Over the past couple of years, I have had a lot of colleagues ask me if pending legislation to limit IRA stretchout would then kill the IRA Inheritance Trust®. For some time, nothing was certain. Details of proposed legislation were vague and it was not clear exactly how it would affect IRA planning.
Finally, in September of last year, under the assumption that a change in the IRA stretch law would bring in $5.5 billion over the next 10 years, the Senate Committee on Finance unanimously voted 26 to 0 to approve the “Retirement Enhancement and Savings Act”. This new law would require beneficiaries of an inherited IRA to pay all taxes due on the account within five years of the IRA owner’s death.
Some people believe that this proposal, if passed and signed into law, will spell the end for IRA Trust planning. I disagree.
This new law does not apply to IRAs or retirement plans that are left to a spouse and there is a $450,000 exemption for non-spouse beneficiaries that will allow the existing stretch IRA law to apply (e.g. a $500,000 IRA would only have $50,000 subject to the 5 year rule).
What this all means is that the stretchout benefits of the standalone IRA Trust are still applicable for IRAs up to the first $450,000. And, as for the excess over $450,000, there likely will be more work for estate planning professionals, such as Roth conversions or lifetime IRA withdrawals to fund (after income tax) irrevocable life insurance trusts. Further, it is important to note that the stretchout benefit is just one of two key benefits of IRA Trusts. The other is asset protection and that will still be important with respect to IRA distributions remaining after income tax, as well as the balance still inside the IRA.
So, regardless of the value of IRAs and the pending law change, the IRA Trust strategy is still a highly viable planning strategy for many, if not most, clients.
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ABOUT THE AUTHOR
Attorney Philip J. Kavesh is the principal of one of the largest estate planning firms in California – – Kavesh, Minor and Otis – – which has been in business since 1981. He is also the President of The Ultimate Estate Planner, Inc., which provides a variety of training, marketing and practice-building products and services for estate planning professionals.
If you would like more information or have a question for him, he can be reached at [email protected] or by phone at 1-866-754-6477.
OTHER ARTICLES IN THIS ISSUE
- ASSET PROTECTION: The Strange Case of Dr. Jekyll and Mr. Oshins – Chapter I (Uniform Acts: Good or Bad?) by Steven J. Oshins, Esq., AEP (Distinguished)
- SUPPORT & ADMINISTRATIVE STAFF: Oh *%@! You Messed Up! Now What? by Kristina Schneider, Executive Assistant