Five Ways to Protect Your Financial Legacy from the SECURE Act

This month, I want to provide you with the following proactive steps you can take now to protect your family’s financial future after the SECURE Act (or something similar) becomes law. The information is from my new book, Retirement Plan Owner’s Guide to Beating the New Death Tax, an Amazon #1 Best-Seller.

1. Reduce Your Traditional IRA Balance with Roth IRA Conversions

If timed correctly, Roth IRA conversions can be an effective strategic planning tool for the right taxpayer. Often, a well-planned series of Roth IRA conversions will be a great thing for you and your spouse and will be one of the principle defenses from the devastation of the SECURE Act. You and your heirs can benefit from the tax-free growth of the Roth IRA from the time you make the conversion up to 10 years after you die. One of the advantages of making a series of conversions is that the amount you convert to a Roth IRA reduces the balance in your Traditional IRA, which will reduce the income taxes your heirs will have to pay on the Inherited IRA within 10 years of your death.

Inherited Roth IRAs are subject to the same 10-year distribution rule after death as Inherited Traditional IRAs under the SECURE Act. The important difference between the two accounts is that the distributions from Roth IRAs are generally not taxable. One good thing about the Tax Cuts and Jobs Act of 2017 is that it temporarily lowered income tax rates, so this year is probably a better than average year for many IRA and retirement plan owners to consider Roth IRA conversions as part of their long-term estate planning strategy.

In short, it may make more sense for you to pay income taxes on a series of Roth IRA conversions done over a period of years than it would for your heirs to pay income taxes on the accelerated distributions as will be required under the SECURE Act. The strategy of doing a series of Roth IRA conversions over several years tends to work better because you can often do a series of conversions and stay in a lower tax bracket than if you did one big Roth conversion.

2. Spend More Money

Many of you don’t spend as much money as you can afford. Maybe if you realize to what extent your IRAs and retirement plans will be taxed after you die, you would be more open to spending more money while you are alive. Why don’t you enjoy your money rather than allowing the government to take a healthy percentage of it? Considering taking your entire family on a vacation and paying for everything. My father-in-law takes his entire family on a 4-day annual vacation in the Poconos. Yes, it costs him, but family memories will be a more valuable legacy than passing on a slightly bigger IRA―especially if your IRA is destined to get clobbered with taxes after you die.

A variation on the same idea is to step up your gifting plans―not only to charity but also to your family. Sometimes it makes sense to lend a financial helping hand to family members who might need one sooner than later.

3. Update Your Estate Plan

Thoughtful estate planning can provide options for survivors that will allow them to make better decisions because they can do so with information that is current at the time you die. Even if you have wills, life insurance and trusts, the changes in the laws suggest you review and possibly update your estate plan. This includes your IRA beneficiary designations too, and that’s particularly true if you have created a trust that will be the beneficiary of your IRA or retirement plan. Assuming some form of the SECURE Act is passed into law, you would likely improve your family’s financial security by updating your estate plan.

4. Life Insurance & Sprinkle Trusts

The changes brought about by the SECURE Act could make life insurance more valuable to your estate plan than in the past. The idea is you would withdraw perhaps 1% or 2% of your IRA, pay taxes on it, and use the net proceeds to buy a life insurance policy. In the past, your heirs could stretch the IRA over their lives. The SECURE Act makes life insurance much more attractive. Another good strategy for some IRA owners under the SECURE Act is Sprinkle Trusts. If used in an optimal manner, they can provide families with the opportunity to spread the tax burden from Inherited IRAs over multiple generations by including children, grandchildren, and great-grandchildren as beneficiaries. Sprinkle Trusts have become more attractive recently because they can offer significant tax benefits to certain IRA owners, but they can also have hidden downfalls so discuss with an attorney who has expertise in both tax and estate planning to map out a strategy that is appropriate.

5. Combine Different Strategies

Perhaps the best response to the SECURE Act involves a combination of strategies including revised estate plans, a series of Roth IRA conversions, a series of gifts and the purchase of a life insurance policy.

Please note that the SECURE Act will not apply directly to an IRA or retirement plan that you leave your spouse. After your spouse dies and leaves what is left to your children, then the SECURE Act rears its ugly head.

The foregoing content from Lange Financial Group, LLC is for informational purposes only, subject to change, and should not be construed as investment or tax advice. Those seeking personalized guidance should seek a qualified professional.