Skip to Content
chevron-left chevron-right chevron-up chevron-right chevron-left arrow-back star phone quote checkbox-checked search wrench info shield play connection mobile coin-dollar spoon-knife ticket pushpin location gift fire feed bubbles home heart calendar price-tag credit-card clock envelop facebook instagram twitter youtube pinterest yelp google reddit linkedin envelope bbb pinterest homeadvisor angies

Beware! A new bill called the SECURE Act is set to pass the U.S. Congress. For families with retirement accounts greater than $1 million, the effective tax increase can be as high as $370,000, a 37% tax rate.

The bill has passed the House, is expected to be approved by the Senate, and the President has said he will sign it into law. This will increase tax on inherited IRA owners under the guise of protecting taxpayers’ retirement accounts. The bill would eliminate the “stretch IRA” planning tool, and require inheritors of IRA accounts to withdraw all of the funds within ten years! There are a few exceptions – spouses and few other IRA accounts. The new law will raise 16 billion dollars over the next decade according to the Joint Committee on Taxation.

How does one plan for this threat? Here are a few strategies to minimize taxes on your wealth:

During your lifetime

A solid tax planning strategy is to use a Roth conversion plan that includes tax bracket management. A Roth conversion plan needs to be mindful of your tax bracket. The successful plan is to avoid large jumps in your tax bracket. For example, if your marginal tax bracket is 24%, it is optimal to take conversion distributions up to but not more than needed so that you do not jump to the 32% tax bracket. In 2018, for married filing jointly filers the 24% tax bracket starts at $165,000 and the 32% bracket starts at $315,000. To optimize the conversion, it is best to take distributions that keep your taxable income in the 24% bracket. Does that make sense? Other planning considerations are capital gain taxes, the Net Investment Income Tax (NIIT) and the Qualified Business Tax Deduction.

Planning for your heirs

Establish an Irrevocable Life Insurance Trust, (ILIT). The net tax and cash flow benefits for your family upon your death are tremendous using the benefits of the ILIT. How? The insurance premium uses the leverage concept. By paying for the insurance premiums during your lifetime, your estate pays less total tax compared to the insurance premiums paid to fund the tax due. Here is an example: an ILIT has annual insurance premiums of $10,000 over a ten year time. The insurance policy proceeds will pay for the taxes on an IRA valued at $1,000,000.

At the death of the insured person, the ILIT insurance funds are available to pay the income tax due on the IRA when it is distributed to the heirs. The IRA tax, if paid in the year of death of the insured, at current tax rates, is $370,000 plus the Net Investment Income Tax (NIIT) tax of 3.8% on $800,000 income ($1,000,000 income over the $200,000 NIIT threshold income).  This example presumes a single tax filer. The income tax is $30,400; the total tax due would be $400,400 ($370,000+ $30,400). The total insurance premiums paid would equal $100,000. The insured person saved their beneficiaries $300,400 net of tax compared to the insurance premiums paid!

For charitably minded taxpayers, Charitable Remainder Trusts, (CRTs) that take effect at death minimize your heir’s income taxes and fulfill your charitable goals. The general concept is upon your death your family member(s) are lifetime income beneficiaries. At their deaths, the CRT funds are distributed to the designated charity.

This plan, in effect, stretches out the IRA distributions over the lifetime of your family beneficiaries, converts highly taxed distributions to lower taxed capital gain distributions over time, and fulfills your charitable goals!

We welcome your comments on the topic, and are pleased to offer a complimentary meeting to discuss your questions on these important tax and wealth management plans.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general educational information only.