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Unpacking the SECURE Act

Visit our resource center to learn more about the significant retirement changes that may impact you and your financial plan.


Jeremiah Barlow: Hello everybody. We will be getting started here in just a couple minutes. Just waiting for everybody else to join on the line.

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Kara Duckworth: Good morning and good afternoon everyone. This is Kara Duckworth. I’m the managing director of Client Experience. I’m part of the client communication team here at Mercer advisors. This is a special client presentation being recorded on Thursday, March 19, 2020 where we will be discussing the SECURE Act. Our presenter today will be Jeremiah Barlow and I will introduce him shortly. This webinar is provided for educational purposes. As always, we encourage you to speak with your Mercer advisor’s client advisor if you would like to address specific issues around your personal financial situation.

Before we get to our content on the SECURE Act, I’d like to take a minute to let you know that we’re all working very hard to help you stay focused on your financial plan in these challenging times. We are producing a variety of materials, including articles and webinars to help you navigate this constantly evolving situation. You should be receiving notices about these resources via email. However, to make it easy to find the most up to date information that we have released all in one place, which would include updates on market conditions and Coronavirus, we’ve created a special page on our website. When you visit our website at, you will find a quick link at the top to our resources page.

Now onto our main event. As many of you know, in addition to providing you with timely information, financial planning, and investment management, we also provide our clients with estate and tax planning services. The SECURE Act is one of the topics that our estate and tax team has been navigating for months. To discuss the SECURE Act today, I would like to introduce our speaker, Jeremiah Barlow. Jeremiah is our Head of Family Wealth Service, where he leads our estate planning and income tax team. He is an estate planning attorney and prior to joining Mercer Advisors, he owned his own estate planning practice. He helps our clients with their estate and tax needs and speaks across the country on estate and tax related topics. Jeremiah, thank you for being here with us.

Jeremiah Barlow: Thank you so much, Kara. It’s an honor to be here to talk about something as important as the SECURE Act. So, thank you to everybody who is available today and getting to join our discussion. A couple of quick housekeeping items as we get started today. I do want to let everybody know that this presentation is being recorded. It will be posted to a special resource page that we have created, our Resource Center, just on the SECURE Act. You can see the link here. We sent it out yesterday, also, in our newsletter. It has all of the contents to support what we’re talking about today. In addition, the webinar will be posted there shortly, after the presentation, at least within a few days. I also want to encourage everybody, as we’re going through, the discussion today…I want you to ask questions. Please interject by submitting your questions via the question feature on the presentation. That will allow me to answer questions as we go along, make sure they’re timely and make sure we can discuss them as we go. With that in mind, I will hopefully have time at the end of our discussion today to answer additional questions as you submit them, as well. If I don’t get to your question, I will do my best to circle back around and answer it if appropriate, afterwards.

Today we are going to talk about the SECURE Act. I am going to activate my web camera so that you all can see me. For those of you who can navigate the features, my face is not the biggest thing you’re seeing on the screen. Hopefully, you can actually reduce it and allow the presentation itself that I have shown on the screen today, to be the first item you see and my face being secondary. But, I wanted to make sure that I could see all of you all, especially in these times when some of us are at home working and experiencing the webinar today.

Importantly, just as Kara mentioned, Mercer Advisors takes care of all of you and our clients with financial planning and amazing investment management. Some of the items that we additionally have, that you may be aware of or not, is that we also have a team that I have the pleasure of working with, which is our estate planning and tax planning and preparation group that focuses on providing our clients with estate planning, advice and implementation, as well as tax planning and preparation. If you’re interested in those in more detail, feel free to reach out to your advisor.

But today is one of those topics that we have spent a lot of time navigating a little over a year now, as we watched it go through the Senate and so on. Today, I really want to provide three things for everyone who is listening. That is one, a quick overview of the SECURE Act as it applies to those who are have plan owners, yourselves, if you have retirement accounts, and secondarily, beneficiaries at the end of the day. Number two, one of the big changes that occurred was how assets are transferred with retirement. So, the retirement wealth transfer process with the SECURE Act. And then, ultimately, some planning opportunities and considerations that you may want to talk about with your advisor, as well as our estate or tax teams, to see if they’re appropriate for you. So, very exciting times that we’re going to have an opportunity to walk through today. Again, please feel free to ask questions as we go along. I look forward to answering them as we go.

So, first and foremost, a quick overview of what the SECURE Act did. Biggest change that we’ve seen to our retirement system in over a decade. The SECURE Act itself made a number of changes to our retirement system, but it took a little while to get there. A quick summary of the timeline, it actually started way back in May of 2019, which seems like a long while now, given the events that are going on. But, it actually passed bipartisan 417 to 3. In the House, back in May of 2019, didn’t do much throughout the year, but then we had a must-pass spending bill that went into effect on December 20 and was signed into law. In that, they attached the SECURE Act to that law. And then, ultimately, it became effective on January 1st of 2020. The big takeaway here is SECURE Act is effective now. I’m going to spend some time to unpack why we still need to know the previous laws if you already inherited a retirement account that was in effect in 2019 and before, and then also we’ll talk about the dynamics otherwise as well.

The notable changes…there was a lot of them, and I’m not going to go through all of them. I’m going to focus primarily on plan owners, those of us who own and have retirement accounts. And then secondarily, the effects on the beneficiaries. So, for the plan owners, a couple quick changes. Requirement on distributions or the required beginning date for those was increased from 70 and a half to 72. Important note, that in order for this to go into effect, you cannot have been 70 and a half before December 31st of 2019. You have to have turned 70 and a half on or after January 1st, 2020 in order to take advantage of that. Said another way, if you’re already taking required distributions, because you turned 70 and a half on July of 2019, you still do need to take distributions accordingly. You can’t now defer it to 72. For those of you, though, who received notices from your various institutions that you do need to take your required minimum distribution, although you turned 70 and a half in 2020 or later, not necessarily a glitch. A lot of systems were set up in December, before…or email notifications were set up in December, before the law was passed. And, of course, you had the holidays. Not necessarily something that happened on the Mercer side, but a lot of our custodians had that. So, definitely talk with them if you have questions.

It also removed the contribution age limits that we had before. So, now you can continue to contribute to a traditional IRA. As long as you have income that you are generating, you can continue to contribute to it. Also, for parents having children in that year in which you have a child, whether it be born or adopted, you can take $5,000 out per parent, out of the retirement account, penalty free, in order to take care of the child is the idea. Keep in mind, there still is taxes on that if it’s in a traditional retirement account. But, nice benefit, nonetheless. Also, expands 529 plans, where we can now use it for registered apprenticeships and up to $10,000 to pay student loan payments. Again, nice benefit that they added as well. And then, the kiddy tax return to the parent’s tax bracket. We had a scenario where in the Tax Cuts and Job Act, the law was changed and we had the child’s tax bracket linked up with the trust tax brackets. Now, with the new laws, it’s aligned back with the parent’s tax brackets. So, nice benefit there as well.

For beneficiaries, this is kind of where the big changes occur. In order to pay for all of these amazing things that went into effect, we needed to…or Congress, I should say, needed to make some concessions. So, there’s no change for spouses. So, if you’re going to pass assets onto your spouse when you pass away, no problem there. The big change we’re going to unpack today is the fact that the stretch IRA for most was eliminated. There are some minor exceptions to that for special beneficiaries. But, at the end of the day, the 10-year rule is something we’re going to unpack. So, those are some of the big changes. Again, we’re going to really focus on the beneficiaries, the 10-year rule specifically, as we go here and start to unpack how retirement assets are going to pass at the end of the day. Worth noting, as some of you pointed out, the change was from the required beginning date for a plan owner to take out distributions was changing from 70 and a half to 72. 100 percent correct, as well.

So, how are retirement wealth transfers going to occur now with the SECURE Act? Important to note, what I’m talking about here is everything on your right, not on your left. So, we’re talking about everything here. So, if you have a 401K, an IRA, a Toth, SEP, Simple IRA, 403b, 457 pension plans and so on, that’s what we’re referring to here. We are not talking about this. All this would be inside the revocable living trust. Some generalities there. But, we’re going to spend our time today unpacking why you would also now need and ultimately want an estate plan built around your retirement assets, just like you have an estate plan built around all the rest of what I’ll call taxable assets, your house, your brokerage account, that are taxable, business and so on.

To understand this a little bit, most people don’t actually don’t think about this too much, or at least didn’t prior to the SECURE Act, because our retirement accounts come with a beautiful thing, a designated beneficiary form, which actually is a form that allows you to fill out who is going to inherit your assets. Super easy to facilitate, but things have changed a lot. So, if you have a spouse like myself. I actually have my wife, Kim, whom I’m married to. I have three children who are all young, seven, five, and two. The way my beneficiary designation form is filled out is that if something happened to me, all of my assets will transfer to my wife, Kim. My wife will actually be able to just roll that over to her own retirement account, take it out as if it was hers over her life expectancy. Then, if something happens or when something happens to my wife, everything goes to our three children. So, the three children, that contingent beneficiary scenario is what we’re going to spend our time on today, for the most part, unless you don’t have a spouse and you’re going directly to this contingent beneficiary pool. That would be your primary beneficiary in that circumstance.

But, for me, I’ll use my example as we kind of walk through things today. Everything goes to my wife, Kim, first. Kim and I are both gone, it goes to our children as the contingent beneficiaries. So, that’s why I have a square here, because the rules have really changed. In order to give you all the background and understanding of what has changed, I’m going to tell you what it used to look like and then what it looks like today. So, if you have inherited a retirement account in 2019 or earlier, or if someone passed away 2019 and that inherited IRA kicked into effect, basically, what would happen is that you’d have two options. So, if me and Kim are gone, my oldest son, Harrison, he’s seven, in this particular case what will happen to Harrison? He would have a choice. He would have the choice of either taking all of that money out in a lump sum or he would get the opportunity, again in 2019 or earlier, to take the money out over his lifetime. He could stretch it out over his lifetime and that’s where we get this concept of a stretch inherited IRA. For Harrison, he gets to take out small amounts of money every single year and distribute it out over his lifetime. So, he gets to choose that. Of course, if he’s underage like he is right now, he’s seven, we’ll have a guardian or conservator that are making that decision for him. But, what that would logistically look like…I’m, a visual person, so I’d want to see what it looks like. I’m gone. Let’s fast forward a little bit. Me and Kim passed away and Harrison is 40. He inherits a million-dollar IRA. In 2019 or earlier this is what it would look like. Harrison could defer taking all the money out of the account. He cannot wait until he is 70 and a half, like you all can, because you’re plan owners. What he can do is actually take out small distributions every year. These are required minimum distributions using the IRS actuarial tables and at 40 a million-dollar IRA, that first year, the year after me and Kim passed, you’ve got to take out about $22,000, a little bit more than that. Then, every year, it goes up a little bit because he’s getting older. This is using the assumption of a million-dollar IRA growing at six percent a year, of what it currently would happen.

So, this is nice. You can actually structure this even if you wrapped it inside of a trust that slowly drips the assets out so that Harrison has money year over year, and isn’t just spending it all. So, that’s what it used to look like. However, in order for Congress to pay for the SECURE Act, again, like I said, there had to be concessions. The big concession was they eliminated this opportunity to take that money out over Harrison’s lifetime. So, what it looks like now is they actually took away that opportunity. They instead inserted what we call now the 10-year rule. That replaces the stretch IRA. In the simplest terms, what that means is there’s no requirement distributions over that ten-year period. It just means by the end of the tenth year after Kim and I go, Harrison has to have all of that money out of that tax-free or tax-deferred environment and into a taxable environment. So, the money has to come out of that account into another account that’s now being taxed year over year. When that happens, unless it’s a Roth, it will be taxed.

There are some exceptions. Like I mentioned, spouses not affected by this. There are some exceptions for minor children. I want to be clear here, though. Minor children have to be your minor children, the plan owner’s minor children. It can’t be just any minor individual. That minor child must be yours. So, if you raise your hand and say, “I don’t have any children that are under 18,” or 21 depending on age of majority in your state, then this doesn’t apply. This does not apply to grandchildren, does not apply to great-grandchildren, does not apply to friends or nieces or nephews that happen to be under the age of majority. It must be your child.

Secondly, disabled and chronically ill, there is a very clear and defined definition of this. It has to be approved as chronically ill or disabled. My sister is autistic, and she actually would fall into this realm, given the spectrum in which she falls. What that means is she actually would be able to take that money out over her lifetime. She would get the stretch back. Same thing with the minor children. Nuance on that minor children, if I might back up. They actually don’t get to take the stretch over their lifetime. If Harrison inherited the IRA at seven, he’d get to use the stretch provision, the actuarial tables for the stretch from seven to 18. Then, at 18 the 10-year rule would kick in. Then, any individual who is not more than 10 years younger than the plan owner, so if I’m 55, if I give it to anybody who is between 45 and 55, then we are okay. At the end of the day, 45 or older, as long as they’re not more than 10 years younger than you, they get the stretch too. Conceptually, Congress who is trying to basically grab what I would assume is significant others, brothers and sisters, that happen to be not less than ten years younger than you.

With that, what I want to do is take a second to show you the visual corollary to the RMDs that I just spent a second to describe how Harrison would take that money out, compared to what it would look like today. So, today with the stretch being eliminated, Harrison has a myriad of options that he could utilize. These are two options that I’m describing here. The first is that Harrison could take the money out in equal distributions every year. This is just an option. Again, you don’t have to take any money out at all. But, Harrison could choose to take even distributions out every year. In this case, he’s 40. Maybe he is in his peak earning years and he doesn’t want to catapult himself into the maximum tax bracket. So, he chooses to take out methodical amounts every year to manage, what I would call, tax brackets optimization, keeping himself within various tax brackets. Or, maybe he defers it all the way to year ten. That is the far-right column here, basically letting that money continue to grow tax-deferred and not take the money out until the end. Importantly, there is no required minimum distribution for this 10-year rule. So, you could take out $6 in year one. You could take out $100 in year two. You could take out $300,000 in year three, whatever combination you want to do. There is no requirement. It’s just at the end of the tenth year, December 31st of the year after the plan owner’s passing, the bucket has got to be emptied.

Now, why would you use these? I’ll kind of unpack why. But, maybe, like I said, on the left-hand side on the equal distribution the $135,867, maybe Harrison is doing that for tax bracket optimization. For the 10-year, waiting until the end, maybe it’s a Roth IRA. Maybe we want to keep that money in there, let it grow tax-free for ten years, and then take the money out. Other options, as we’ll describe, maybe there was a special needs scenario. Maybe the beneficiary shouldn’t receive the money. Or, maybe it’s an old revocable trust that’s named as the beneficiary. I say old, anything 2019 or earlier that has provisions in there that we would call conduit provisions that would push the money into the beneficiary’s hands if it touches the trust. So, maybe we want to hold off at all costs because if the beneficiary gets it, he’ll spend it. I will tell you guys for my own son, seven years old, I give him $135,000 in a given year or worst case, $1.79 million, I know exactly what he’s going to use that money for. He’s going to buy $1.79 million worth of Legos. So, we don’t want that to happen. We want to make sure that he spends it properly and prudently.

So, some strategy and options that I want to spend the latter half of our discussion talking through is understanding that in our current dynamic we now have a scenario where you need to make a threshold decision. That threshold decision, if you’re planning to pass assets onto a beneficiary that’s not a spouse, that threshold decision is due…I want to protect that money or do I want to save taxes for the beneficiary? So, you need to make that threshold decision first. If you decide to go the protection route, the utilization of what we call a retirement trust becomes a no-brainer at the day. It’s basically a tool to protect the retirement money. I’ll expand on that here in a little bit. Then, saving taxes, similarly, you could use a Roth IRA, and I’m going to unpack when that’s appropriate using Roth conversions. Then, also you can combine that retirement trust with the Roth IRA, which is a very powerful tool. You now have a tax-free bucket that’s protected from what I would call creditors and predators out there, or even just beneficiaries from themselves, so Harrison doesn’t blow it all on Legos, right? So, you can combine them together and really get tax-free buckets at the end of the day. Then lastly, charitable options, we’ll unpack how you can use charitable options to benefit you as well.

A couple remarks as I pivot away from this topic and kind of go into the strategies. Those of you who have already inherited an IRA, the rules are the same as they were before. You are grandfathered into the previous rules. There is some ambiguity on what will happen when you pass away, but most of those who have interpreted the statute, my reading of it as well, would say that the 10-year rule will kick in after you’re gone. So, your beneficiary can’t just inherit and keep taking at your distribution rate, as they used to. Now the 10-year rule will kick in. So, it’s important to note there’s a little bit of ambiguity on how it would work in some circumstances. Not uncommon when a statute like this goes into effect. It gets spliced into an existing code section. As situations evolve, the IRS will issue guidance as we go along. Importantly also, the traditional IRA and the Roth IRA, treated exactly the same when it comes to the 10-year rule. You will actually have to take the money out over the ten-year period, even if it’s a Roth IRA. The benefit is, you don’t have to pay the taxes when the money comes out. That’s at the end of the day what you get as your benefit. And again, one of the key benefits that you’ll get at the end of the day when it occurs.

Let’s unpack a little bit about the retirement trust and talk about why it has some benefits for everybody. So, if you take out the money with the lump sum, it has some drawbacks. So, a retirement account here. This is if you don’t use a retirement trust. You have a beneficiary, call him Harrison, my son. I’ll use as an example. The money just distributes out to him any time it comes out of the retirement account. If he’s named as an individual or if he had a trust that used a conduit provision, which just means that any retirement money that touches the trust would pass onto the beneficiary. Very, very, very common in revocable trusts that were drafted in 2019 or earlier because they were trying to maximize the ability to use that stretch, knowing that there were some tradeoffs. One of the tradeoffs that we see is a loss of protection, in the sense that there was a seminal case, the Clark v. Rameker case from 2014 that was ruled on by the U.S. Supreme Court that basically has the result, in many cases, of allowing a creditor to reach into the account and take the money out if you have a judgement. Big issue, if Harrison is 40, he has serious times of turmoil going on in his life and those times of turmoil might be divorce or bankruptcy or a bad business deal, or just the fact that we live in a litigious society. We want to make sure that that money is protected, just like the rest of his inheritance is protected inside of the revocable trust in which he inherited. There’s no reason not to. Some of you have probably seen scenarios where this has occurred and we want to protect against that.

One of the ways to do that is the utilization of a retirement trust, also known as a spray trust. It has various different names. It is not a revocable living trust, though. It is a completely separate document. Harrison will inherit all me and Kim’s taxable money, our house, our brokerage accounts, and checking and savings accounts, vehicles and such in the revocable trust. Then, they’ll have the retirement trust that holds all the retirement assets. The way the retirement trust works is basically it drops right down in between the retirement account and the beneficiaries. So, anytime distributions come out of the retirement account, they go to the retirement trust first. That’s our first line of defense. We can actually hold the money in that trust and only distribute to Harrison if we have to. Beneficiary gets to make that choice. Using my son as an example, maybe he’s 50 years old…call him a little younger than that. Call him 35 years old and he’s not overseeing his trust yet. Maybe his Aunt Jackie is still the trustee of his trust. Harrison calls up Aunt Jackie and says, “Hey Aunt Jackie, I’m mourning Dad and Mom’s passing. I’m sitting at the Porsche dealership staring at the Porsche that looks just like Dad’s. I need to get it in order to mourn the death. Please wire me $100,000 so that I can drive it off the lot.” Of course, Aunt Jackie is going to say yes. She knows Harrison. She knows his dad. But, at the end of the day she might not say, “You get a Porsche.” Maybe she says, “Yeah, you need a car that’s in your financial plan. Instead, there’s a $20,000 Honda sitting across the street, feel free to go to the Honda dealership and knock yourself out.”

All of that to really just say we want to be able to protect beneficiaries from this money. Even if it’s not protection, one of the benefits that this brings is helping that distribution cycle. We can help make sure that Harrison doesn’t get $130,000 every single year. Maybe he does need it, maybe he doesn’t. Maybe Harrison works in a litigious career, a doctor, engineer, lawyer like myself and he’s getting sued. We want to protect that money in that trust and dribble it out over time or hold it back in certain years. So, it gives you a lot of options that you don’t have if you name a individual, just Harrison outright, or whoever your equivalent is. But, also allows you to play with the tax brackets. What I can’t do is stop the 10-year rule. The money still has to come out of that retirement account, but it will go into that trust first, as a first line of protection before spraying it out to the beneficiary. Again, very beneficial at the end of the day.

When it comes to how that beneficiary designation form would be filled out, again, I’m a visual person. So, the way it would look is that first distribution would go to my wife, Kim, using my example. Then, it would distribute out to the beneficiaries, Harrison, Louis [Phonetic 00:33:59], and Broderick. But, it wouldn’t go to them outright. Instead, the retirement trusts would be named as the beneficiaries of the retirement account. So, Harrison’s retirement trust would be the first, getting a third. Then, Louis’, he’s my five-year-old. Then, Broderick, who is my two-year-old. I should say ours, me and Kim’s. So, the money would go to them, one-third, one-third, one-third. Now, we’ve kind of sprinkled and spread it out for them over time.

For a lot of our clients who have worked with our estate planning team and so on, we’ve been utilizing this kind of structure and retirement trust for some time. We’ve started utilizing it in response to the Clark v. Rameker case. Used it before that for unique situations, like my sister, for example, who is autistic and receiving the assets in a retirement trust is kind of a no-brainer. So, it allows her to still get governmental aid. But, we’ve been doing it for a while. Even more of a reason to do it if you don’t have one. The barometer I use for utilizing a retirement trust is about $300,000. Primarily that’s the amount that was at issue in the Clark v. Rameker case. So, I definitely support doing so. Definitely have a lot of clients who have less than that. Some of those are earlier in their career or they have a scenario where it’s $250,000. Still a lot of money for most, and that would ultimately allow sheltering of that money for the beneficiary at the end of the day.

That’s a retirement trust. Again, kind of a no-brainer, first line of defense. If you do nothing else, that’s the first thing you should do. One of the reasons you should consider not using a revocable living trust and combining it with the beneficiary designation forms here, I’m a big believer given the current dynamics we have of not muddling the two things together. We have a scenario where we have a bunch of taxable assets that are not subject to all these various retirement rules, and then we have an assets like your IRAs and 401Ks and so on that are. So, your house does not have a 10-year distribution rule attached to it, nor does your checking and savings account, your vehicle, your business and so on. So, I’m a big believer in separating the two, managing them separately and ultimately designing two different structures to facilitate them. Definitely worth its weight in the work of putting it together. So, with that, if you guys are interested in that retirement trust, you can just ask your advisors and we can help you.

I do want to switch gears from the protection component to the tax savings component, which is our second strategy. I believe I answered all of the questions at the end of the day. Important though, when utilizing all these structures, you need to fill out that beneficiary designation form correctly. We are here to help you. Three strategies I want to cover here with your wrap up, and the last component of our discussion. First of all, giving assets directly to charity, Roth conversions, and thirdly, utilization of a charitable trust, which could help actually get the stretch back. I’ll expand on what I mean by that.

Giving directly to charity, nothing exotic here. You can always give assets directly to a charity through your retirement accounts. So, if you want to give all of your retirement assets or a fraction of your retirement assets to charity, you can do that. You can actually say, after me and Kim are gone, I want to give 100 percent of my retirement account to a specific charity or multiple charities. By doing that, you actually cut out Uncle Sam completely, which is pretty amazing. Always a fan of that. So, you really want to make sure if you want to do this you’re charitably inclined, of course. But, you can absolutely give, again, all of it to a charity or just a portion of your assets to charity. Sometimes there’s some strategic reasons for doing. Maybe you have an estate tax issue, both state or federal and there’s a myriad of reasons that you might want to utilize this as an option.

Roth conversions are the interesting ones. There were certain circumstances where you’d use a Roth conversion for your own personal benefit, in the sense that you want to basically fill up your tax-free bucket. I am a big believer in not only diversification within your portfolio, but what we would call balance sheet diversification. That is making sure that you have a healthy mix between taxable assets, tax-free assets and ultimately tax-deferred assets. What we’re going to talk about here is how to fill up that tax-free bucket with the utilization of Roth conversion, but not in the sense for yourself exclusively, but more so for a wealth transfer tool. How do we transfer those assets so that at the end of the day, we can get those assets to the beneficiary in a tax-free manner?

So, with a Roth conversion, the ultimate goal here is to optimize the tax brackets in converting. So, you’re physically moving money out of your traditional IRA over into a Roth IRA. When you do that, you do generate taxation on the account. That’s important. So, you want to do this strategically, something our advisors do regularly with our clients who utilize this strategy. You want to do it by optimizing the tax brackets, not going too much, so that you don’t push yourself too high if that’s not appropriate for you. An ideal scenario would be to maximize those lower tax brackets if you have years where you have lower income. We’ll call those notch years. Maybe a year after retirement, but before Social Security kicks in and prior to your required minimum distribution that now go into effect at 72. So, that’s not the only reason you would do this or the only timing that you would do this. But, it definitely is a great time to do so.

This would be a visualization of what that notch year would look like. Maybe you have your income here. It drops down in a specific year due to maybe retirement. But, you don’t start taking Social Security and you ultimately don’t start taking requirement of distributions out of your retirement account, which is this line right here. It obviously is scaling up, because you’re getting older year after year and those R&Bs continue to increase. So, that would be the notch year. Like I said before though, that is not your end all be all for doing this. Now, there’s even more reason for doing it if you believe that you’re going to have significant assets that will pass on to the beneficiary. So, what we’re trying to do as advisors is to help you strategically take advantage of optimizing our tax brackets.

So, the tax bracket, this is our progressive tax system. The more assets you make, the higher your tax bracket increases. For those who we can, it’s ideal to try to take advantage of this middle section here, in that 10, 12, 22 brackets, before assets start to creep up and additional taxes start to apply. If we can keep it in there, fantastic. We want to really take advantage of that 10, 12, 22 percent tax bracket when possible. Like I said, not always possible. But, when you also do Roth conversions, it’s important to do it strategically, and if you can, over time. Doing it all in one year would catapult you into the maximum federal tax brackets. If you converted over $600,000, that might be appropriate given your circumstance, but if you can basically do small incremental amounts over time, that’s ideal. Again, I’m a visual person, so I’m going to show you what that looks like.

In this particular case, if over time you got to 60, call that your notch year. You started to slowly convert all of your growth, all of the growth in your portfolio from 60 to 70 over to a Roth, you would get a significant benefit. If you’re kind of looking at this, of why is it flat-lined here, that’s because if a million-dollar IRA grows by $60,000 we’re actually converting it down into the Roth. Year over year, slowly and methodically, to where over that ten-year period that Roth is being funded. But, then it begins to really accelerate. You kind of get the gas behind it and the snowball effect. Your traditional IRA is beginning to deplete, because your RMDs will kick in. But, of course, with a Roth, you don’t have required membership distributions for you and that is tax-free money that if you need it, great. But, from a wealth transfer tool, even more powerful.

By using an example on this, if you passed away at 90 years old, a 2.75-million-dollar value there at 90, using this example. If you passed away and that was in a Roth and you passed that onto your beneficiary, very very powerful. The example here I’ll extrapolate off the one I used before. Harrison is 40. He inherits a 2.75-million-dollar IRA. He now gets to keep that money in there for ten years, because it’s tax free. It’s protected inside that retirement trust, so he’s not going to lose any of the protection. Then, when he pulls that money out at 50, he’s probably in his peak earning years. When he takes that money out of that retirement account, it will not be taxed. It will dump into his retirement trust. It will be protected from creditors and there’s no tax. So, it’s really a win-win-win across the board. Now, of course, with that 10-year period we can’t stop the 10-year rule, so the money does have to come out of the account and it will be in that taxable environment at that point. But, you can see the value just in the numbers. It is inherently valuable. And, your tax bracket might be lower than theirs at the end of the day, so maybe better to do it at yours rather than theirs. We are in the best tax environment that we’ve ever been in and taking advantage of that is critical.

So, that yellow scenario there would be the distribution example. Of course, if Harrison needed the money he could take it out or have it distributed out to him.

[Inaudible 00:44:33] – [Inaudible 00:44:46]

You have a special needs beneficiary. Why I say that is for a special needs beneficiary we do need to protect that money inside of the IRA. We want it to stay inside the IRA. But, when it goes to a trust, we generally want to accumulate that money. Trusts are taxed at different tax rates and it’s better to have a Roth-free bucket. So, if you have a special needs beneficiary, like my sister, my parents are doing significant Roth conversions to create a tax-free bucket for her, to put her in the best position, so that we can give that money to her when they pass away. She will still be able to get governmental benefits, but that money is even more efficient because it’s not going to pay any taxes until we need to take the money out. So again, very very valuable, a no-brainer if it’s a special needs beneficiary. I use the example of my parents. They’re giving significantly more on the tax bracket perspective right now because of that. They’re not managing the tax brackets too much, although we’re doing it over time. They are older and my sister needs the help. Also, if you have middle to high income beneficiaries, they are also beneficial. Like I said, you don’t want to be in a scenario where you have to pull a couple extra hundred thousand out of an account or worse a million plus dollars out of an account in one year. It will catapult you into the maximum tax bracket. We might not be in the best tax bracket when that time comes because, again, we’re in the best tax environment we’ve ever been in year over year. Again, the benefits of this tax-free distribution and allowing that money to stay tax-free and also be protected in that trust. It’s very very beneficial at the end of the day.

The charitable trust, though, is also a very significant tool that we can utilize. I will say first and foremost, charitable trust only appropriate if you’re charitably inclined. But, in essence, it gives us back the stretch. So, if you want to allow that money to grow tax-deferred and only small distributions come out to your beneficiary every year, charitable trust is a fantastic tool. The way it works, I’m going to go through a quick summary. It is what we call a split beneficiary trust, which means we have two sets of beneficiaries. One that’s non-charitable. That would be my example, my children. They would be the first in line beneficiaries when Kim and I pass away. Then, when my three boys pass away, that’s when the secondary charitable beneficiary steps in. That can either be at passing. We can design it with a couple options over a term of years, generally 20 years. But, for me, I have mine designed for my children when me and Kim pass away. It pours into that charitable trust and distributes out to them over time. So, two different types of beneficiary. First in line is your non-charitable. Second in line is your charitable. That’s why they call it a charitable remainder trust. The charity is the remainder beneficiary. They get the remainder of the balance.

So, the way it’s structured is this retirement trust would be named as the beneficiary of your retirement account after your spouse. Then, you have a couple options, like I outlined a second ago. You can either structure this trust to distribute out over the life expectancy of your beneficiary. So, for me, I want Harrison to get the distributions, and Louis and Broderick, over their lifetime or I could give it over a term of years. Maybe I only want them to have it for 20 years. That allows you to increase the percentage a little bit. But, the good news is you get to design this however you want and I’ll show you an example of that here in just a second.

It’s really ideal for those who are charitably inclined, first and foremost. Also, really ideal if you want to control those distributions or get back the stretch. If you thought, “Hey, that stretch design is really nice. I want to make sure my beneficiaries only get that certain percentage every year,” it does just that. It also helps with that tax bracket management because when the retirement account pours into the charitable trust that you’re passing, there’s no taxes. The 10-year rule is moot at that point. The money is still growing tax-free in the charitable trust, because it’s a charitable entity and the money dribbles out over time.

So, let me show you an example of what I mean, because like I said before, I’m visual. So, if you have a million-dollar IRA…in this example I’m going to use Harrison only. So, say you I have one child, Harrison. He’s 40 years old and Kim and I have structured our charitable trust to name the charitable trust as the beneficiary of the IRA. It distributes out over Harrison’s life expectancy and it pays Harrison six percent a year. That six percent a year is flexible. You can go as low as five percent. You generally can get up into 10, 15. By statute you can go as high as 50 percent, but that would be rare. Harrison would have to be 80 years old, 90 years old at that point to make that work. But, generally you’re going to see it in that five to 15 range. We have some limits on that based on life expectancy, of what age Harrison is. But, very very beneficial tool.

The annual distribution for Harrison gets to be about $60,000 at the beginning and about $58,000 in this example. His life expectancy using the IRS actuarial tables, about 38 years for the account. As you’ll see in this illustration, what ends up happening is Harrison gets about 2.242 million dollars over his lifetime, which is very beneficial. But, of course, also when he’s gone, when Harrison passes away, the charity also gets about a million dollars. This is assuming a million-dollar IRA. It’s in a tax-free environment, so it’s growing at six percent a year in this particular case, just using my example. The illustration you’re seeing is…you’ll see a break here in the middle. This is just because I took out years 11 through 29, just to put it all on one page. But, you start at a million dollars. It grows by…we’re using a sex percent example. You take out six percent, leaving about $999,000 in the account. You kind of rinse and repeat that every single year. The trust distributes out how much value is in the trust. There are other ways to design this, where if you want to create an annuity stream and you want it to be a guaranteed amount every year, you could do that. Most people tilt, given our current interest rate environment towards what we call a unitrust design, which is this type of design, which is a percentage of the estate value. So, if it grows more, the beneficiary gets the benefit of that. They just get the set percentage every single year. So again, very very powerful to distribute out in order to make sure that the money gets dribbled out over time. In this particular case, Harrison is 40. Again, entering his peak earning years, he’s only having to take out certain amounts every year. That’s ordinary income. But, if invested prudently, these last years of distribution, they actually could be long-term capital gains and it’s just the way that the trust income tax distributions are required, our fiduciary distribution requirement. You could literally be getting these distributions at long-term capital gains, which is an additional added benefit for doing so. Again, very very valuable and allows that money to continue growing tax-deferred over Harrison’s lifetime, but he still gets the benefit of it. Again, extremely beneficial if you have even spend thrift beneficiaries, because you can control that distribution over time.

When it comes to how the beneficiary designation would look, in this particular case you’d have a designation form where you would name the…for my case, Kim first and then the charitable trust next, in this example. In this case, 50 percent. But, it could be as many as you want, if you have multiple children across the line. So, very very beneficial in that respect and it could be perfect for you to utilize. I just encourage you guys to reach out to your advisor and we can run the numbers to see if it’s right for you. First and foremost though, you have to be charitably inclined because the way the math works, you’re giving up that end. In that particular example that I used, that is a million dollars that’s going to that charity at the end of it. Still significant benefits, in a lot of ways more benefits than would have gone if it had to all come out at the end of ten years and pay taxes over time, the benefits there. But, at $966,000 going to charity, you’ve got to want to be charitably inclined to do so.

With that being said, I want to end discussion today with some quick action items. What do I do? First and foremost, review your beneficiary designation forms. I know your advisors have been doing that with you and they’ll continue to do that, just to make sure that you don’t have a revocable trust named as the beneficiary. If you do, we want to look at that, see if it’s appropriate. In most cases you’re going to want to defer to that retirement trust. And, if you’re wanting to create that retirement trust, same type of thing. We want to be able to protect you with that as well. Then, the charitable options, of course, you can always give directly to charity. That charitable trust is a unique one, and if you’re interested in it, we’ve already created a couple for our clients this year or set our clients up to do so. Definitely here to help you all on figuring out the best approach for you at the end of the day. The way the charitable trust is structured…we had a question come in on how is that charitable remainder trust treated as a beneficiary of the trust? At the end of the day, that charitable retirement account…the retirement account when it pays the charitable trust, it doesn’t necessarily matter if it’s a designated beneficiary or not, because all of the money is going to distribute out into that charitable trust. Not going to pay the taxes when it does, and then it will pay the money out through the charitable trust and be in a tax-free environment due to the charitable nature. So, the legal requirements, those who are thinking it through, there needs to be a designated beneficiary. How does it work? That kind of thing, kind of out the window. When it comes to the charity, when Harrison passes away, the money just distributes out to the charity outright. So, the charity just gets a check and they get to take the funds or they just get the stocks transferred to them and they can liquidate them at their leisure.

I do want to end with answering a couple questions before we finish up. But, before we do, I did spend a lot of time talking about my family. So, I wanted to end with a picture of who my boys are and what they look like. Harrison, the one I kind of used as my example today and in some ways picked on with Legos and porches, he’s on the left-hand side for you there with the blue polo. Louis is on the far right with the aqua green polo. He’s five. And then, Broderick, our two-year-old in the middle. This is taken every Father’s Day by my wife. I did talk about my wife a little bit today. She is not here in this picture. That is actually by design and intentional. That was by explicit direction of her that she not be pictured here today. So, I’m going to honor that and for our ten-year anniversary tomorrow that will put me in good standing, letting her know that she wasn’t on there. At the end of the day, that’s the kids.

I do want to take a second and give you the last two minutes to answer some questions that have come in. A lot of them I’ve answered as we’ve gone along. So, I want to kind of scroll through here and figure out where I might be able to provide some guidance. One question was, “My spouse and I turned 70 and a half in 2020. We no longer need to take distributions. Can we still do a QCD at 70 and a half?” The QCD is a unique one, probably too much of a rabbit hole to go down right now. While you can, there’s a bit of a trap between 70 and a half and 72 on how you do that, something I could spend probably 30 minutes walking through. But, I will circle back around with you on that one to make sure I answer your question.

For those of you who have retirement trusts in place today, ones in which we helped facilitate, the good news is you’re in good shape. We could circle back around if it’s updating your documents and at the end of the day you’re in good shape on the overall design. We might make some tweaks in the way it’s drafted today, just because of evolution. But, you don’t have to rush in to update all of your documents immediately today. So, put your mind at ease there.

One question, “It seems a Roth is treated the same as a conventional IRA. What is the advantages to the government for a Roth to be taken out faster?” The simple answer is they get their money sooner. So, if you do a Roth conversion today, when you convert from that traditional IRA to the Roth, you’re paying taxes now. You’re not waiting, what could be for you, 20 years down the line in order to facilitate that. So, definitely something to consider, I guess, if you’re looking at intent by the government. I’m guessing, but that would be my interpretation there. When this went into effect, I think it was in the mid-90s when you started being able to do this.

When it comes to the facilitation of all this, and there’s some questions about how do we do this? Reach out to your advisor. We can definitely look over your existing documents if you’d like. If the documents are older than just a couple years, it’s probably better to just revisit them in general. Again, our estate planning team is here to help you with that, and your advisor can help navigate getting that queued up. But, we’re happy to do so.

As a reminder for those of you who came on later, the recording of this presentation will be uploaded into our resource page. Again, the email that went out yesterday that you should have received in our newsletter, but also there’ll be a link that comes out here for those of you who attended as well. So, you definitely can watch the recording. It’ll be on the website.

Another question here, does all this apply to 401Ks? The answer is absolutely yes. Any qualified account it applies to. I do have all of your questions. The extent that I can answer them offline I will. I really appreciate all of your time today. I hope you all learned something or leave today at least with more knowledge than you had coming in. I do want to encourage all of you to do something with what you learned today. A lot of information here, a lot of you have retirement accounts. I really encourage you guys not to just sit back and do nothing with what we learned. But, definitely take action if you think something should be discussed with your advisor. They’re definitely there to help you. Thank you all for your time and have a fantastic rest of your day.


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