Based on my news feed, and the sudden increase of emails forwarding me articles on this topic, interesting legislation on IRAs has caused many financial planners, clients and estate planning attorneys to review and potentially rethink how IRAs are coordinated with a client’s estate plan. The link below will take you to an article posted on Barron’s discussing this new legislation.
My take:
Yes, if Congress enacted this legislation, it would definitely mitigate the IRA’s tax-mitigation benefits- and growth potential for IRA-owners’ heirs. Namely, limiting the stretch out period to 10 years vs. a person’s life expectancy, which could be 30, 40, 60 years, greatly impacts the IRA’s income-tax mitigation properties.
From a revocable living trust planning perspective, the proposed elimination of the stretch, also reduces the effectiveness of IRA trust conduit provisions. IRA conduit provisions allow IRA’s to be held in trust while preserving the stretch-out. Such provisions require RMDs to be distributed to the beneficiary, while protecting the income-producing principal. While this article and many others I have seen state that the proposed legislation would be the end of IRAs as an estate planning tool, I believe this is an overstatement.
As I see it, in coordinating IRAs with one’s revocable living trust, it would be important to have toggle provisions in the trust to switch between an accumulation trust and conduit trust, depending on the client(s)’ estate planning goals. Accumulation trust provisions permit distributions from IRA to be retained in trust, and distributed under the trust’s terms. For example, let’s assume that you have an IRA valued at $500,000. Using simple and inaccurate math (I am a lawyer after all), if the legislation required the IRA to be distributed over 10 years, then $50,000 (+interest/appreciation, etc.) would have to be distributed annually. Therefore, if you designated your trust (having conduit provisions) as the beneficiary, the trust would distribute that annual amount directly to the beneficiary. On the other hand, if you had accumulation trust provisions, the trust would take the $50,000 and retain such distribution in trust. By retaining it in trust, the Trustee would then have the discretion to distribute the $50,000 for a home down-payment, or not at all, or for whatever purpose you have carefully decided under the terms of your trust.
Further, if a client has a spendthrift beneficiary or young beneficiary, the accumulation provisions would be important to retain the payout of the IRA over the 10 year period (whatever is finally decided, if Congress enacts what is discussed in the article). In any event, the estate planning conversation now and upon the enactment of such legislation would need to balance the tax ramifications, client(s)’s long term goals for the beneficiary and the beneficiary’s delicate nature. Of course there are a number of other considerations to consider that are particular to the client and each individual beneficiary that weigh in on whichever estate planning decisions are made.
I hope this provides a little insight into what I speculate would be the new planning concerns if such legislation was enacted. While each person should periodically review his or her estate plan to address potential impacts of new legislation, estate plans crafted and designed based on a family’s own persona and characteristics require less adjustments based on legislation than those designed with only taxes on the brain.
Written By: Shayna W. Borakove, Attorney and Counselor at Law, Partner