will.  See here for more details.  https://galligan-law.com/i-have-a-trust-so-why-do-i-need-a-pour-over-will/

With no will and no estate plan, property may pass unintentionally to someone you never intended to give your life’s work to. Or, having an out of date will that doesn’t reflect your wishes may direct property to someone you no longer wanted to benefit.  Having an up to date will lets the Executor know who should receive your property. The laws of your state will be used to determine who gets what in the absence of a will, and most are based on the laws of heirship. Speak with an estate planning attorney to create a will that reflects your wishes, and don’t wait to do so. Leaving yourself and your loved ones unprotected by an up to date will, is not a welcome legacy for anyone.

Reference: The News Enterprise (September 22, 2019) “To ensure your wishes are followed, prepare a will.”

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I have a Trust, so why do I Need a Pour Over Will?

Even if you utilize a trust in your estate plan, it is essential to have a “pour over will” that directs assets at your death to your trust through probate.

If the goal of estate planning is to avoid probate, it seems counter intuitive that one would sign a will, but the pour over will is an essential part of some estate plans, reports the Times Herald-Record’s article “Pour-over will a safety net for a living trust.”

If a person dies with assets in their name alone and without some contractual beneficiary which avoids probate (e.g. life insurance) those assets go through probate. The pour over will names the trust as the beneficiary of probate assets, so the trust controls who receives the inheritance. The pour over will works as a backup plan to the trust, and it also revokes past wills and codicils.

Living trusts became more widely used after a 1991 AARP study concluded that families should be using trusts rather than wills. Trusts were suddenly not just for the wealthy. Middle class people started using trusts rather than wills, to save time and money and avoid estate battles among family members. Trusts also served to keep financial and personal affairs private. Wills that are probated are public documents that anyone can review.  See here for more details.  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/

The one downfall to a trust is that it must be properly funded to work right.  As I said earlier, you probate assets in your name that do not pass by contractual obligation.  So, the trust must either own assets itself (“funding it”), have assets pass to it (e.g. the life insurance pays to the trust) or you must have some other mechanism for an asset to get to the trust or beneficiaries, such as a “joint tenants with rights of survivorship” account.  The pour over will is the safety net that makes sure if you missed something or obtained an asset you didn’t expect, there is still a way to get that asset to the trust and ultimately to your beneficiaries after death.

Speak with an experienced estate planning attorney to talk about how probate may impact your heirs and see if they believe the use of a trust and a pour over will would make the most sense for your family, and how best to fund the trust to accomplish your goals.

Reference: Times Herald-Record (Sep. 13, 2019) “Pour-over will a safety net for a living trust.”

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