We hope you have enjoyed our episodes of Beyond Investments on KNCO! In this episode, Seth Leishman and Rick Fisher share how the market has been performing lately and what businesses are doing to open up again, and how consumers are responding.
In the second half, Seth Leishman and Rick Fisher discuss estate planning and how vital it is for every family.
By Allen Ostrofe | Download PDF
We received a call from Tom & Siobhan from Walnut Creek, California. They asked how the “Setting Every Community Up for Retirement Enhancement (SECURE) Act”, signed on December 20, 2019, might impact their retirement/estate planning. Both are employees, 69 years old, and charitably inclined. Both did not want to start taking required minimum distributions from their retirement at age 70.5 years. Instead, they both wished to extend the distributions of their IRAs, after their deaths, to their grandchildren ages 10 and up, for the duration of their grandchildren’s lifetimes. This example is called a “Stretch IRA”. The new Tax Act has changed their plan!
The answer depends upon whom you ask. Our Congressmen and Senators state that 700,000 more Americans will have access to retirement plans (source: American Council of Life Insurers). Small businesses are being offered tax credits from $500 to $5000 to start a new plan. However, those of us who frustratingly watch our government’s “deficit spending” believe it helps offset the government’s tax revenue loss from too much deferring of our required minimum distributions (RMD’s). One Certified Financial Planner (CFP®)—those who are held to the highest “Fiduciary Standard”—states: “From an advisor standpoint, I’m more than happy to trade off the loss of the stretch IRA to postpone the RMD age a bit longer, and be able to contribute longer! 10-years of deferring taxable income (instead of over the beneficiary’s lifetime) is still financially favorable!”
Will the change from 70.5-Years (or April 1st of the following year) to age 72 improve Tom and Siobhan’s distribution plan? Since Tom and Siobhan have no plans to retire soon, and they do not own more than 5% of their company, this is a windfall. They gain up to two years tax-deferred compounding of their untouched retirement funds, and they can still contribute more! They still have the option at age 70.5 years to make tax-free contributions to qualified charities (501c[3]) of their choice from their IRA, up to $100,000 per year. This strategy avoids taxes completely, while benefitting cash-strapped non-profit organizations.
Under the old law, designated beneficiaries of an inherited IRA, ROTH, 401k, or 403(b) had the ability to “stretch” the distributions over their life expectancy. The SECURE Act reduces the maximum distribution period from these accounts (any owner who died after December 31, 2019) to 10 years. There are no requirements that payments be taken every year, just that the account must be fully liquidated by the end of 10 years. There are exceptions to the 10-year rule for surviving spouses, disabled individuals, beneficiaries less than 10 years younger than the account owner, and minor children of the account owner. These individuals will still be allowed to take a life-expectancy payout. We suggest scheduling a meeting with both a Certified Financial Planner (CFP®) and an estate planning attorney to develop an alternative strategy to ensure “income for life” for individuals not exempted from this new law, like older grandchildren.
The beneficiaries of your IRAs, ROTH IRAs, 401k’s, and 403b’s generally are controlled neither by your will nor your trust. Review with your CFP® to make sure that your current beneficiaries are accurate for every single retirement (or insurance) plan. Make certain that you have named “contingent beneficiaries”. Review to make certain you have named “real people” as beneficiaries or ask your advisor whether it is prudent to name a trust as beneficiary or contingent beneficiary. One downside of some trusts as beneficiary, is that the trust may be forced to liquidate over a 5-year, not 10- year period. Check that you have included “Per Stirpes” next to those beneficiaries where you wish their kids subsequentially included.
Tom and Siobhan have made necessary changes in the retirement and estate planning. How about you? And, if you know of someone who is over 70.5 years and still working, they might consider continuing to contribute to their IRA.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion. This information is a summary only and not meant to represent all provisions within the SECURE Act. Please consult your financial advisor regarding your specific situation.
Allen Ostrofe, MBA, CFP®, is President Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.
By Frederick "Rick" Fisher
Originally published in The Union on April 24, 2016. Download the PDF.
Over the last 26 years, I have settled three estates — and in my 18 years of financial planning, I have seen the effects of good planning and of poor planning.
Having an effective estate plan is crucial, however having a poorly thought out plan can be as harmful as having no plan at all.
Our firm routinely advises our clients who have yet to address their estate planning to do so. We provide referrals to competent estate planning attorneys. However, having a good estate planning attorney who will guide you through the process and prepare the appropriate documents, is not necessarily going to give you a proper estate plan. A crucial ingredient to the process has little to do with the attorney or the documents. It has to do with the choices the trustors make regarding who will administer the estate upon the death of the trustors, and how the estate will be distributed.
To illustrate we will take the case of the fictitious couple Richard and Monica Jones.
Richard and Monica are in their early 40s with three children under 18, with the youngest being 8. Richard is a banker and Monica is a part-time teacher.
A few years ago, Richard’s parents asked him if he would be the successor trustee for their trust. They chose him because he was a banker and understood financial concepts. They also felt that he had the proper temperament to take on this huge responsibility. Richard could separate the financial aspect of an estate from the personal considerations of an estate. Richard had seen firsthand in his role as banker, how having a person who struggles with the emotional part of administering an estate can create problems.
He remembered how a successor trustee refused to sell assets in order to pay estate bills and taxes, because they could not detach the deceased from the business part of estate administration. This led to fines, additional costs and fire sales that ultimately led to angry beneficiaries and lawsuits. Having successor trustees that can handle the job, from a business and emotional standpoint is crucial. Having accepted the role as successor trustee, I reminded Richard that he and Monica, had yet to complete their financial plan.
They had started, but got stuck on who would be the custodian for their three children; a key decision when creating an estate plan. Another concern for the Jones’ was how to fairly divide their property to their kids. Deciding to split the financial assets three ways was the easy part. The hard part was how to divide the personal items, the artwork, the collectibles, and the family photos.
This was going to take time and more discussion. To complicate matters, the Jones are wealthy and they want to make sure that their children don’t receive a financial windfall till they are ready. So, the decision is who will monitor the investments, and when should the children have access to the money. Fortunately, once the decisions are made, they are not set in stone. Estate plans can be amended as needed. Once the kids are grown, there is no need for guardians. In addition, they may be able to help trustors fairly divide up those personal items that are hard to assign.
In the end, Richard and Monica sat down and made the decisions necessary to get the plan in place, and took our advice to review every five years and make changes as needed.
If you have been putting off estate planning due to these issues, now is the time to set up a partnership with an Estate Planning Attorney and a Certified Financial Planner.
Frederick Fisher is a Certified Financial Planning Practitioner, and Insurance Agent. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, contact Rick Fisher at (530) 273- 4425, or Frederick.fisher@natplan.com, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley