The Stretch IRA Is Diminished but Not Completely Gone

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE ActSetting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

  • Surviving Spouses.
  • Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
  • Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
  • Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
  • Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

 

What Is Family Business Succession Planning?

The importance of the family business in the U.S. can’t be overstated. Neither can the problems that occur as a direct result of a failure to plan for succession. Business succession planning is the development of a plan for determining when an owner will retire, what position in the company they will hold when they retire, who the eventual owners of the company will be and under what rules the new owners will operate, instructs a recent article, “Succession planning for family businesses” from The Times Reporter. An estate planning attorney plays a pivotal role in creating the plan, as the sale of the business will be a major factor in the family’s wealth and legacy.

  • Start by determining who will buy the business. Will it be a long-standing employee, partners, or family members?
  • Next, develop an advisory team of internal employees, your estate planning attorney, CPA, financial advisor and insurance agent.
  • Have a financial evaluation of the business prepared by a qualified and accredited valuation professional.
  • Consider taxes (income, estate and gift taxes) and income requirements to sustain the owner’s current lifestyle, if the business is being sold outright.
  • Review estate planning strategies to reduce income and estate tax liabilities.
  • Examine the financial impact of the sale on the family member, if a non-family member buys the business.
  • Develop the structure of the sale.
  • Create a timeline.
  • Get started on all of the legal and financial documents.
  • Meet with the family and/or the new owner on a regular basis to ensure a smooth transition.

Selling a business to the next generation or a new owner is an emotional decision, which is at the heart of most business owner’s utter failure to create a plan. The sale forces them to confront the end of their role in the business, which they likely consider their life’s work. It also requires making decisions that involve family members that may be painful to confront.

The alternative is far worse for all concerned. If there is no plan, chances are the business will not survive. Without leadership and a clear path to the future, the owner may witness the destruction of their life’s work and a squandered legacy.

Speak with your estate planning attorney and your accountant, who will have had experience helping business owners create and execute a succession plan. Talking about such a plan with family members can often create an emotional response. Working with professionals who benefit from a lack of emotional connection to the business will help the process be less about feelings and more about business.

Reference: The Times Reporter (March 7, 2021) “Succession planning for family businesses”

 

What are the Stages of Probate?

Probate is a court-supervised process occurring after your death. It takes place in the state where you were a resident at the time of your death and addresses your estate—all of your financial assets, real estate, personal belongings, debts and unpaid taxes. If you have an estate plan, your last will names an executor, the person who takes charge of your estate and settles your affairs, explains the article “Understanding Probate” from Pike County Courier. How exactly does the probate process work?

If your estate is subject to probate, your estate planning attorney files an application for the probate of your last will with the local court. The application, known as a petition, is brought to the probate court, along with the last will. That is also usually when the petitioner files an application for the appointment of the executor of your estate.

First, the court must rule on the validity of the last will. Does it meet all of the state’s requirements? Was it witnessed properly? If the last will meets the state’s requirements, then the court deems it valid and addresses the application for the executor. That person must also meet the legal requirements of your state. If the court agrees that the person is fit to serve, it approves the application.

The executor plays a very important role in settling your estate. The executor is usually a spouse or a close family member. However, there are situations when naming an attorney or a bank is a better option. The person needs to be completely trustworthy. Your fiduciary will have a legal responsibility to be honest, impartial and put your estate’s well-being above the fiduciary’s own. If they do not have a good grasp of financial matters, the fiduciary must have the common sense to ask for expert help when needed.

Here are some of the tasks the fiduciary must address:

  • Finding and gathering assets and liabilities
  • Inventorying and appraising assets
  • Filing the estate tax return and your last tax return
  • Paying debts, managing creditors and paying taxes
  • Distributing assets
  • Providing a detailed report of the estate settlement to the court and any other parties

What is the probate court’s role in this part of the process? It depends upon the state. The probate court is more involved in some states than in others. If the state allows for a less formal process, it’s simpler and faster. If the estate is complicated with multiple properties, significant assets and multiple heirs, probate can take years.

If there is no executor named in your last will, the court will appoint an administrator. If you do not have a last will, the court will also appoint an administrator to settle your estate following the laws of the state. This is the worst possible scenario, since your assets may be distributed in ways you never wished.

Does all of your estate go through the probate process? With proper estate planning, many assets can be taken out of your probate estate, allowing them to be distributed faster and easier. How assets are titled determines whether they go through probate. Any assets with named beneficiaries pass directly to those beneficiaries and are outside of the estate. That includes life insurance policies and retirement plans with named beneficiaries. It also includes assets titled “jointly with rights of survivorship,” which is how most people own their homes.

Your estate planning attorney will discuss how the probate process works in your state and how to prepare a last will and any needed trusts to distribute your assets as efficiently as possible.

Reference: Pike County Courier (March 4, 2021) “Understanding Probate”