Estate planning is one of the most complex areas in law. While many estate plans may not require detailed strategies involving complicated legal concepts, even straightforward plans often involve subtleties and can benefit from thoughtful consideration. Retirement savings comprise one component of estate planning, but this aspect of the plan can be crucial in achieving an overall objective. And because the SECURE Act of 2019 (SECURE 1.0) has changed the rules for passing on retirement savings to younger generations, careful planning has become even more necessary.
Some Key Estate Planning Considerations
Any brief discussion of estate planning issues can only touch the surface. Therefore, it's crucial that self-directed IRA (SDIRA) owners seek sound advice when setting up or revising their estate plan. While there are several key items that you should consider as part of any plan involving your SDIRA, professional guidance can provide reassurance and confidence in your decisions.
Law changes make a big difference
SECURE 1.0 significantly altered the withdrawal options for certain beneficiaries in the event that the IRA owner passes away after 2019. For example, the previous rules allowed any individual (versus a nonperson) to take annual payments based on the life expectancy of the beneficiary. This was known as a "stretch IRA." Now, when an IRA owner dies in 2020 or later, many beneficiaries (e.g., adult children of the IRA owner and grandchildren) must deplete the IRA by the end of the tenth year following the year of the IRA owner's death. One of Congress's main reasons for changing this rule was to raise tax revenue. But the new requirement also prevents larger accumulations of wealth—for generations, in some cases. Since fewer beneficiaries can now elect the stretch IRA option, IRA owners may want to reconsider how their retirement assets can best be utilized for their own benefit and for the greatest advantage of their beneficiaries.
Roth IRA versus Traditional IRA?
Determining the right balance between Roth and Traditional IRA assets for your best financial outcome is another essential objective. For example, you might have rolled over substantial pre-tax assets from your 401(k) plan into a Traditional IRA. If you decide to convert some of these assets each year to your Roth IRA, it may take a while to reach your preferred balance. The conversion decision itself is an important one—one that should be made after consulting with a competent advisor. In addition to the tax implications for IRA owners, there are tax benefits for the beneficiaries of Roth IRAs. Specifically, beneficiaries will typically receive Roth distributions tax-free and penalty-free.
Beneficiary designations are important.
On one level, the importance of your beneficiary designation seems obvious. Of course, you want to provide for loved ones, for instance, so you name them as beneficiaries. However, beneficiary designations sometimes have subtle—but critically important—characteristics. For example, IRA assets that pass directly to beneficiaries generally bypass the probate process. That is, IRA funds can usually be paid directly to named beneficiaries rather than being paid first to the estate of the decedent and then distributed to the estate's beneficiaries. If the estate is the beneficiary, then the IRA assets typically must be collected by the estate's personal representative and distributed from the estate account. This process slows down distributions to the beneficiaries and generates more work. Thoughtful beneficiary designations can also serve the broader purpose of the estate plan.
Example: Bettie wants to give a portion of her wealth to a charity on her death, and she makes this bequest in her will. But she has named her sons as beneficiaries of her Traditional IRA. Therefore, her sons will be required to pay income tax on any distributions from this IRA, whereas some of Bettie's other assets would not be taxed when paid to her sons. By naming the charity as a partial beneficiary of her Traditional IRA, Bettie could have changed a normally taxable distribution into one that would not be subject to income tax if paid to an eligible charity.
Well-conceived beneficiary designations can significantly enhance your overall estate plan. On the other hand, certain designations can act at cross-purposes with an otherwise solid estate plan. So paying close attention to your choices can yield significant benefits.
Three Recommendations
The following suggestions help you align your self-directed IRA plan with your overarching estate plan.
- Seek sound estate planning advice. Plenty of attorneys will draft a will for you. In fact, you can do it yourself after a brief Internet search. However, hiring a competent lawyer to integrate all aspects of your long-range plan is likely worth the added expense.
- Review your beneficiary designations regularly. This applies both to IRA and non-IRA designations, and should include a review for life events such as
- deaths in the family (including those of existing beneficiaries),
- births,
- marriage or divorce, and
- any major change in your financial situation.
- Understand beneficiary distributions under the new rules. SECURE 1.0 and the resulting final IRS beneficiary rules have necessitated significant adjustments from the previous rules. Knowing some of the basics may help you make the right decisions when designating your IRA beneficiaries.
Although estate planning choices don't have to be overly complicated, they are important—and can significantly influence the benefits your loved ones receive. STRATA recognizes the seriousness of these decisions, and we're here to assist. Reach out to our IRA experts with any questions about the rules governing your self-directed IRA.
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