Navigating Your Future- Episode 3: Secure Act 2.0 - Norris McLaughlin, P.A., Attorneys at Law

Episode 3: Secure Act 2.0

Welcome to Norris McLaughlin’s Navigating Your Future, a limited podcast series discussing estate, planning and the wellbeing of your future. I’m your host, Chris McGann, an attorney here at the Trust and Estates Practice Group at Norris McLaughlin. In this episode, I’m joined by Jim Boyd. Jim, want to introduce yourself? Hello everyone, and thanks Chris for having me on the esteemed session today. Really excited to talk about Secure 2.0. I don’t want to steal your Thunder, but I have been in the financial planning world for the past 20 plus years and am an owner at Kane Financial Group and am a certified financial planning professional. So hopefully it can bring some insight today to your topic. All right, well, you know the surprise has been ruined. We’re talking today about the Secure act 2.0. So, Jim, let’s just jump into it. I know you work with a ton of business owners and other wealthy individuals. Can you just tell me, you know, broadly how has the SECURE Act impacted your clients? I think in a couple ways. You know, some of the very positive things are that the SECURE Act has really addressed kind of the 800 pound gorilla in the room, which is we have a very large demographic in our country, the baby boomers that are living longer than ever, which is super positive. And the reality is with people living longer than ever that you know, the government realizes we need to make sure their assets last as long as they do. So one of the main things is the old age of 70, 1/2 that you used to always hear about as that required minimum distribution starting age. If you had money in an IRA or a 401K or A-403-B that has been pushed ahead to this year, it’s 73 years old. You have to begin taking required minimum distributions in a decade from now it’s going to 75. So what that lets us know is people are working a little longer and also people are living a little longer. So the government has updated those distribution requirements to reflect that.

One of the other positive things is it used to be such a punitive amount that you would be hit with if you didn’t pull your required minimum distribution out by the required time from the IRS. I mean, they used to hit you with a 50% penalty. So if you’re required to pull $20,000 out into giving tax and you forgot to, you’re on vacation or you didn’t know what was going on or it was the first year that you’re supposed to do it, you got hit with a $10,000 penalty. So it was massive, you know, now that penalty has been watered down. Instead of being 50%, it starts at 25% for missing that required minimum distribution time. And if you actually take corrective action as soon as you’ve realized it, it actually gets watered down to 10%. So that’s a huge win for people and I think makes it a little less scarier when you have to start those required minimum distributions. Another thing I really like is for closely held businesses, which are really the backbone of our economy, allowing them to get 401 KS and retirement plans set up in a much easier fashion, less cumbersome fashion. So it’s going to allow a lot of the American people to get access to retirement plans, which has been desperately needed for a long period of time. So those are kind of the main highlights of Secure 2.0 that I really like. I know we’re going to get into some things, you and I, because you do a lot of work in the estate and tax planning arena. You work with a lot of executives and really successful people. You know, tell me how the passage of the SECURE Act has, you know, impacted that type of planning. Yeah. So the biggest impact that came away from the SECURE Act was the overall loss of the, what’s known as the stretch provision. So previously with IRA’s you could leave it to an individual you pass away. That individual could then take distributions from that IRA over his or her lifetime. So you can obviously understand and appreciate that those monies that are were tax deferred to begin with by the person who contributed to the plan would continue to grow on a tax deferred basis for another individual’s lifetime.

So eventually, I guess Congress got sick of that because they want their tax money and by getting rid of the stretch provision, that mission has been accomplished. So now if you die and leave your IRA pretty much to anyone, that stretch provision is gone. Now, there are some limited exceptions. If you leave your IRA to a spouse, a chronically disabled person, anyone who is a minor that’s under the age of 18, then they still will have the ability to stretch the IRA distributions over their lifetime. Just one little note, once that minor turns 18, then from that point forward distributions have to be taken out over 10 years. So you’re really just putting off the inevitable by naming a minor. But for us as estate planning individuals, you know, you can still feel free to name your spouse as the beneficiary of an IRA. That’s fine. And really before, with families that had disabled individuals that were figuring out how to compensate that person, setting up a trust for that person, what assets would fund the trust? Well now really one of the clear choices is to use an IRA because you will be able to stretch those distributions over that disabled person’s lifetime and that will potentially get into some income tax issues with having funds distributed to a trust. But still that is a open avenue and something that we often analyze. So for any other individual that you’re leaving your IRA to, the general rule is that after the year of death, distributions have to be taken out over 10 years. So by the 10 year anniversary from date of death, that IRA has to be drained. And what we learned from Secure Act 2.0 is that not only do you have to use up the funds within that 10 year window, you have to take RMD’s each year too, because previously that was unclear.

So you don’t get the advantage of being able to just take nothing from the IRA until year 10 and then draw completely. RMD still have to be taken over that 10 year. And that’s only for someone who you know died when they were in the pay period when RMD’s had to be taken to begin with. So really that limits us as estate planning professionals in terms of the advice that we can give because it’s kind of a black and white rule. So we don’t have that many options that beforehand we did in terms of setting up trust that would be able to receive the IRA and stretch the distributions over a child’s, let’s say lifetime. So we’re limited. But Jim, you know, what have you been seeing since given the loss of the stretch Ira, what have you been doing about that? Yeah, you know what, Chris, it it’s interesting because it takes us back almost to the time whenever the Bush era tax laws came through and legislation that that increased the federal estate exemptions to such large amounts. You know, before that period of time we saw a lot of life insurance planning specifically with like irrevocable life insurance trust where individuals would stick large life insurance policies into trust and fund them. That way the large death benefit amounts that they amassed would not be included when they’re taxable estates, especially when exemptions were so low. And what we’re seeing now with the removal of that SECURE Act as a really efficient and successful way to transfer assets to many generations. If you know get an executive then at 5 or $6 million an IRA, they could pass that over generations and it was a really great estate planning tool. Well now we know it’s not. So how do we replicate getting a large amount of assets in a very tax efficient fashion to the next generation? And we do that through life insurance, essentially setting up a irrevocable life insurance trust.

And then individuals taking distributions of that forever taxable money, whether that’s the required minimum distributions they had to pull out or other distributions from their IRA or 401K paying the tax. And then using those proceeds to purchase life insurance inside of irrevocable life insurance trust. So now what they’re doing is effectively taking forever taxable money and putting into a spot that’s going to be never taxable to pass to their kids and in most states will be you know inheritance tax free as well too as income tax free and everything else. So now it’s just leveraging dollars to be able to pass a lot more money to the next generation. So again you know people are smart, tax attorneys are smart, you know they come up with different ways to continue passing legacies even when legislation changes. So we’re seeing a lot more life insurance policy placement right now to address the changes in SECURE Act. Yeah. Now that’s a great way to continue to make essentially tax free gifts to your heirs by doing just that that you said. All right, awesome. Well, you know, I think to wrap up the discussion on SECURE ACT 2.0. So the RMD age has been increased up to and it’s going to go up to in another decade. If you miss the RMD, it’s not so harsh to a penalty anymore, which is good news, but you still want to take it. Setting up 401KS are a lot easier for small businesses, which is definitely a win since we have a lot of them in this country. And generally, you know, if you die and you leave your IRA to someone, it’s got to be drained within 10 years. Limited exceptions, but that’s the general rule. So Jim, I want to thank you. This has been Norris McLaughlin’s Navigating Your Future at the Limited podcast series, discussing A variety of topics related to trusts and estates and tax matters. Jim, again, thank you and thank you, the listener, for being part of the conversation. Be sure to tune in next time for a brand new episode. If you’d like to learn more about our work, please e-mail me at navigatingyourfuture@norrislaw.com.