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By Nancy Burner, Esq.

Nancy Burner, Esq.

A key tool in the estate planner’s toolbox is a living trust. The term “living trust” refers to a document created during life that establishes a legal entity which can own certain assets.  The term differentiates a living trust from a “testamentary trust,” which is created after death. A further distinction to be made is whether the trust is Revocable or Irrevocable. Regardless of the title of the trust, the terms of the document will dictate the rules of how the assets in trust are managed and what control is retained by the trust creator.

A revocable trust leaves the creator with complete control over trust assets. The creator can be named as trustee with the power to revoke, amend, and restate the trust. Further, the creator’s Social Security number is used for the trust’s estate and income tax reporting. The main purpose of creating a revocable trust is to avoid court involvement after death. 

Assets that are not in a trust, do not have a joint owner, and do not name a beneficiary, require a court process after death. For those assets, the New York State Surrogate’s Court process is called probate, if the deceased person had a will, and administration, if they died without a will. There are several reasons to avoid the court after death, varying from disinheriting family members or not knowing your family, to owning property in multiple states or having disabled beneficiaries. For these and other purposes, the creation of a trust is often recommended.  

Beyond revocable trusts, circumstances may dictate the creation of an irrevocable trust. Irrevocable trusts are those that are written in a way to limit the creator of the trust in some fashion. The exact limitations will depend on the goals of the trust.  Common reasons to create an irrevocable trust are for Medicaid planning purposes or estate tax planning.  

For estate tax planning, two such trusts are an Intentionally Defective Grantor Trust (“IDGT”) and a Spousal Limited Access Trust (“SLAT”). Assets owned by an IDGT are removed from the creator’s estate, placing the growth outside of their taxable estate while taxing the income to the creator.  A SLAT is an irrevocable trust created by one spouse for the benefit of the other. The SLAT can provide income and principal distributions to the spouse and other beneficiaries. While the contributing spouse makes an irrevocable gift to the trust and gives up any right to the funds, the beneficiary spouse and other beneficiaries are provided immediate access to the gifted funds. Both the IDGT and SLAT are tools for claiming the benefit of the current Federal estate tax exemption ($12.06 million in 2022) before it expires.

Most people do not realize that the death benefit of life insurance is taxable in your estate. Creating an Irrevocable Life Insurance Trust (“ILIT”) and transferring policy ownership to the trust removes the death benefit from the taxable estate. This also provides liquidity to pay any taxes imposed on the balance of the estate.

If the goal is to protect assets while obtaining eligibility for Medicaid benefits, it may be prudent to create a Medicaid Asset Protection Trust (“MAPT”).  Under this type of trust, the creator should not be the trustee.  While the creator can receive income distributions, they are restricted from accessing principal of the trust.  

All trusts, whether revocable or irrevocable, can avoid court process after death so long as the document is drafted and funded properly. The type of trust and exact terms can be determined by an estate planning attorney to ensure the client’s specific circumstances and goals are considered. 

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael E. Russell

Michael E. Russell

It has been a tumultuous 90 days. Investors are currently on the path to seeing one of the worst years in stock market history. This statement was made by several strategists at Goldman Sachs on CNBC.

This could be considered a reasonable position to take, but why? Well, to point out the obvious, stocks and bonds are off to a horrible start, while consumer prices continue to increase. Also, no baby formula!

If you extrapolate this bad news to the end of the year-even though we are barely halfway through Spring, diversified investors may see the potential for significant losses after inflation.

I take a less dire view. Big stock downturns are normal. Over the last 72 years, the S&P Index has fallen more than 20% from its high on ten different occasions.

There are many differences about this decline. The current decline is approximately 18% from the January high. The major difference is that the current decline has occurred after a market that never seemed to stop going up.

Another interesting point is that during the career of Warren Buffett, the average Bear market has taken about two years to go back to even, while a few have stretched to four years or more.

How about this statistic: the NASDAQ has been positive every year since 2008 UNTIL this year!

My take is that expectations need to change. Crypto currencies have fallen off a cliff. Some investors think it wise to buy in at these lower prices. I disagree. Until Crypto currencies are regulated, losses could be devastating. A case in point is Crypto exchange Coinbase Global which totally missed earnings estimates. The company stated that customers could lose their assets if it were to declare bankruptcy.  Coinbase CEO Brian Armstrong tweeted a clarification, saying “we have no risk of bankruptcy.” 

Unfortunately, I remember the same statements made by the CEO of ENRON.

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A Georgetown law professor recently spoke of crypto bankruptcy risks. His point was that even though the contracts say you own the currency, you have the potential of being a general unsecured creditor if there is a bankruptcy.

For those with strong stomachs, there are plenty of companies with strong cash flow, good growth potentials and decent dividends. Never flee the market. Historically, the stock market outperforms most other asset classes. Domestic stocks represent the businesses that keep America strong.

An interesting point was advanced by Vanguard. They recently calculated that since 1935, U.S. stocks have lost ground to inflation during 31% of one year time periods, but only 11% of ten-year cycles.

I believe investors could begin to add to their portfolios shortly, with the caveat that this market may still have some downside risk. However, keep in mind that the S&P was trading at a P/E of more than 21x in January while currently trading at 17x earnings. Some technical analysts believe that the bottom line may be 15x.

Trying to time the bottom line is futile.  Keep in mind that the average annual return for the S&P since 1988 is 10.6%; 34 years of growth.

The view espoused at Morgan Stanley is that there may be a little more downside risk. But Lisa Shalett, Chief Investment Officer, states that segments of the market are priced. For upside surprises, these include financials, energy, healthcare, industrials and consumer service companies.

We still must be concerned about Russia/Ukraine and China/Taiwan.

In my next article I will mention some stocks with good growth potential. Hoping for a market bottom soon!

Until then, enjoy the rest of Spring and stay healthy.

Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations being made here are not guaranteed and may incur a loss of principal. The opinions and investment recommendations expressed in the column are the author’s own. TBR News Media does not endorse any specific investment advice and urges investors to consult with their financial advisor. 

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By Nancy Burner, Esq.

Nancy Burner, Esq.

The legalities surrounding a Last Will and Testament stem from Roman times, when six witnesses affixed their personal seals to a will. The will was later validated by examining these seals to make sure they remained intact. 

Today we use staples instead of seals, but, because the probate process remains so formal, many misconceptions exist. Let’s discuss some of the more prevalent myths surrounding probate that we encounter.

Myth: If I have a will, my estate doesn’t have to go through Probate.

While a will documents where your assets go at death, a will does not avoid probate. Probate is a Surrogate’s Court proceeding whereby a decedent’s Last Will and Testament is validated and given effect. 

In New York, a will is admitted to probate after the Executor files a petition. The probate petition includes the original will, as well as a death certificate and funeral bill. Proper notice must be given to the individuals who would have inherited had the decedent died without a will. 

The court issues “letters testamentary” which give the executor the authority to act. The executor opens an estate bank account, pays the debts of the estate and then makes distributions to the beneficiaries.

The only way to avoid probate is to place all assets into a trust or die owning only “non probate assets.” Non-probate assets are those held jointly or that list beneficiaries. Common non-probate assets with beneficiary designations are retirement accounts and life insurance policies. Not all types of accounts allow designated beneficiaries or transfers on death. Naming others as joint owners can have catastrophic drawbacks, such as capital gains tax and creditor issues. A revocable trust is the gold standard in avoiding probate.

Myth: I don’t need a will because my spouse will inherit everything.

The only way your spouse inherits everything is if you do not have children or grandchildren. People are often surprised to learn that if they have children, their spouse does not inherit all their assets. 

In New York State, if someone is married with children and dies without a will, their spouse gets the first $50,000 and half of the remaining assets. The children split the other half amongst themselves. This means that without a will, minor children or children from a previous marriage inherit almost half of your assets. 

This is not what most people expect or want. The only way to make sure your spouse inherits 100% of your assets is to draft a will or trust. 

The probate process can be avoided if the couple owns all assets jointly. Joint ownership has its own problems — especially considering estate taxes or if there are children from a previous marriage. 

The probate process may sound confusing, but the procedure is easy and orderly with the help of an estate attorney. One of the kindest things you can do for your family is to draft a well-thought-out estate plan so that your assets pass in an orderly manner. At Burner Law Group, we charge flat fees so that clients fully understand their options and receive an estate plan custom tailored to them.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

As an investor, you can easily feel frustrated to see short-term drops in your investment statements. But while you cannot control the market, you may find it helpful to review the factors you can control.

Many forces affect the financial markets, including geopolitical events, corporate profits and interest rate movements — forces beyond the control of most individual investors. In any case, it’s important to focus on the things you can control, such as the following:

Your ability to define your goals: One area in which you have total control is your ability to define your goals. Like most people, you probably have short-term goals  — such as saving for a new car or a dream vacation — and long-term ones, such as a comfortable retirement. Once you identify your goals and estimate how much they will cost, you can create an investment strategy to help achieve them. Over time, some of your personal circumstances will likely change, so you’ll want to review your time horizon and risk tolerance on a regular basis, adjusting your strategy when appropriate. And the same is true for your goals — they may evolve over time, requiring new responses from you in how you invest.

Your response to market downturns: When the market drops and the value of your investments declines, you might be tempted to take immediate action in an effort to stop the losses. This is understandable.  After all, your investment results can have a big impact on your future. However, acting hastily could work against you. For example, you could sell investments that still have solid fundamentals and are still appropriate for your needs. If you can avoid decisions based on short-term events, you may help yourself in the long run.

Your commitment to investing: The financial markets are almost always in flux, and their movements are hard to predict. If you can continue investing in all markets — good, bad or sideways —you will likely make much better progress toward your goals than if you periodically were to take a “time out.” Many people head to the investment sidelines when the market tumbles, only to miss out on the beginnings of the next rally. And by steadily investing, you will increase the number of shares you own in your investments. And the larger your ownership stake, the greater your opportunities for building wealth.

Your portfolio’s level of diversification: While diversification itself can’t guarantee profits or protect against all losses, it can help to greatly reduce the impact of market volatility on your portfolio. Just how you diversify your investments depends on several factors, but the general principle of maintaining a diversified portfolio should govern your approach to investing. It’s a good idea to periodically review your portfolio to ensure it’s still properly diversified.

The world will always be filled with unpredictable, uncontrollable events, and many of them will affect the financial markets to one degree or another. But within your own investment world, you always have a great deal of control — and with it, you have the power to keep moving toward all your important financial objectives.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Spring is here and so is tax season. The income tax filing deadline this year is April 18, 2022. You have likely been gathering your documents or filing an extension. Since you are already working on putting your affairs in order, this is the perfect time to finally check estate planning off your to-do list. Why is now the best time to do estate planning when you are already stressed out about your tax documents?

You are already organized

You are already organizing your financials — expenses, bank accounts, 1099s. This is the same information you need to disclose to an estate planning attorney. Your estate just means “everything you own.” Your estate includes real property, bank accounts, retirement accounts, stocks and bonds, life insurance, business interests and any other valuables assets such as jewelry and art.

Maximize gifting next year 

If your income taxes are high or you regularly give money to family members, there may be a better way to maximize gift tax benefits. In 2022, individuals can gift up to $16,000 per year to as many people as they wish without incurring estate or gift tax. The recipient isn’t taxed on the amount received either. Individuals can also pay for other’s education and medical expenses estate and gift tax free. Although the federal exemption is very high right now at $12.06 million, it is set to sunset to $5.9 million in 2026. Estate planning attorneys can help you leverage this historically high exemption before it goes down.

Business succession planning 

If you own a business, you have likely already completed your returns. But have you thought about what would happen to your business if you became ill or passed away? Business succession planning is an integral part of estate planning — especially for small businesses. If you have any questions about your business structure, key person insurance or tax efficiency, now is the time to set up a meeting.

Save on income taxes

If your income taxes are too high, there are efficient ways to lower them. You can make donations to charity or transfer certain income generating assets to family members.

Changes in the law

Now is also a good time to review existing wills and trusts in light of upcoming changes in estate law. Do your beneficiary designations on your retirement accounts still make sense after the passing of the SECURE Act? If it has been more than a few years, you will want to make an appointment to review your documents with your attorney.

Protect your family 

Doing estate planning is one of the kindest things you can do for those you leave behind. Taking the time now to protect your family eases their burden later. If you have minor children or beneficiaries with special needs, estate planning is crucial.

An estate planner can draft an estate plan tailored to your situation — from simple wills and revocable trusts to asset protection planning — and organize your estate planning documents so everything can be kept safely in one place. We cannot know the future, but we do know that there is no way to avoid death or taxes.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

You might enjoy owning your home — but the mortgage? Not so much. In fact, you might want to do everything you can to pay it off as quickly as possible. But is that always the best strategy?

In one sense, your mortgage can be considered a “good” debt because it’s backed by a tangible asset — your home — that has real value and may even gain further value. Furthermore, by historical standards, you’re probably paying a pretty low interest rate on your mortgage, so you’re getting a lot of benefit — a place to live and a potentially appreciating asset. And if you itemize on your taxes, you can possibly deduct some, or maybe all, of your mortgage interest.

Nonetheless, despite these benefits, a mortgage is still something you have to pay, month after month and year after year. And for some people, it may feel good to pay it off. After all, there may well be a psychological benefit to being free of this long-term debt. But is it really in your best financial interest to make extra payments?

Suppose, for example, that you need a large sum of money quickly for a new car, a new furnace or some other unexpected, significant expense. Or, in an even more serious scenario, what if your job ends and you need money to tide you over until you get a new one? In these situations, you need liquidity — ready access to available cash. And your house may not be the best place to get it. 

You could apply for a home equity loan or line of credit, but these typically require approvals (which might be difficult if you aren’t employed), and you’ll be using your home as collateral. A home equity loan or credit line isn’t always bad — under the right circumstances, it can be a valuable financial tool. But that doesn’t change the basic fact that your home is essentially a non-liquid asset.

So, instead of making extra house payments, make sure you have built an emergency fund containing several months’ worth of living expenses, with the money kept in a low-risk, accessible account. After building an emergency fund, you should weigh extra mortgage payments against other uses of your money. For example, if you have other types of debt — such as credit cards or student loans — you might want to work on paying those off more quickly, as these debts may also carry higher interest rates.

You might also consider increasing your contributions to your 401(k), IRA or other retirement/investment accounts. You could spend two or three decades in retirement, so it’s important to save as much as possible for those years.

As you can see, you do have some good reasons for using any extra money you may have for purposes other than making additional mortgage payments. Ultimately, though, it’s a personal decision. In any case, think carefully about your choice. You may want to review the various tradeoffs with a financial professional, who can possibly recommend the most advantageous strategies. And you may also want to consult with a tax professional. By understanding all that’s involved in the “extra payment” decision, you’ll be better prepared to make the right moves.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Although cryptocurrencies like bitcoin have gone mainstream, non-fungible tokens (NFTs) were relatively unknown until 2021. You may have heard about “Bored Apes,” “Crypto Kitties” or that artist Beeple sold an NFT for $69 million. If you do not exactly understand what an NFT is, you are not alone.

Unlike cash, which is interchangeable, non-fungible items are one of a kind. An NFT is a unique digital asset built on a blockchain that comes with the right to use it. An NFT can be a photograph, animation, graphic image, video, meme, tweet, or anything digital. The value of the NFT lies in its uniqueness, which is attributable to its traceability on the blockchain.

The easiest to understand use of NFTs is when they represent real-world assets or serve as certificates of authenticity. For example, Nike distributing an NFT with every sneaker to protect against counterfeiting. Owning a multi-million dollar digitally generated avatar is a bit harder to grasp. But 1 out of 10 Americans invested in NFTs in 2021, so even if the appeal escapes you, the concept of scarcity should be familiar.

What to do if your grandson gifts you an NFT for Christmas or grandma sends an NFT as a birthday present? Keep the password safe! NFTs reside in “digital” wallets, which are stored on a computer, flash drive, or an app on your phone. You must have the private key or seed phrase (at least 12 unrelated words) to access the wallet. This private phrase is the only way to retrieve the NFT.

Whether you buy the NFT or it is gifted, the basis in the asset is the purchase price. Just like stock or real estate, the basis (purchase price) is used to calculate the capital gain or loss for tax purposes when the item is sold. Likewise, the NFT gets a step up in basis to fair market value at the owner’s death.

NFTs pass like any other asset at death — if you can find them. Unless the private key is known, there is no way of accessing and gaining ownership. We recommend redundancy. Write the phrase down and store it some place safe, keep it in a password protected file on a computer and flash drive. Since there is no central repository to verify ownership of an NFT, we advise clients to make specific bequests of an NFT in their wills. Calling attention to it ensures that the Executor at least knows of its existence. Do not include the password of course, since a will becomes public after probate!

You can also hold an NFT in a Trust or Limited Liability Company (LLC). An NFT cannot be retitled in the name of a Trust — but you can transfer the NFT on paper, much like we do with stocks and LLC interests. Some practitioners champion using an LLC because it is easier to transfer compared to transferring the NFT on the blockchain. However, avoiding recording the transfer on the public ledger defeats the purpose of transparency and authenticity. There are other advantages to an LLC to consider, such as transfer tax discounts and asset protection.

The future use, value, and regulation of NFTs is unknowable. Perhaps one day your Last Will & Testament will be stored in a digital wallet. For now, just make sure to disclose NFTs to your estate planning attorney, so she can incorporate them into your estate plan.

Nancy Burner, Esq. is the founder and managing partner of Burner Law Group, P.C. focusing her practice areas on Estate Planning, Elder Law and Trusts and Estates. Burner Law Group P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, NYC and East Hampton.Visit www.burnerlaw.com.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

As an investor, your own decisions will be the biggest factor in your success. Nonetheless, you’ll always want to consider the potential power of external events. And today is no different — with the lingering effects of the pandemic, the geopolitical situation in Ukraine, the impact of inflation and the rise in interest rates, you might be grappling with feelings of uneasiness. How should you respond?

First of all, remember that the financial markets have shown great resilience through wars, recessions, natural disasters and political crises — events as serious as what’s going on now.

Nonetheless, you could still feel some discomfort when you’re bombarded by anxiety-producing news of the day. But you don’t have to go it alone. Many people have found support and guidance from a financial professional to be especially valuable in turbulent times. 

In fact, more than three-fourths of investors who work with a financial advisor are very or somewhat confident in their knowledge of the impact on the economy on their financial situations, according to a recent survey from Morning Consult, a research and data analysis company. By comparison, the same survey found that only about half of the adults in the general population have this degree of confidence.

Specifically, a financial professional can help you:

Reduce the tendency toward emotion-driven investing. It’s usually not a good idea to let emotions be a primary driver of your investment decisions. For example, if you let fear drive your choices, you could end up selling quality investments — ones that still have good prospects and are still suitable for your needs — when their prices have fallen, just to “cut losses.” A financial professional can help you make informed moves appropriate for your goals.

Put investment results in context. You may wonder why your investment portfolio’s performance doesn’t track that of a major index, such as the S&P 500. But if you maintain a diversified portfolio — and you should — you’ll own investments that fall outside any single index. So, instead of using an index as a benchmark, you should assess whether your portfolio’s performance is keeping you on track toward your individual goals. A financial professional can help you with this task and suggest appropriate changes if it appears you are falling behind.

Recognize investment trends and patterns. If you invest for several decades, you’ll likely see all kinds of event in the financial markets. You’ll see “corrections,” in which investment prices fall 10 percent or more in a short period of time, you’ll see “bear markets,” in which the downturn is even greater, and you’ll see bull markets, in which prices can rise, more or less steadily, for years at a time. A financial professional can help you recognize these trends and patterns — and this knowledge can make it much easier for you to maintain a long-term perspective, which lead to informed decision-making.

Gain feelings of control. Most important of all, a financial professional can enable you to gain a feeling of control over your future by helping you identify your important goals and recommending strategies for achieving them.

The world, and the financial markets, will always be full of events that can be unsettling to investors. But by getting the help you need, you can reduce the stress from your investment experience — and you’ll find it’s easier to keep moving in the direction you want to go.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael E. Russell

Michael E. Russell

As I sit here on Sunday morning pondering what I would recommend to readers, I find myself in a quandary.

Ukraine is in the forefront of the news, while Canadian truckers are being arrested and having their bank accounts taken due to their opposition to Trudeau and his position on masking and vaccinations.

Is it time to put money to work during these uneasy times? Emotionally an investor could think not. History says otherwise.

Once again, the reader only has to look back in time and realize that sound investment decisions can be made at any juncture. 1929, 1952, 1987, 2001, 2002, 2008. These dates were extremely stressful to the investor. Sell, hold or buy? DECISIONS, DECISIONS!

Today, it is more of the same. Companies that we have mentioned are still financially strong with solid balance sheets. Yet, they are being punished by this market! Do we sell shares in these companies while earnings are robust?

Is 5G now a passing fancy? Not so.

Increasing interest rates will bolster the balance sheets of many Money Center and Regional banks. It is fair to say that even though the ten-year treasury is now yielding 2%, our checking and savings accounts are still yielding close to 0%! Thus, bank earnings and balance sheets are stronger than ever.

I believe that based on past history, investors should think about adding or starting a position in some great companies. Dollar cost averaging is a smart way to start or increase your positions. Emotion should not play a part in selling a stock. 

Banks need to watch their loan portfolios and manage the risk as to their non-performing loans.

We are all aware of the supply chain problems thus effecting the costs of goods and services.

With all of this in mind, we need to remember a basic tenet; try to have enough liquidity to cover 6 months of household and business expenses. It is especially important now to monitor your debt load due to higher interest rates.

Let us look at some stocks that have been mentioned before. Qualcomm is certainly a quality investment at these levels, even during this volatile market period. It is reasonably priced with a P.E. ratio of 14x forward earnings with a solid dividend. Morgan Stanley is another sound investment idea. The company is buying back $3 billion in stock each quarter while paying a 3% dividend. 

Still a favorite is Nvidia. This company has exceeded even the highest expectations of forward guidance for earnings. A great CEO, Jensen Huang, has Nvidia positioned to take advantage in the growth of 5G. For those suffering from cabin fever, look at Disney. Increase pricing power and high occupancy rates at their theme parks suggest good earnings growth.

In closing, let us hope the people of Ukraine will be safe. By the time this article is published we will probably know if Russia has decided to invade.

Be safe and stay healthy. 

Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations being made here are not guaranteed and may incur a loss of principal. The opinions and investment recommendations expressed in the column are the author’s own. TBR News Media does not endorse any specific investment advice and urges investors to consult with their financial advisor. 

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By Nancy Burner, Esq.

Nancy Burner, Esq.

On January 1, 2020, as we entered another year without any idea of what was on the horizon, a new federal law took effect regarding retirement accounts. 

The SECURE Act, “Setting Every Community Up for Retirement Enhancement,” affects millions of Americans who have been saving through tax-deferred retirement plans with the biggest impact falling those set to inherit these plans. Now, two years later, SECURE is still a new concept for many clients who are unaware of the law or how it applies to their own situation.

One change is that the age at which a plan holder must take required minimum distributions (“RMDs”) was increased from 70 1⁄2 to 72. RMDs are taken annually, based on the full value of the account on December 31 of the prior year and the life expectancy of the plan holder. The delay to age 72 will result in a year and a half more of tax-deferred growth on the funds.

SECURE also created a $10,000 penalty-free withdrawal for someone giving birth to or adopting a child. The Act also expanded the ability for small business owners to offer retirement plan funding. However, the most drastic item in SECURE takes aim at the beneficiary of the plan after the death of the original plan holder.

Prior to SECURE, a non-spouse designated beneficiary had the option of converting the plan to an inherited IRA and taking a RMD based upon their own life expectancy. The beneficiary could take more than the RMD if needed, realizing that each distribution is taxable income. 

Consider a 90-year-old with an IRS life expectancy of 12.2 years who names a 65-year-old child as designated beneficiary. A 65-year-old has an IRS life expectancy of 22.9 years. That beneficiary could previously “stretch” the distributions over their life expectancy and allow those funds to grow tax-deferred for many more years. With SECURE, this stretch is lost for the majority of beneficiaries. SECURE prescribes a mandatory 10-year payout for a designated beneficiary. Being forced to liquidate in the 10 years will result in the payment of more income taxes than if the beneficiary had the 22.9-year payout.

The SECURE Act carved out limited exceptions to this 10-year payout rule. These five categories of designated beneficiaries include a spouse, minor child of the plan holder, chronically ill person, disabled person, or a person not more than 10 years younger than the plan holder.

If you have retirement assets, this change serves as a trigger to have your plan reviewed by your estate planning attorney and financial advisor. This review is especially important where an estate plan includes a trust as the beneficiary of a retirement account. The terms of the trust may need to be adjusted from being a conduit trust to an accumulation trust. 

A conduit trust forces all distributions out to the beneficiary, whereas an accumulation trust allows the distributions to remain protected in the trust. Other clients may decide to leave tax-deferred retirement assets to charities rather than individuals. Still others may rearrange allocations to make IRAs payable to a person not less than 10 years younger than them, such as a sibling, thereby focusing on saving other types of assets for beneficiaries otherwise forced to take a 10-year taxable payout.

Many Americans have spent their working lives contributing to tax-deferred plans with the idea that it will give them a stream of income in retirement, and pass on to their beneficiaries as a stream of income. While SECURE may not alter the plan for some, the impact of SECURE should be considered by all. Stay tuned for future updates because there are already whisperings about SECURE 2.0 which, among other things, may raise the age at which RMDs are required.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

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