3 Wealth Transfer Strategies to Help with Changes to the “Stretch IRA”

Since the passing of the SECURE Act, many account holders of IRAs are concerned for the tax burden on their heirs since the abandonment of the so-called “Stretch IRA.” Below we highlight 3 potential wealth transfer planning opportunities that we may discuss with our clients:

1. Life Insurance
   1. Due to the loss of the ‘stretch’, it may be helpful for clients who are intending on transferring the asset to heirs, to consider re-positioning strategy in which life insurance is purchased with annual taxable withdrawals from the IRA. Because the inherited IRA must be distributed within 10 years under the Act, this approach, referred to as the IRA/Qualified Plan Max strategy, may provide a larger tax-free legacy for heirs, while minimizing the income taxes for the beneficiary.
2. Charitable Remainder Trusts (CRTs)
   1. Consider that it is possible to name a testamentary CRT as beneficiary of the retirement assets in order to mimic what the ‘stretch’ would have looked for the children. That is, the account owner can plan on having the retirement assets distributed to the CRT at his/her death, and the trust will then make an annual distribution to the account owner’s children (as non-charitable income beneficiaries of the trust), each year for their respective lifetimes. At the death of the lifetime trust beneficiaries, the remainder of the CRT balance will then transfer to charity. Although the assets will be included in the owner’s estate at death, he/she will receive a charitable contribution deduction based on the federal 7520 present value rate and the ages of the children at that time. While the children will owe taxes on the distributions they receive from the CRT during their lifetimes, the CRT assets will continue to grow tax-deferred. During lifetime, the account owner may be able to carve out a portion of the IRA income to purchase life insurance to replace the value of the IRA transferring to charity.
3. Review IRA trusts
   1. Because the ‘stretch’ option in an IRA may be eliminated under the SECURE Act, trusts drafted in the past to receive IRA assets on behalf of beneficiaries should be carefully reviewed. That is current IRA assets transferring to non-spousal beneficiaries generally need to be distributed within five years after the death of the account owner. By having these retirement assets transfer to a ‘look-through’ trust instead—with children as beneficiaries of the trust—the trust would ‘stretch’ distributions over the life expectancy of the oldest beneficiary. These trusts may not make a lot of sense any longer under the SECURE Act since the ‘stretch’ would be eliminated. Moreover, the fact that the assets will need to be distributed over a ten-year period under the Act, the benefits of using such a trust likely does not outweigh the high tax rates that come with the arrangement. Thus, this presents a good opportunity to review your estate documents with your attorney.

These are just a few strategies that may be a potential solution to help alleviate any new concerns derived from the changes of the SECURE Act, specifically to the “Stretch IRA.” A lot of the above aforementioned strategies involve careful estate examination. Vertex Planning Partners welcomes the opportunity to meet with you and your attorney to ensure that the strategy is executed properly. Vertex Planning Partners works with attorneys specializing in complex estate matters. Contact an advisor at Vertex to learn more about how these strategies could potentially help your legacy.

The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.