The Best Estate Plan for Most Married IRA Owners After the SECURE Act

by James Lange, CPA/Attorney

Effective January 1, 2020, we have a radically different law governing Inherited IRAs and retirement plans. The stock market seems jittery and that may continue for a long time. Your own finances and family situation could change significantly between the time you draft your wills, trusts, and beneficiary designations and the time of your and/or your spouse’s death.

The Elephant in the Room of Estate Planning 

The elephant in the room of estate planning is uncertainty, and many traditional estate plans take a fixed in stone approach that does not account for changing circumstances. Most married IRA owners have “I love you” wills. They typically name their surviving spouse as the primary beneficiary, and then their children equally as the contingent beneficiaries. They name trusts for the grandchildren of predeceased children. Usually, the children don’t get any money until both the husband and wife die, and the grandchildren don’t get anything until their parents die.

Using Disclaimers to Benefit your Estate Plan

Image featured in the Jewish Chronicle in Pittsburgh, PA. Article written by CPA/Attorney James Lange, posted on his site paytaxeslater.comA better idea for many married couples would be to include disclaimer provisions in their plan which allows your named beneficiary to say, “I don’t want this money — give it to the next person in line.” If you include disclaimer provisions in your wills, trusts, and in the beneficiary designations of your IRAs and retirement plans, your surviving spouse has up to nine months after your death to consider how much to keep and how much to disclaim to your children. Your children would also be able to disclaim well-drafted trusts for the benefit of their own children.

The passage of the SECURE Act, effective January 1, 2020, has put a big crimp in that strategy. Now, subject to exceptions, the beneficiary of a traditional Inherited IRA must withdraw and pay taxes on that Inherited IRA within 10 years of the IRA owner’s death. One of the important exceptions is the surviving spouse.

So, a surviving spouse now gets a longer “stretch” than the children or grandchildren. Although there is not as much income tax incentive to disclaim IRA dollars, there is still an incentive. In addition, there may be an incentive to disclaim after-tax or non-IRA dollars. But again, I don’t want a reader to commit to a certain course of action when changing circumstances could make any “fixed in stone” plan less than optimal.

The point is there is a constant uncertainty surrounding what laws will be in effect when you die. Furthermore, for each type of asset, whether it is an IRA, a Roth IRA, a brokerage account, life insurance, an annuity, a house, or other assets, there might be compelling reasons for who should get what both at your death and when your spouse dies that you can’t accurately predict today. A change in circumstances could change the optimal choice of which beneficiary gets which asset.

If your estate plan includes traditional estate planning documents that “fix in stone” the distribution of your assets to your heirs, they are not likely to get the full benefit of your legacy. Better decisions regarding who should get which assets can be made after your spouse dies, when circumstances are current and clear. Furthermore, if your estate planning documents are drafted with disclaimer options like Lange’s Cascading Beneficiary Plan (the name of our plan), your surviving spouse will have nine months after your death to think about options and determine the best strategies both for themselves and the family.

These decisions can be made either with their family or, ideally, with their family and a trusted advisor who understands the enormous benefit of flexible estate planning combined with tax-savvy post-mortem estate planning. Post-mortem estate planning is when you determine a course of action based on what is best for the spouse and the family after the death of the IRA owner. Similarly, after you both die, providing your heirs (usually children) with as much flexibility as possible is also optimal.