Trust is not the luxury of wealthy people; it also works for net worth falls within the federal estate tax exemption. According to the IRS 2020, the federal estate and gift tax exemption is $11.58 million for an individual and $23.16 million for a married couple in 2020. The reason for trust is an excellent estate planning tool that could help clients transfer property to intended beneficiaries as planned. In this article, we will explore two practical strategies for making trust work for mass-affluent families.
Designating Trusts as Beneficiaries of IRAs
Financial planning practitioners can help clients plan for intended IRA’s transfer in the events of the IRA owner’s death. The IRAs are transferred by contract, which avoids probate that are payable to the named beneficiary(ies). Reviewing a client’s beneficiary designations of their IRAs could help a client meet estate planning objectives.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law as part of the Further Consolidated Appropriations Act, 2020. One of the SECURE Act’s is eliminating the so-called stretch IRA by requiring non-spouse beneficiaries of inherited IRAs to distribute the entire balance from inherited accounts within ten years. The new rule applies to the owners of retirement accounts who die after December 31, 2019 (IRS, 2020). Before the SECURE Act, non-spouse individuals who inherited an IRA could defer the distribution of the inherited accounts over their life expectancy. The SECURE Act stipulates that non-spouse beneficiaries of an inherited IRA must receive the full balance of the retirement funds at the end of the ten years after the owner’s death.
However, there are several exceptions to this 10-year distribution rule for non-spouse beneficiaries of the inherited IRAs. Exemptions include the following:
- a surviving spouse
- a child who has not reached the age of majority
- a disabled or chronically ill person or a person not more than ten years younger than the employee or IRA account owner (IRS, 2020).
Therefore, in certain circumstances, the clients may benefit from designating a trust as a beneficiary of the IRA, even if the assets in the account have to be distributed to the trust within ten years. For example, the beneficiary is spendthrift or addicted to drugs or alcohol, or the beneficiary is a qualified beneficiary of disability or chronic illness; If the trust is properly drafted, these beneficiaries will be able to take the distribution over their life expectancy.
Holding Community Property Assets in a Trust
Community property laws generally provide that all property acquired by a married person during a marriage is communal in nature. Currently, there are ten states that recognize community property laws in the United States, including Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (Tomin & Carcone, 2018). By holding appreciated community property assets in a trust that may, in some cases, provide tax advantages to meet a client’s objectives than titling the community property by Joint Tenancy of the Right of Survivorship (JTWROS).
When a husband or wife inherits a community property which is titled by JTWROS from a deceased spouse, he or she could only get a step-up basis of the fair market value (FMV) on his or her half share of the property. If a community property asset is held in trust, the inherited basis would be the entire FMV of the property, which would provide more step-up basis advantages than the JTWROS, especially for the highly appreciated community property assets.
To learn more about the Financial Planning Program at California Lutheran University, please contact Graduate Admission at clugrad@CalLutheran.edu or visit us at https://www.callutheran.edu/academics/graduate/financial-planning/
Hratch J Karakachian, CPA, ESQ, is a senior adjunct faculty member in California Lutheran University School of Management. He has been teaching in the MBA in Financial Planning Program since 2013. He has taught Principles of Estate Planning, Income Tax and Strategy, Managerial Accounting and Foundations of Accounting and Finance courses.
Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase the equity value of their firms. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program in the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®).
Jade Zhang is a graduate student at California Lutheran University expecting to graduate in July 2020. She is studying for a Master of Science in Financial Planning.
IRS. (2020). Estate tax. Received from: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
IRS. (2020). Retirement Plan and IRA Required Minimum Distributions FAQs. Received from: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions.
Tomin, C., & Carcone, C. (2018). Community Property Overview. Principles of Estate Planning (3rd,ed.). P41. Erlanger, KY: The National Underwriter Company.