SECURE Act goes into effect Jan. 1, 2020, Makes Big Changes To Retirement Planning

The SECURE Act has been enacted into law. Effective January 1, 2020, it makes sweeping changes to retirement savings plans. These changes will also impact some people's estate plans.

From an estate planning perspective, the most important changes occur in two areas:

• The age for mandatory withdrawals from IRAs and 401ks has been raised.

• Non-spouse beneficiaries have less time in which to  withdraw the funds from an inherited IRA.

The legislation is currently being analyzed by estate planning and financial professionals. Final regulations have yet to be promulgated. We will provide further information to our clients and readers as we get greater clarity on the impact of the law and possible steps that should be taken.

Detailed information at The Karp Law Firm website. 

Late RMD from your IRA? Uncle Sam MIGHT Forgive You

Uncle Sam wants you to take your required minimum distributions (RMD) from your Individual Retirement Account at just the right time. Not too early. Not too late.

If you make a withdrawal too early - before age 59 1/2 - you'll face a 10% penalty. But that's mild compared to what happens if you fail to take your RMD by the year following the year you turn 70 1/2. That violates the RMD rules, and will get you a whopping 50% penalty. For example, if your RMD was supposed to be $5,000 and you miss the deadline, you'll owe the IRS an additional $2,500 on top of the taxes you would ordinarily pay on the distribution. Uncle Sam doesn't fool around.

The administrator of your IRA should alert you that an RMD is due, but the buck - and the penalties - stop with you, so it's wise to stay on top of the deadlines.

There have been some cases in which the IRS has waived the penalty for a late RMD. If you find you've missed the deadline, you should take the RMD as soon as possible. Submit it, along with IRS Form 5329 (Additional Taxes on Qualified Plans). Attach a letter to the filing explaining why you were late - lost paperwork, health issues, family crisis, hurricane, etc. Also indicate what steps you have taken to ensure your future RMDs will be timely. 

The IRS is not known for being "warm and fuzzy," but it doesn't hurt to try appealing to its softer side.

MyRA retirement savings program now terminated

The Obama Administration introduced the myRA program in 2014. Designed to help low- to middle-income earners with no workplace retirement plans begin saving for retirement, the myRA program was open to married couples and individuals with adjusted gross incomes up to $191,000 and $129,000, respectively. The no-fee accounts were a type of Roth IRA that could be opened with as little as $25, and were backed up by Treasury Bonds.

Now, the Trump Administration is discontinuing the program, citing insufficient participation. According to the Treasury Department, 30,000 accounts were established since 2015, with investments totaling $34 million. With total administrative costs at $10 million annually, the program is considered too costly to continue.

At this point, those with existing myRA accounts can close their accounts, paying income taxes on any earnings. Or, they can roll over their accounts into a traditional Roth IRA. The Treasury Department has instructions on how to proceed. Click here for more information.

What can clients expect following the 2016 election?

The most contentious election in recent memory is over. Whatever your opinion of the results (and I'd venture to say you probably have a very strong opinion), my job is to analyze the impact of the election on the issues that concern my clients, and to recommend steps they may take.

Specific predictions are impossible, of course. However, we can make some educated guesses about what a Trump presidency would look like based on (1) what was said on the campaign trail; and (2) the GOP platform, since it now controls both houses of Congress. Here are some possible scenarios that could impact clients:


Changes to Florida Medicaid Benefits for Long-Term Care?

During the campaign, Trump did not mention the growing long-term care crisis that is bringing more and more middle class families to financial ruin. Clients who do not have long-term care insurance to cover nursing home expenses often turn to Florida Medicaid long-term care benefits, and, with our help, can preserve a significant portion of their assets without going broke. 

Currently, the Centers for Medicare and Medicaid Services set the basic ground rules for Medicaid, with the states having some leeway to fine-tune the rules. Republicans have long advocated replacing this system with "block grants," whereby each state would get a chunk of money, most likely a smaller chunk than they receive now. Each state would then have the freedom to formulate its own eligibility standards and other rules. If this occurs, the potential negative implications for clients could be profound. For example, as a cost-cutting measure, Florida or any state could extend the look-back period beyond the current five years, and/or well spouses of nursing home residents could lose their current financial protections.

Recommendation: 

If you believe you have inadequate protection from long-term care costs, take action without delay.

• Look into long-term care insurance. Many types of policies are now available, other than traditional policies. Read my prior post on these new types of hybrid policies. Call our office and we can put you in touch with someone who can help you select a policy. 
• In the alternative, start doing Medicaid planning, taking the steps necessary to protect your assets. Call my office for assistance.

Medicare to be Reconfigured?

Currently, 57 million seniors receive Medicare benefits. In the months leading up to the election, Trump said little about the program. However, his website now mentions "modernizing" Medicare, with the help of Congress. We do not know what "modernizing" means, but we do know that House Speaker Paul Ryan has long supported dismantling Medicare's current configuration and replacing it with a voucher system. Under that system, seniors would get a subsidy to be used to purchase private health insurance. The new system would apply only to future beneficiaries, not to those already receiving benefits. 

The GOP has also expressed a desire to increase the age of eligibility from 65, to 66 or 67. Rep. Tom Price (R-GA), House Budget Committee chair, recently told reporters that the GOP will likely begin pushing for major cuts to Medicare within the coming months. 

Some experts also expect dismantling of other programs benefiting seniors that were put in place by the Great Society program and by the New Deal. We'll have to wait and see.




Scrap the New Fiduciary Rule for Retirement Accounts?

As I reported in a prior post, beginning in April 2017 a new Department of Labor rule requires those providing financial advice on tax-advantaged retirement accounts such as IRA's and 401k's to adhere to a "fiduciary" standard. Under that standard, the advisor's recommendations must be based solely on the client's best interest. If a more expensive or riskier investment is suggested, the advisor must explain the reasons for the recommendation. This differs from the current rule, whereby an advisor is legally obligated only to steer clients into "suitable" investments - even when the suitable investment is more advantageous for the advisor than for the person being advised. It is precisely such conflicts of interest that the new rule was designed to eliminate. 

The new rule was applauded by consumer advocates, and generally opposed by the financial industry. Trump has made no specific mention of it, but CNBC in October 2016 reported that a key Trump advisor said that the President-elect will likely push for its repeal.

Recommendation:

• If you are receiving advice on your retirement accounts from a broker-dealer, be sure to ask the rationale for any recommendations. Ask if there are other options available that may be better. Do not make hasty decisions.

• Whether or not the fiduciary rule stands, note that a Registered Investment Advisor, unlike a broker-dealer, is legally obligated as a fiduciary and must act in accordance with your best interest. If you would like to consult with one of Karp Financial Services' Registered Investment Advisors, please call 561-626-1130. 

Estate Tax to be Eliminated?

The estate tax put $18 billion in federal coffers in 2015, but affected only about 5,000 estates, according to the Tax Policy Center. Beginning January 1, 2017, an individual may pass $5.49 million tax-free (up from $5.45 million in 2016); a married couple can double that amount. The excess is taxed at 40%. Obviously, only the very wealthiest Americans are impacted by the estate tax. Proponents of the estate tax point to its role in mitigating the accumulation of dynastic wealth. Critics view it as an inherently unfair form of double taxation. Trump falls into the latter group and has specifically called for its elimination.

He has also proposed eliminating the step-up in basis for inherited assets over $10M. If this comes to pass, assets over this amount will be subject to capital gains tax of 20%, based on what the decedent paid for the asset, not on the day-of-death value which is the current rule. It is unclear whether the tax would be levied when the asset is inherited, or only when it is sold. Paul Ryan, however, has said he is in favor of retaining the step-up.

Income Tax Brackets Changing?

Under the President-elect's income tax plan, the current seven income tax brackets would be reduced to three, as follows: 

• For married couples filing jointly with taxable income of up to $75,000; and for single filers with taxable income up to $37,500: 12% marginal tax rate. 

• For married couples filing jointly with taxable income from $75,000 to $225,000; and for single filers with taxable income from $37,500 to $112,500:  25% marginal tax rate. 

• For married couples filing jointly with taxable income of $225,000 or greater; and for single filers with taxable income of $112,500 or above: 33% marginal tax rate.

Contrary to popular belief, not all middle class taxpayers are expected to benefit from Trump's proposed tax plan. The non-partisan Tax Policy Center estimates that nearly 8 million middle class families would pay higher taxes under his proposals, a view shared by the conservative Tax Foundation and American Enterprise Institute.

Additionally, it is unclear as to what tax deductions would be retained or scrapped. 

Recommendation:

At this juncture, there is little actionable information to go on. Stay alert to developments, so that you can take advantage of any possible tax benefits and avoid pitfalls. Consider using a financial advisor to help you stay current, and who can inform you of any benefits and complications of particular investments.  

We will keep our eye on all these issues and report any new developments to you. Keep up with the news by checking this blog, our website, and our Facebook page. You may also subscribe to our monthly e-newsletter here. 

IRS relaxes rule for late retirement plan rollovers

Taxpayers rolling over a distribution from an IRA or other retirement account into another account must complete the rollover within 60 days of taking the distribution, or face paying income tax on those funds. In the past, if you failed to meet the deadline, the only recourse was to apply for a Private Letter Ruling from the Internal Revenue Service. That involved quite a bit of paperwork, a filing fee, and typically, a slow turnaround. Now, the IRS is cutting tardy taxpayers a bit more slack.

Under a new rule, the IRS will permit some people with tardy rollovers to avoid the Private Letter Ruling procedure and, instead, "self-certify." Essentially, self-certification entails requesting a waiver directly from the administrator of the recipient plan. The self-certification procedure is available only to those taxpayers whose rollovers are delayed because of one or more of these mitigating circumstances: 

• The distribution was paid by check, and the check was misplaced or lost and never cashed.
• An error was made by the financial institution making the distribution or the financial institution accepting the deposit.
• The taxpayer rolled over the distribution into an account he/she erroneously thought was an eligible retirement plan.
• The taxpayer's main residence was significantly damaged or destroyed.
• A family member was seriously ill.
• A family member passed away.
• The delay was due to an error by the postal service or other delivery agent.
• The plan making the distribution failed to provide on a timely basis all the information the receiving plan required, despite the taxpayer's attempts to obtain the information.
•  A foreign nation restricted the transfer for various reasons.
• The taxpayer was incarcerated.

Once the mitigating reason for the delay is eliminated, the taxpayer has 30 days to deposit the funds.

If you have exceeded the 60-day rollover deadline,  meet one or more of the above criteria and wish to self-certify to obtain a waiver, use the model letter the IRS provides and submit it to your recipient plan. See it here (scroll to page 5). Read more about the new self-certification procedure here.

IRA charitable rollover made permanent by 2015 PATH Act

With bipartisan support, The Protecting Americans from Tax Hikes Act of 2015 (PATH) was signed into law by President Obama in December 2015. It made permanent the option for those age 70 1/2 and over to make donations directly to qualified charitable organizations from Individual Retirement Accounts and (1) have the withdrawal excluded from the individual's income for tax purposes, and (2) count toward the individual's annual required minimum distribution. 

Under PATH, you may donate as much as $100,000 annually to qualified charities. Once the charitable rollover is made, you may not take that donation as a deduction. The donation must be made directly by the IRA administrator to the charity or charities you've selected. You may not receive any goods or services from the charity in return for the gift. You may contribute throughout the year to as many qualified charities as you wish, and you are not limited to just one transfer, just so long as the total contribution does not exceed $100,000 in any given year.

This provision is especially useful for individuals who make sizable contributions to charity, since charitable deductions cannot exceed 50% of a taxpayer's adjusted gross income in any given tax year. Rolling over a portion of an IRA to charity can reduce the donor's taxable income as well as reduce the size of the donor's estate which might otherwise be subject to estate tax. 

Because the legislation was passed in the waning days of 2015, many people missed the deadline for making contributions for the 2015 tax year. There is plenty of time to start thinking about making IRA charitable rollovers for 2016. Talk with your estate planning attorney and accountant about this.

New law: Some fixed pensions may not be safe

Some retirees with fixed pensions funded by multi-employer pension funds are discovering that those pensions may not be so... well, fixed. This ominous news can be found deep in the spending bill Congress passed just before it recessed.

Employers in several industries participate in multi-employer plans, which are managed by professional trustees. Some of these plans are on shaky ground, due to the financial crash of 2008, greater longevity of retirees and other factors, jeopardizing their ability to meet their obligations to retirees. To save dangerously underfunded multi-employer pensions from collapse, the just-passed law allows  trustees to reduce benefits to retirees, even to those who are fully vested.

To be eligible to reduce benefits, the fund would have to be below 60% funded and declining, and a majority of active and retired workers would have to agree to the reduction. In addition, the Treasury Department could initiate the reductions if the solvency of the Pension Benefit Guarantee Corporation, which insures the funds, is at risk. 

The law prevents any cuts to pensions of retirees age 80 and above. Workers age 75 to 80 could see benefits reductions, with younger retirees subject to the largest reductions. Retirees in so-called "red zone" pensions could be affected. Many potentially affected retirees had union jobs and have generous pensions.

To find out if your pension plan has liquidity troubles that put it in the "red zone," check out the Department of Labor's website here. If you find your pension listed, you can determine the potential reduction to your benefits from the Pension Rights Center online calculator here.

While some groups, including the unions and AARP are opposed to the law, its proponents point out that there is a longstanding precedent for cutting pensions, and that reductions may be unavoidable in order to protect the most workers from the most harm. 


They say there are no guarantees in life, but most Americans cling to the notion that fixed pensions are the exception to the rule. Perhaps that is why statistics show that those with fixed pensions tend to save less than those without them. This latest development puts the lie to the belief that fixed pensions are sacrosanct. And although at this juncture the new law applies to only a certain type of pension, who knows what will happen in the future with our national economy?  The takeaway: All workers should be socking away as much as they can in 401Ks, IRAs and other self-directed retirement vehicles. 


This new development should also give pause to clients who, anticipating a large fixed pension, have decided to "self-insure" for long-term care costs. While you may not be able to count with absolute certainty on your pension, you can count on long-term care costs continuing their relentless upward spiral, which ultimately could result in your income being insufficient to cover the cost. If you have a large fixed pension and plan to self-insure, you may want to reconsider obtaining long-term care insurance. 


For an interesting perspective on many of the additional implications of the new law, check out this Bloomberg article.

Inherited IRAs not protected in bankruptcy: U.S Supreme Court

An inherited IRA does not have the same bankruptcy protection as a non-inherited IRA, the U.S. Supreme Court has decided. The unanimous June 12, 2014 decision in Clark v. Rameker has far-reaching estate planning implications. An IRA is often one of, if not the largest, asset in an estate. If you intend to leave your IRA to your children, you should take steps without delay to protect the funds from your child's creditors in the event your child goes through a bankruptcy in the future. 

Clark v. Rameker concerned a $300,000 IRA that Heidi Clark-Heffron inherited from her mother when her mother died. When Clark-Heffron's business subsequently failed, she filed for bankruptcy under Chapter 7. She argued that the IRA she had inherited was a retirement account and thus protected from creditors under federal bankruptcy law. The Supreme Court ruled against her, concluding that an IRA inherited by a non-spouse is not, effectively, a "retirement account." Unlike an IRA a person sets up, contributes to and withdraws from at retirement age, or one passed to a spouse and rolled over by the spouse, the funds in an inherited IRA may be withdrawn without penalty at any time before retirement age. Thus, an inherited IRA has effectively lost its status as a retirement account and is simply a "pot of money" that does not merit any special protections, the court determined.

The Supreme Court decision says that the IRA you leave your non-spouse beneficiary will be available to his/her creditors should the beneficiary file for bankruptcy. However, a grey area exists that must still be clarified with regard to beneficiaries who reside in Florida. Fortunately, notwithstanding this grey area, proper estate planning can protect an inherited IRA regardless of where the beneficiary resides, as I will explain later.

Here is the grey area: Florida statutes exempt inherited IRAs from creditor claims. Of course, this protection applies only to beneficiaries who reside in Florida. (I do not know what other states, if any, provide similar protection.) On the other hand, bankruptcy laws are federal rules that govern whether debts will be discharged in bankruptcy. The unanswered question is: If a Florida resident who owns an inherited IRA files for bankruptcy, will the federal bankruptcy court allow the discharge of debts, if the beneficiary retains the IRA?

Although this may sound confusing, the problem is that there are two different and distinct issues at play. One, can a creditor attach a Florida resident's inherited IRA? Clearly, no. Two, can a debtor who resides in Florida be discharged in bankruptcy while retaining an inherited IRA? The latter has yet to be answered by our courts. I have spoken to several experts in bankruptcy law who say they are uncertain as to how the courts will hold.

Regardless of what the courts ultimately decide, or where your child resides (in a state that provides IRA beneficiary protection or not), there are steps you can take to protect the IRA funds you pass to your beneficiary. The key: Do not make your child the beneficiary of your IRA. Instead, leave it in a spendthrift trust for your child. A properly drafted IRA Trust or IRA Stretchout Trust can accomplish this goal. Do not rely on a traditional revocable living trust to accomplish that goal! 

For assistance, contact the Florida estate planning attorneys of the Karp Law Firm.

What's in the works for the estate tax, 2015 version

Last week the Administration presented its  budget proposal for 2015, adhering to the spending limits already set by Congress. From an estate planning point a view, here are some of the budget's most relevant proposals:

First, a proposal to return to federal estate tax levels of 2009. This would bring the federal estate tax exemption back down to $3.5 million per individual, from today's level of $5.34 per individual indexed to inflation. In addition, the top federal estate tax rate would rise from 40% to 45%. However, portability - the ability of a surviving spouse to use any portion of the exemption not used by the deceased spouse - would remain in effect.

Second, a proposal requiring non-spouse beneficiaries of an IRA or other qualified plan to take distributions within a five-year period. Certain classes of beneficiaries would be exempted from the rule, for example, disabled individuals or minor children. 

You can access the entire proposed budget in the Department of the Treasury Green Book here. (The item dealing with estate tax issues is page 158: IRAs, page 253.) 

No one knows how all this will actually play out. Besides the usual political tug of war, there surely are events none of us can foresee that will affect the outcome. Stay tuned.