SECURE Act Presents Hurdles for IRA Owners’ Estate Plans

Passing the SECURE Act on December 19, 2019, has changed how retirement account distributions must be made. Congress’ timing made it impossible for professionals to comply with the new law before its effective date of January 1, 2020.

By passing the SECURE Act, the IRS changed the definition of a Designated Beneficiary for IRA and retirement plans. This is important as only Designated Beneficiaries, as defined by the IRC §409(a)(9), may stretch the payment of an IRA over their life expectancies.

Under the SECURE Act, the only Designated Beneficiary eligible for stretch IRA treatments are:
1. Surviving spouses;
2. Minors under the age of majority (but they must withdraw the entire balance within ten years after attaining the age of the beneficiary);
3. An individual who is less than ten years younger than the account holder;
4. Disabled beneficiaries; or
5. Chronically ill beneficiaries.

For the latter two categories, the original statute contradicted existing regulations and rulings.

A task force of the National Academy of Elder Law Attorneys (of which I was a member) prepared an issue brief for the Congressional Joint Commission on Taxation pointing out the problematic issues. I am glad to announce the Joint Committee found our issues valid and amended the law to allow those beneficiaries to stretch their benefits. Since the law is two days old, we are reviewing the statute to assure our issues were properly addressed.

Everyone else is no longer a Designated Beneficiary and must receive the entire account balance, including accrued interest, within ten years. Unlike the prior law, those beneficiaries have to take minimum distributions over the ten year period. The beneficiary can allow the account to accumulate income tax free if the account is distributed by the end of the ten-year period.

To make matters worse, every estate plan providing for stretch payments to those who are no longer Designated Beneficiaries are no longer valid and must be revised.

There may be other options available. Many reputable estate planners have been blanketing the internet with seminars on how to handle the new act. Personally, while I agree with many of their conclusions, it would appear that except for limited circumstances, taking immediate action may be counterproductive, until a careful analysis of the law is complete.

Many suggestions involve the purchase of life insurance using distributions from IRAs to pay the premiums. While this may be acceptable to many clients, some clients are averse to insurance or may be uninsurable. Other solutions offered are charitable remainder trusts. While they may be acceptable to some clients, the deferral is not as efficient as the deferral under the old rule, and the charity must receive at least 5% of their trust assets.

If the wrong option is selected, it may be impossible to correct.

If you have questions, please call the office at 516-307-1236.


This November, the IRS issued proposed regulations changing the life expectancy tables and distribution period tables for computing the required minimum distribution (RMD). This information is used for owners of retirement accounts and their beneficiaries for inherited accounts, to calculate their withdrawals. Keep in mind, under the SECURE Act, beginning in 2020, the starting age for IRA distributions increases from 70 ½ to 72.

The Department of the Treasury and the IRS examined the life expectancy and distribution tables along with current mortality data. They concluded that the tables need to be updated to reflect current life expectancy.  The new information was based on mortality rates for 2021.

Not surprisingly, American life expectancy has increased. Under the prior tables, a married couple within 10 years of each other’s age would have a life expectancy at age 70 of 27.4 years. Under the new table, the life expectancy would be 29.1 years.

A longer life expectancy means a smaller RMD. That’s excellent for purposes of wealth preservation and transfer.

Here is an example of what this might mean for a 73-year-old couple with a $560,000 IRA beginning of year balance.

• Under the old table, they would have an RMD at age 73 of $22,672.
• Under the new table they’d have a smaller RMD of $21,212.
• Under the old table, if one of them lived to age 95, and they made 6%, they’d take out (and pay taxes on) about $920,000 of total RMDs and have an ending balance to the beneficiaries of about $448,000.
• Under the proposed table, they’d take out (and pay taxes) on about $907,000 of RMDs and have an ending balance of about $495,000.

If you have not yet taken your RMD for 2019, the window is closing quickly.

Contact your financial institution or advisor to ensure that you meet the requirements for RMDs for 2019.

Posted in RMD

Can You Trust Your Trust? – Part 1—Credit Shelter Trusts

Many trusts may be no longer necessary, may conflict with current tax laws or no longer meet the original intent of the person establishing the trust because of changes to federal estate tax laws. There may have been changes in family situations or perhaps a beneficiary has suffered a health event, creating a need for government benefits. Regardless of federal or NY estate tax laws, there are important options available.

Can you trust your trust? It depends. Let’s start with a look at Credit Shelter Trusts. These trusts are typically used to let a married couple reduce estate taxes when the second spouse dies.

In 1990, upon his wife’s death, a credit shelter trust was established for the benefit of the surviving husband. The trust was funded with a rental building and received a step-up in basis to $600,000. Funding the trust avoided the imposition of a federal estate tax upon the wife’s death. Upon the husband’s death, the children become the owner of the building.

It is now 2017, and the surviving husband is still alive. Over the years he received the income generated by the building, and the building is fully depreciated. The building has appreciated in value to $1.1 million.

Originally, the trust was necessary to avoid the imposition of a federal estate tax on the death of the wife. However, in 1990 the federal estate tax exemption was $600,000; and 2017 the federal estate tax credit is $5.49 million. Assuming the husband’s estate is under this number, there will be no federal estate tax.

However, upon the husband’s death, when the children become owners of the building, there is no step-up in basis; they inherit the property at the trust’s tax basis. Due to the past depreciation deductions, if the children sell the building there will be a recapture of the depreciation resulting in substantial income tax liability. Appreciation in the value of the building will produce capital gains.

The best move?

Distribute the property out of the trust directly to the husband or decant the credit shelter trust into a trust which will include the value of the building in the husband’s taxable estate. Upon the death of the husband, the children’s tax basis will be equal to the fair market value on the husband’s date of death. This wipes out any potential income tax attributable to both the appreciation of the property and the depreciation taken over the past 17 years.

If the children sell the building, a capital gain would is determined by the excess of the sales price over the value of the building on the husband’s date of death. Often all potential capital gains taxes are eliminated. And, since the husband estate was under the federal estate tax limit, there is no estate tax.

The same would hold true if the assets of the credit shelter trust are securities that appreciated over the years. The same strategy would eliminate any capital gains to the children upon the sale of the securities after their father’s death.

Every situation is different and a careful review of the existing trust document and each client’s situation is necessary to determine whether using any of these strategies are appropriate.

A Work In Process – Stay Tuned For Update On The Kiddie Tax And The New Tax Law

The article on QDiSTs published on this blog on January 31 is a complex topic, even for those of us who routinely scale the heights of tax law. I have realized it was too complicated and I am completing a scaled-down version.  Meanwhile, here is an update.

The core concept: I am making the case to consider non-grantor third-party trusts, a concept which most Elder Law attorneys routinely dismiss out-of-hand largely because they do not know about IRC 1(g). 

The new law makes the QDiST an important tool in our planning arsenal. 
In 2001, I received a call from counsel to the Congressional Joint Conference Committee on Tax. They had called Clifton Kruse, a nationally acknowledged expert in trust law; he referred them to me. I reviewed the proposed legislation with them and told them most trusts were grantor trusts, so the effect of the proposed legislation was limited. Counsel told me this was the proposed legislation and they would entertain no other proposals.
Under the prior law, there was a $4,050 trust exemption (indexed), and there was no Kiddie Tax — but no one seemed to know that. The standard deduction for the beneficiary was the lesser of earned income plus $350 or $1,050.

Under the new law, the exemption is $4,150, and the beneficiary gets a full standard deduction of $12,000. And until the beneficiary income exceeds $39,000, the beneficiary’s capital gains tax rate is zero.

If the beneficiary is under 24, there are virtually no income tax repercussions.

Also, going forward, there is still a trust exemption of $4,150 indexed for inflation, while other non-grantor trusts have only a non-indexed $100 or $300 exclusion. The trust can retain the exemption amount tax-free and can accumulate as a substantial fund for future needs, especially is invested for growth.
I spoke extensively with leading tax sources, and neither of them knew that QDiST income is earned income for Kiddie Tax. Another leading source agrees the QDiST is a more viable strategy.

To date, I have found no one who knew that since 2006, QDiST income is deemed earned income — since 2006!
This could be a considerably powerful tool in our planning arsenal.  If the parents are the taxpayers, the effective tax rate on the trust income is substantially higher.  
If the Special Needs Trust produced $15,000 in income, a grantor trust would produce upwards of $5,000 of tax to the parents; if the trust is a QDiST, there is no tax due.

QDiST’s shine when made the Designated Beneficiary of an IRA or pension.

If a QDiST is the Designated Beneficiary of an IRA, the tax benefits are enormous. Clients wanted to name their children as Designated Beneficiaries because they thought that if they left part of their deferred compensation plans to grandchildren with special needs, the tax burden would be prohibitive.

RMD’s on a $500,000 IRA between ages 10 and 24 produces less than $5,000 income tax, versus over $278,000 of distribution in a QDiST opposed to over $70,000 if the trust is not a QDiST.
I have also seen accountants who took the $4,050 trust exemption but still paid Kiddie Tax. 

Thank you for bearing with me as I work through the knots of this complex but equally potentially beneficial approach.

If you have questions or want a spirited debate, call me at 516-307-1236, or email I welcome further discussion on this and related topics.

Posted in Tax

Personal Finance 101: What’s the Difference Between a Stockbroker and an Investment Advisor

Thank you to Blank Slate for publishing my recent article, The Difference Between a Stockbroker and an Investment Advisor. Far too many people don’t understand that there is a big difference between these two roles.

A financial advisor must put their client’s interests first. They are a fiduciary, and have a legal and ethical obligation of primary loyalty to clients. 

A broker is not a fiduciary. Their primary loyalty is to themselves and earning commissions. There’s no doubt that some brokers do great work and earn every penny of their commissions, but clients are not their top priority.

The article goes into more detail on the roles, current regulations about broker sand advisors, and more.

If you don’t have time to read it, here’s the critical takeaway:

Know how the person who is handling your investments gets paid, so you know whose interest they are putting first. If it’s your money, you should always come first.

Does Your Will Need a Thorough Cleaning or Just a Refresher?

As a BBQ maven, I spend a fair amount of time making sure that my tools are well maintained. They take much abuse from high heat, charred fats, and sauces. The results are delicious, but the tools get messy.

Your estate plan faces more challenges than you may know. That’s why you need to review your estate plans. Sometimes all they need is a quick swipe, and other times, they need a thorough overhaul.

Here’s why, as detailed in a good article from Forbes, titled “Why You Should Change Your Will Now.”

There have been a lot of changes in the law regarding estate plans and taxes. Opportunities that were not available five, ten, or fifteen years ago could make the planning you did originally useless. Alternatively, there may have been changes in your financial situation that don’t work for your original will, or your will may be invalid.

Financial institutions are very cautious about Power of Attorney forms. If your Power of Attorney forms are older than five years, your loved ones will have a problem when they try to use them.

Let’s say that your financial situation improved dramatically in the last five years, but you never updated your will. You left a share of some small, unknown startup company to a nephew, thinking it might not be worth much, but you wanted him to have something. Today that startup is a global brand worth millions. Still, want to leave it to your nephew, or should your kids get it?

For parents with babies or teens when they created their estate plan, family situations may have changed. If your oldest daughter married someone whom you don’t trust, there are ways for you to ensure that she inherits assets that her husband can’t easily access.

What if you have an adult child with a substance abuse problem? Unfortunately, this touches many families today. There are planning strategies used to protect your child and ensure that they receive some financial support, using a trust with more control than one that distributes a certain amount of money at set ages.

A couple who did their estate plan while they were in their 40s and enjoying good health needs to review their estate plan if they are now in their 60s with health issues on the horizon. If either family’s relatives have diabetes, dementia, or other diseases that run in families, they likely need additional documents to prepare for several varying situations.

Any big change, like moving to a new state, divorce, death, birth, or marriage requires a review of the will. If one spouse dies, the will may have been originally prepared to continue to work for the surviving spouse, but many circumstances may have changed. It’s time for a review.

Grandchildren are perhaps the happiest reason to revise a will. Grandparents who want to help pay for college or summer camp expenses, or set up a trust fund so the money will be available later in their grandchildren’s lives, can do so as part of their estate plan. There are several strategies to make this happen in the most tax-efficient manner.

Wills and estate plans are not “set it and forget it” documents. They reflect individual lives and of the laws of the time. If it’s been years since you’ve been in our office to review your will (over three or four), please call the office at 516-307-1236 and make an appointment for a review.


Estates of decedents who die during 2020 have a basic exclusion amount of $11.58 million, up from a total of $11.4 million for estates of decedents who died in 2019.  An individual taxpayer may leave $11.58 million to heirs with no federal or gift taxes due. A married couple will be able to leave $23.16 million.

The gift tax exclusion remains at $15,000, the same as it was for 2019.

The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year.

For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 in for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800).The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600).

For tax year 2020, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $118,000, up from $116,000 for tax year 2019.

For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes greater than $518,400 ($622,050 for married couples filing jointly). The other rates are:

  • 35%, for incomes over $207,350 ($414,700 for married couples filing jointly);
  • 32% for incomes over $163,300 ($326,600 for married couples filing jointly);
  • 24% for incomes over $85,525 ($171,050 for married couples filing jointly);
  • 22% for incomes over $40,125 ($80,250 for married couples filing jointly);
  • 12% for incomes over $9,875 ($19,750 for married couples filing jointly).

The SECURE Act – What You Need to Know

While most of Washington is otherwise occupied, seven Republican Senators sent a letter to Senate Majority Leader Mitch McConnell, urging prompt passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement).

The SECURE Act passed the House of Representatives with strong bipartisan support in May by a vote of 417 to 3. The Senate was poised to pass it before Memorial Day by unanimous consent. However, at the last-minute, Ted Cruz voiced his objections, and the bill has been languishing ever since.

The letter portrays the SECURE Act as a lot of sunshine and happy news for the middle-class, the reality is much different. It contains seismic changes to IRA distribution rules in effect for over 40 years. It also permits sponsors of 401(k) plans to expand the use of annuities to provide benefits under the plan and repeals the onerous Kiddie Tax provisions, which subjected the children of soldiers killed in action to confiscatory income tax rates.

To summarize, the major provisions of the SECURE Act include:

  1. Sets age 72 as the required beginning date for distributions from an IRA;
  2. Requires beneficiaries of IRAs (other than surviving spouses, children under twenty-one, disabled beneficiaries, and chronically ill beneficiaries) to withdraw the entire balance of the account within ten years. Previously, the beneficiary of an IRA could stretch the payment of the IRA over their life expectancy;

It is believed the primary motivation eliminating the ability to stretch IRA payments is to speed up the payment of income tax on the distributions. While this may be true in the short run, eventually, it appears to be counterproductive. Under the current law, a forty-year-old beneficiary can withdraw the account balance over the remaining life expectancy of 43.6 years. The SECURE Act requires complete distribution within ten years;

Using the above example, upon the death of the parent, the forty-year-old child is the beneficiary of the $500,000 IRA. Using the current rules, the child would receive over $3.42 million while paying income taxes of over $1.37 million. Under the SECURE Act, if the child waits ten years to withdraw the entire balance, they would receive $983,000 and owe $393,000 in income tax. It appears they are mortgaging the future to increase revenue now;

  1. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the Kiddie Tax income tax rates to the same rates applied to trusts and estates. Gold Star children receiving benefits are subject to a federal income tax rate of 39.5% on income over $12,000. An adult taxpayer does not reach this level until the income exceeds $625,000.

The SECURE Act attempts to remedy the situation by repealing the increased Kiddie Tax rates enacted by the TCJA by repealing them. However, just like the TCJA, which is poorly drafted and contains many unintended consequences, the outright repeal may adversely affect Qualified Disability Trusts for children with special needs. The Senate passed a fix much simpler and has no unintended consequences;

  1. It makes it easier for plan sponsors to use commercial annuities to provide benefits in 401(k) plans. However, the Act relieves the plan sponsor from any liability if the annuity provider they select goes under, even if the plan sponsor did no due diligence, or was even negligent in selecting the annuity provider. Benefits in 401(k) plans have federal protection if a catastrophic illness occurs. Unless structured properly, the prospective annuities under the SECURE Act lose this protection and subject to a complete spend-down before any benefits are available;
  2. unless the regulations regarding distributions from IRAs It makes, there is an adverse effect on distributions to disabled beneficiaries, and those with chronic illnesses.

Since May, the SECURE Act has hovered over planners like the Sword of Damocles. Since 2001 estate planning has been a moving target. The estate tax exemption amount changed continually until 2010 when the repeal of the estate tax went into effect. In 2011 the estate tax was re-instituted retroactively until 2017 when Congress doubled the estate and gift tax exemptions. However, this increased estate tax exemption must be passed by Congress again in 2026 or will revert to the pre-2018 level. Factor in the upcoming 2020 election and even more uncertainty lurks. If the election results in the Democrats gaining control of the government, there will likely be cuts in the estate and gift tax exemptions.

The specter of the SECURE Act Practitioners handcuffs practitioners like me. We are now ten weeks away from year-end, a time when we typically meet with clients about a year and planning. If Congress intends to pass the SECURE Act, let it do it now, so at least we know what to tell our clients. Doing nothing will delay my ability to provide my clients with accurate planning advice (to the extent I can due to the fluctuating tax laws).

The letter (a copy of which follows) sent to The Honorable Mitch McConnell, Majority Leader of the United States Senate was signed by:

  • Tim Scott –(R) South Carolina
  • Rob Portman (R) Ohio
  • Thom Tillis (R) North Carolina
  • Joni K. Ernst (R) Iowa
  • Martha McSally (R) Arizona
  • Susan M. Collins (R) Maine
  • Cory Gardner (R) Colorado
Sen. Scott Letter on SECURE Act-1
Sen. Scott Letter on SECURE Act-2

Medicare Continues to Confuse and Confound

With the start of the Medicare enrollment season here, more seniors are finding themselves baffled by an array of choices.  How can you avoid making a mistake that may haunt you for the rest of your life?

The launch of the new Medicare Plan Finder will be the only way to discover information about the 2020 Part D drug plans and Medicare Advantage plans, according to a recent article from Forbes“Is the New Medicare Plan Finder Putting Seniors in Jeopardy?”

We’re from the government. We’re here to help. Heard that before.

Here’s the first part.

To access your information, you must now log into your account. If you don’t have an account, you must set one up. To do so, you will need your Medicare number and some “protected health information.”  

The access to this information may create problems for people trying to help beneficiaries with Medicare Advantage and Part D drug plan reviews. How will this be handled? One agency says have the helping person pass the keyboard to the beneficiary so they can type in the information themselves. What if the help is being given while the two people are on the phone? The person can take the information from the beneficiary and put it directly into the system, never writing it down.

But this doesn’t follow the requirements. You or your appointed Authorized Representative are the only people who should be able to access this information.  What is an “Authorized Representative?”

There is a process for doing this, through the Medicare website. There’s a form that can be filled out and mailed.  But what if the person doesn’t feel comfortable assigning this role? That also means that the pharmacist, insurance agents and plan representatives need to be made official. But that also leaves room for abuse.

With more scams targeting seniors emerging every day, how long until scammers figure out a way to cash in on this? Preying on senior’s susceptibility and trusting nature, a caller could easily offer to help the senior log into their account and help, while accessing records and getting into who knows what kind of money-making scheme.

There’s enough confusion without adding to it.

The Legacy Plan Finder required only a user’s zip code, medication list and pharmacy information. The information is saved, a drug list ID and password date is the only information needed to access the account. There’s no protected information on the site.

Expect the next few months to give many seniors a lot of agita. Doing reviews without logging in will be time- consuming and frustrating. Even if there were no medication changes, it’s possible there may be questions during the process. Too bad – the person must start all over again.

And how many people will be willing to become personal representatives? This is a responsibility that will give them access to information they may rather not have. What is the liability if a mistake is made? In today’s culture of blame, that’s a risk that even family members may not want.

A new tool is supposed to be an improvement. This one is a step in the wrong direction.