The SECURE Act’s Impact On Estate and Retirement Planning—Part 1

On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and it represents the most significant retirement-planning legislation in decades.

Indeed, the changes ushered in by the SECURE Act have dramatic implications for both your retirement and estate planning strategies—and not all of them are positive. While the law includes a number of taxpayer-friendly measures to boost your ability to save for retirement, it also contains provisions that could have disastrous effects on planning strategies families have used for years to protect and pass on assets contained in retirement accounts.

Given this, if you hold assets in a retirement account you need  to review your financial plan and estate plan as soon as possible. To help you with this process, here we’ll cover three of the SECURE Act’s biggest changes and how they stand to affect your retirement account both during your lifetime and after your death. Next week, we’ll look more deeply into a couple of additional strategies you may want to consider.

1. Increased age for Required Minimum Distributions (RMD)
Prior to the SECURE Act, the law required you to start making withdrawals from your retirement account at age 70 ½. But for people who haven’t reached 70 ½ by the end of 2019, the SECURE Act pushes back the RMD start date until age 72.

2. Repeal of the maximum age for IRA contributions
Under previous law, those who continued working could not contribute to a traditional IRA once they reached 70 ½. Starting in 2020, the SECURE Act removed that cap, so you can continue making contributions to your IRA for as long as you and/or your spouse are still working.

These two changes are positive because with our increased life spans people are now staying in the workforce longer than ever before, and the new rules allow you to continue contributing to your retirement accounts and accumulating tax-free growth for as long as possible.

However, to offset the tax revenue lost due to these beneficial changes, as you’ll see below, the SECURE Act also includes some less-favorable changes to the distribution requirements for retirement accounts after your death.

3. Elimination of stretch provisions for inherited retirement accounts
The part of the SECURE Act that’s likely to have the most significant impact on your heirs is a provision that makes significant changes to distribution requirements for inherited retirement accounts, and effectively ends the so-called “stretch IRA.”

Under prior law, beneficiaries of your retirement account could choose to stretch out distributions—and, therefore, the income taxes owed on those distributions—over their own life expectancy. For example, an 18-year old beneficiary expected to live an additional 65 years could inherit an IRA and stretch out the distributions for 65 years, paying income tax on just a small amount of their inheritance every year. And in that case, the income tax law would encourage the child to not withdraw and spend the inherited assets all at once.

Under the SECURE Act, however, most designated beneficiaries will now be required to withdraw all the assets from the inherited account—and pay income taxes on them—within 10 years of the account owner’s death. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.

The law does offer exemptions to the mandatory 10-year withdrawal rule for certain beneficiaries, known as eligible designated beneficiaries (EDB):

1.      A surviving spouse named as an outright beneficiary of a retirement plan still has the option of rolling over the benefits to his or her own IRA or taking distributions based on his or her own life expectancy.

2.      Beneficiaries who are less than 10 years younger than you can still take distributions based on their own life expectancy.

3.      Your minor children, who have not reached the “age of majority” don’t have to deplete the account until 10 years after they come of age.  Yet that still would be a much shorter “stretch” than previously available.

4.      Disabled individuals and chronically ill individuals can take distributions based on their life expectancy.

Apart from these exceptions, opportunities for stretching an IRA over an extended period of time are no longer available. This means if you want the people who will inherit your retirement account after your death to benefit from long-term income tax deferral—as well as asset protection from lawsuits, creditors, or divorce—you must meet with us now to rework your plan.

Impact on trusts: Depending on the value of your retirement account, you may have already addressed the distribution of its assets using a “conduit” provision in your will, revocable trust, or standalone retirement trust. Prior to the SECURE Act, a trustee of a trust that included a conduit provision would only distribute the required minimum distributions (RMD) to trust beneficiaries each year.

This allowed the beneficiary to take advantage of the continued “stretch” based on their age and life expectancy. In this way, the conduit trust protected the account balance and only exposed the much smaller RMD amounts to creditors and divorcing spouses.

Under the SECURE Act, however, the 10-year limit for taking distributions will lead to the acceleration of income tax due, possibly bumping your beneficiaries into a higher income tax bracket. This potentially hefty tax burden would likely result in your beneficiary receiving significantly less funds from the retirement account than you had initially planned on.

What’s more, because the SECURE Act requires all funds in your retirement account to be withdrawn within 10 years after your death, a conduit trust would be required to distribute all of its assets outright to the beneficiary within this shortened period. This means you would also lose any long-term asset protection you may have built into your plan.

Alternative options: Given the SECURE Act’s new rules, you may want to consider amending your trust to shift it from a “conduit trust” to become an  “accumulation trust.” Such a trust structure can’t extend the tax benefits any longer than 10 years, but it can ensure the assets are protected from your beneficiary’s future risky activities and/or a divorce.

One important thing to note: Retained distributions from a traditional IRA distributing to an accumulation trust would be exposed to compressed income tax rates that apply to trusts. Currently, trusts reach the maximum 37% tax bracket with undistributed taxable income of $12,950. Facing such a tax hit, if you opt for this solution, your plan should include additional strategies to address the tax obligation. We’ll share some options for this in next week’s article.

Update your estate plan now

At Tramm Law Firm, PLLC, we can update your plan to address all of the potential ramifications the SECURE Act might have on the distribution of your retirement account’s assets to your loved ones following your death. But to do that, we need to meet with you to consider your family dynamic and all of your assets, so we can thoroughly assess the big-picture impact the SECURE Act stands to have on your estate.

This is exactly what we do during our Family Wealth Planning Session, a two-hour, working meeting that educates and empowers you to know you’ve done the right thing for the people you love no matter what happens to you. Whether you’ve yet to create a plan or already have one created another lawyer, schedule an appointment today.

Next week in the second part of this series, we’ll cover some of the potential ramifications the SECURE Act stands to have on your financial-planning strategies and how you can make the most of the new legal landscape.

Buyer Beware: The Hidden Dangers of DIY Estate Planning—Part 1

Buyer Beware: The Hidden Dangers of DIY Estate Planning—Part 1 

Do a Google search for “online estate planning documents,” and you’ll find dozens of different websites. From Legal Zoom® and Willing.com to Rocket Lawyer® and Willandtrust.com, these do-it-yourself (DIY) planning services might seem like an enticing bargain.

The sites let you complete and print out just about any kind of planning document you can think of—wills, trusts, healthcare directives, and/or power of attorney—in just a matter of minutes. And the documents are typically quite inexpensive, with many sites offering simple wills for $50 or less.

At first glance, such DIY planning documents might appear to be a quick and inexpensive way to finally cross estate planning off your life’s lengthy to-do list. You know planning for your death and potential incapacity is important, but you just never seem to have time to take care of it.

And even if you realize your DIY plan won’t be as good as those prepared by a lawyer, at least it can serve as a temporary solution, until you can find time to meet with an attorney to upgrade. These forms may not be perfect, you reason, but at least they’re better than having no plan at all.

However, relying on DIY planning documents can actually be worse than having no plan at all—and here’s why:

An inconvenient truth

Creating a plan using online documents, can give you a false sense of security—you think you’ve got planning covered, when you most certainly do not. DIY plans may even lead you to believe that you no longer need to worry about estate planning, causing you to put it off until it’s too late.

In this way, relying on DIY planning documents is one of the most dangerous choices you can make. In the end, such generic forms could end up costing your family even more money and heartache than if you’d never gotten around to doing any planning at all.

At least with no plan at all, planning would likely remain at the front of your mind, where it rightfully belongs until it’s handled properly.

Planning to fail
Many people don’t realize that estate planning entails much more than just filling out legal forms. Without a thorough understanding of how the legal process works upon your death or incapacity, you’ll likely make serious mistakes when creating a DIY plan. Even worse, these mistakes won’t be discovered until it’s too late—and the loved ones you were trying to protect will be the very ones forced to clean up your mess.

The whole purpose of estate planning is to keep your family out of court and out of conflict in the event of your death or incapacity. Yet, as cheap online estate planning services become more and more popular, millions of people are learning—or will soon learn—that taking the DIY route can not only fail to achieve this purpose, it can make the court cases and family conflicts far worse and more costly.

One size does not fit all
Online planning documents may appear to save you time and money, but keep in mind, just because you created “legal” documents doesn’t mean they will actually work when you need them. Indeed, if you read the fine print of most DIY planning websites, you’ll find numerous disclaimers pointing out that their documents are “no substitute” for the advice of a lawyer.

Some disclaimers warn that these documents are not even guaranteed to be “correct, complete, or up to date.” These facts should be a huge red flag, but it’s just one part of the problem.

Even if the forms are 100% correct and up-to-date, there are still many potential pitfalls that can cause the documents to not work as intended—or fail all together. And without an attorney to advise you, you won’t have any idea of what you should watch out for.

Harold should feel happy because he just saved money by doing his own estate planning using forms he downloaded off of the internet. But he still feels like he might be missing something . . .

Estate planning is definitely not a one-size-fits-all kind of deal. Even if you think your particular planning situation is simple, that turns out to almost never be the case. To demonstrate just how complicated the planning process can be, here are 4 common complications you’re likely to encounter with DIY plans.

1. Improper execution
To be considered legally valid, some planning documents must be executed (i.e. signed and witnessed or notarized) following very strict legal procedures. For example, many states require that you and every witness to your will must sign it in the presence of one another. If your DIY will doesn’t mention that (or you don’t read the fine print) and you fail to follow this procedure, the document can be worthless.

2. Not adhering to state law
State laws are also very specific about who can serve in certain roles like trustee, executor, or financial power of attorney. In some states, for instance, the executor of your will must either be a family member or an in-law, and if not, the person must live in your state. If your chosen executor doesn't meet those requirements, he or she cannot serve.

3. Unforeseen conflict

Family dynamics are—to put it lightly—complex. This is particularly true for blended families, where spouses have children from previous relationships. A DIY service cannot help you consider all the potential areas where conflict might arise among your family members and help you plan ahead of time to avoid it. When done right, the estate planning process is actually a huge opportunity to build new connections within your family, and we’re specifically trained to help you with that. In fact, that’s our special sauce.

We’ve all seen the impact of families ripped apart due to poor planning. Yet, every day we see families brought closer together as a result of handling these matters the right way. We want that for your family. 

4. Thinking a will is enough

Lots of people believe that creating a will is sufficient to handle all of their planning needs. But this is rarely the case. A will, for example, does nothing in the event of your incapacity, for which you would also need a healthcare directive and/or a living will, plus a durable financial power of attorney.

Furthermore, because a will requires probate, it does nothing to keep your loved ones out of court upon your death. And if you have minor children, relying on a will alone could leave your kids vulnerable to being taken out of your home and into the care of strangers.

Don’t do it yourself

Given all of these potential dangers, DIY estate plans are a disaster waiting to happen. And as we’ll see next week, perhaps the worst consequence of trying to handle estate planning on your own is the potentially tragic impact it can have on the people you love most of all—your children.

Next week, we’ll continue with part two in this series on the hidden dangers of DIY estate planning.

If you’ve yet to create a plan, have DIY documents you aren’t sure about, or have a plan created with another lawyer’s help that hasn’t been reviewed in more than a year, schedule a 15 minute phone call to determine if we can help you by clicking the button below. We can ensure that your plan will work exactly as intended if something should happen to you. Contact us today to learn more.

Are you aware of the consequences of naming your children beneficiaries of your life insurance policy?

You have done a wonderfully responsible thing by purchasing life insurance to protect your children in the event that something happens to you. You sleep better at night knowing that you have protected their financial futures. Have you thought of everything?

You filled out the paper work and named your spouse as the first beneficiary. Did you name a contingent beneficiary?

Of course you did, because you know that your children would need the financial support the most if both you and your spouse passed away at the same time. A horrible thought, but one you have accounted for with your plan. (For considerations involving the guardianship of your children click here)

Naming your children as contingent beneficiaries of your life insurance policies can actually have several unintentional consequences - two that I want to address here.

• The proceeds of a life insurance policy naming minor children as beneficiaries will pass through probate

You decide who will get your life insurance payout by using a mechanism called a beneficiary designation. This is efficient element of life insurance because it means that the life insurance payout will not pass through the probate process and instead will be paid out directly to the named beneficiary by the insurance company. (In fact, a beneficiary designation will actually trump your will, so be aware of those considerations as well).

However, if the proceeds of your life insurance are directed to a minor child as a contingent beneficiary, the insurance company will NOT pay out the proceeds directly to the minor. We can all agree that most of our children probably wouldn’t be thinking about how to reinvest the money – so its is a good thing they wouldn’t end up with it outright at a young age.

What this ultimately means is that proceeds of your life insurance payout would pass through the probate process. Without going into all of the negatives of the probate process, what this means is that a judge will decide who will controls the life insurance proceeds and when your child receives them.

Now that their minor kids are involved in the probate process, the issue that distresses most of my clients is the fact that their children’s names will now be part of a public probate court proceeding where any hustler or predator could learn how much money they are set to inherit.

Don’t unintentionally expose your minor children to the probate process on account of not understanding how beneficiary designations work.

Want to speak with me about what you can do to ensure that your beneficiary designations are set up correctly? Click the button below to schedule a 15 minute informational call with me!

• If you have designated your child as beneficiary of your life insurance policy, the court will distribute the entire proceeds of the policy outright to your child at the age of 21.  

This means that your (technically adult) child will be given a large chunk of cash to do whatever he or she wants to with it.

I ask my clients to consider what they would have done with a $600k or $1.5m check on their 18th or 21st birthday. This unpleasant thought usually elicits some nervous laughter from the parents. What is even worse, is that in this nightmare situation our children would not even have the benefit of the guidance of their parents at this time. They would be on their own and with a lot of cash in their pocket.

After two minutes of contemplating this, we know that our children would probably irreparably damage their chances of having a fulfilling and productive life within a very short amount of time. Anyone would with that much spending power and no life experience or wisdom to temper it.

Understandably, my clients are usually interested in taking steps to protect the proceeds of their life insurance policies for their children’s benefit in a private trust, not a limited, court sanctioned one. This not only addresses the privacy issue discussed above but allows their financial needs met immediately, but restricts access to large chunks of money until later in life.

My firm also works with them to establish a trust that can protect their children’s inheritance for life, not only from themselves but from lawsuits, divorce and bankruptcy. This is very rewarding for me because I have personally witnessed the negative effects on a young person when they come into a large amount of inherited money outright.

If you are interested in having a discussion about any of these issues and you would like a personalized review of your beneficiary designations, please click the button below to schedule a phone call with me. I look forward to speaking with you!

Don't Make Any of These Six Mistakes When Nominating Guardians for Your Children

As parents, we have all shuddered to think what would happen to our kids if we passed away suddenly. Eventually, we all decide to do the responsible thing and put a plan in place to protect our children. Since the stakes are so high, we want to implement a totally comprehensive solution that cover all the angles if the unthinkable ever happened.

Most attorney’s simply recommend that you appoint a guardian in your will to “solve” this issue. Is that really enough? The discussion should not be quite this open and closed as this. Who will raise your children if something happens to you is an extremely important consideration – and not one you should gloss over. Likewise, how this horrible transition would be handled legally and logistically is another. It gets complicated very quickly. Therefore, failing to put the required amount of thought and into this issue may cause you to make one the six common mistakes I see below.

1.       Naming a couple to act as guardians and failing to define what should happen if the couple breaks up or one of the partners passes away. In the event that one of your nominated guardians passes away, have you considered if the other would have the emotional and physical capacity to raise your children as well? If the couple you have nominated has gotten a divorce, do you want to insert your grieving, shocked children into that situation? This is something think about and put into your guardianship documents.

2.       Only named one possible guardian. What if something happens to your first choice? The plan you design to protect your children should be iron-clad and have several contingency plans. You do not want a court to be forced to make this decision without your guidance.

3.        Have not considered financial resources when deciding who should raise your children. Your guardians do not have to (and often should not) be financial decision makers for your kids. Many times I have clients that write off perhaps the best choice to raise their children because they don’t think that couple or individual could financially support the added burden. This is not the correct thought process and I work with my clients to develop a plan that allows them to name the best guardian, regardless of financial resources.

4.       Only have a Will, which means the Court will decide how to distribute your money, it’s totally public and doesn’t protect your money from their divorce and lawsuits. If you have life insurance proceeds or other assets you would leave to your minor children if you passed away, these will be processed by the probate court in your county. Many parents do not like the idea of anyone off the street being able to learn the exact date that their children will be receiving a large sum of money outright. If this is a priority for the parents I help them develop a plan that would keep their assets totally private for their children and also protect them from lawsuits, creditors and divorce even when the children grow up.

5.       Did not exclude anyone who might challenge your guardian decisions or who you know you’d never want to care for your kids. If  you have family that might challenge your nominations in court, it may be a good idea to specifically exclude that family member so that the court will recognize that you specifically did not want them considered to be your children’s guardian. Often times the thought that they may have access to some of the children’s inheritance will bring these relatives out of the woodwork so to speak. I work with my clients to confidentially exclude these relatives just in case the situation presented itself. The relatives will never know such a document exists unless it is needed.

6.       Only named guardians for the long-term and did not make any arrangements for the short term if you were in an accident. What would happen in those immediate hours until your permanent guardians could arrive? This is a scary and often overlooked situation. I like to protect my clients children with additional temporary guardianship options in their direct area that would have a better chance of quickly being on the scene if needed – especially if your my client’s choice of permanent guardian lives any distance away from the family home.

If you feel like your plan may have overlooked some of these issues I would love to speak with you further. I only take a limited number of clients per month, but would love to speak with you by phone to hear about your specific situation and whether I could be of service to you. I would be happy to provide you with some personalized advice about appointing guardians whether we end up working together or not.

Learn more about how to protect your children by booking your call below!

The Real Cost To Your Family: Not Planning For Incapacity

When it comes to estate planning, most people automatically think about taking legal steps to ensure the right people inherit their stuff when they die. And these people aren’t wrong.

Indeed, putting strategies in place to protect and pass on your wealth and other assets is a fundamental part of the planning equation. However, providing for the proper distribution of your assets upon your death is just one part of the process.

And it’s not even the most critical part.

Planning that’s focused solely on who gets what when you die is ignoring the fact that death isn’t the only thing you must prepare for. You must also consider that at some point before your eventual death, you could be incapcitated by accident or illness.

Like death, each of us is at constant risk of experiencing a devastating accident or disease that renders us incapable of caring for ourselves or our loved ones. But unlike death, which is by definition a final outcome, incapacity comes with an uncertain outcome and timeframe.

Incapacity can be a temporary event from which you eventually recover, or it can be the start of a long and costly event that ultimately ends in your death. Indeed, incapacity can drag out over many years, leaving you and your family in an agonizing limbo. This uncertainty is what makes incapacity planning so incredibly important.

In fact, incapacity can be a far greater burden for your loved ones than your death. This is true not only in terms of its potentially ruinous financial costs, but also for the emotional trauma, contentious court battles, and internal conflict your family may endure if you fail to address it in your plan. 

The goal of effective estate planning is to keep your family out of court and out of conflict no matter what happens to you. So if you only plan for your death, you’re leaving your family—and yourself—extremely vulnerable to potentially tragic consequences.

Where to start

Planning for incapacity requires a different mindset and different tools than planning for death. If you’re incapacitated by illness or injury, you’ll still be alive when these planning strategies take effect. What’s more, the legal authority you grant others to manage your incapacity is only viable while you remain alive and unable to make decisions about your own welfare.

If you regain the cognitive ability to make your own decisions, for instance, the legal power you granted others is revoked. The same goes if you should eventually succumb to your condition—your death renders these powers null and void.

To this end, the first thing you should ask yourself is, “If I’m ever incapacitated and unable to care for myself, who would I want making decisions on my behalf?” Specifically, you’ll be selecting the person, or persons, you want making your healthcare, financial, and legal decisions for you until you either recover or pass away.

You must name someone

The most important thing to remember is that you must choose someone. If you don’t legally name someone to make these decisions during your incapacity, the court will choose someone for you. And this is where things can get extremely difficult for your loved ones.

Although laws differ by state, in the absence of proper estate planning, the court will typically appoint a guardian or conservator to make these decisions on your behalf. This person could be a family member you’d never want managing your affairs, or a professional guardian who charges exorbitant fees. Either way, the choice is out of your hands.

Furthermore, like most court proceedings, the process of naming a guardian is often quite time consuming, costly, and emotionally draining for your family. If you’re lying unconscious in a hospital bed, the last thing you’d want is to waste time or impose additional hardship on your loved ones. And this is assuming your family members agree about what’s in your best interest.

For example, if your family members disagree about the course of your medical treatment, this could lead to ugly court battles between your loved ones. Such conflicts can tear your family apart and drain your estate’s finances. And in the end, the individual the court eventually appoints may choose treatment options, such as invasive surgeries, that are the exact opposite of what you’d actually want.

This potential turmoil and expense can be easily avoided through proper estate planning. An effective plan would give the individuals you’ve chosen immediate authority to make your medical, financial, and legal decisions, without the need for court intervention. What’s more, the plan can provide clear guidance about your wishes, so there’s no mistake or conflict about how these vital decisions should be made.

What won’t work

Determining which planning tools you should use to grant and guide this decision-making authority depends entirely on your personal circumstances. There are several options available, but choosing what’s best is something you should ultimately decide after consulting with an experienced lawyer like us.

That said, we can tell you one planning tool that’s totally worthless when it comes to your incapacity: a will. A will only goes into effect upon your death, and then it merely governs how your assets should be divided, so having a will does nothing to keep your family out of court and out of conflict in the event of your incapacity.

The proper tools for the job

There are multiple planning vehicles to choose from when creating an incapacity plan. And this shouldn’t be just a single document; instead, it should include a comprehensive variety of multiple planning tools, each serving a different purpose.

Though the planning strategies you ultimately put in place will be based on your particular circumstances, it’s likely that your incapacity plan will include some, or all, of the following:

A comprehensive healthcare directive: An advanced directive that grants an individual of your choice the immediate legal authority to make decisions about your medical treatment in the event of your incapacity. This document also may provide specific guidance about how your medical decisions should be made during your incapacity.

Durable financial power of attorney: A planning document that grants an individual of your choice the immediate legal authority to make decisions related to the management of your finances, real estate, and business interests.

Revocable living trust: A planning document that immediately transfers control of all assets held by the trust to a person of your choosing to be used for your benefit in the event of your incapacity. The trust can include legally binding instructions for how your care should be managed and even spell out specific conditions that must be met for you to be deemed incapacitated.

Don’t let a bad situation become much worse

You may be powerless to prevent your potential incapacity, but proper estate planning can at least give you control over how your life and assets will be managed if it does occur. Moreover, such planning can prevent your family from enduring needless trauma, conflict, and expense during this already trying time.

If you’ve yet to plan for incapacity, meet with us as you’re an attorney who focuses on this typ of planning right away. Tramm Law Firm, PLLC can counsel you on the proper planning vehicles to put in place, and help you select the individuals best suited to make such critical decisions on your behalf. If you already have planning strategies in place, we can review your plan to make sure it’s been properly set up, maintained, and updated. Contact us today to get started.