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How the SECURE Act Impacts Estate Planning

Dan Edwards – Carlson Capital Management
Dan Edwards, CPA

Director of Estate Planning
507.206.2809
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Professional Biography
Dan Edwards serves as the Director of Estate Planning as part of the Carlson Capital Management team, and as a Senior Tax Advisor as with CCM Tax & Trust Administration, a commonly-held affiliate of Carlson Capital Management. As the Director of Estate Planning, Dan works closely with the CCM advisory team to deliver estate planning expertise and proactive tax planning as part of the fully integrated wealth management experience. As a member of the Tax Team, Dan has responsibility for preparation, review, and completion of individual and trust tax returns and tax projections. Dan also participates in client meetings and serves as a tax resource for clients, providing service both individually and collaboratively with other advisors, to develop customized recommendations.

Prior to joining CCM, Dan spent 24 years in the Senior Tax Director role with RSM US, LLP, where he was responsible for leading the successful growth of the trust and estate tax practice for their Rochester, Minnesota, office. He has extensive knowledge and expertise in the tax planning and compliance sector through his service as the tax director for individual, trust, estate, and corporate clients. Dan is a Certified Public Accountant (CPA) and a member of the American Institute of Certified Public Accountants as well as the Minnesota Society of Certified Public Accountants.

Dan is a graduate of the University of Iowa where he earned his Bachelor of Science in accounting. He enjoys volunteering and is currently supporting the Rochester Estate Planning Council and serving on the Board of Damascus Way. Outside of his work life and volunteer activities, Dan enjoys spending time outdoors and riding his bike. Dan and his wife Stacy reside in Rochester, Minnesota, and have three grown children.

Personal Thoughts
As soon as I started my first job after college my mother gave me some great advice--she said, “It’s not now much money you make, it’s how much you save." Over time, I began to see the additional benefit of my savings from the compound growth of the interest and dividends.

Several years ago, I decided to run a marathon, but after committing to it began to question whether I could actually do it. A friend of mine advised me to start training early and to increase my training mileage by 10% each week. I wasn’t sure I could complete the marathon, but I knew I could run 10% more than the prior week. After about four months of weekly 10% increases, my training runs were long enough that I knew completing the marathon was possible. I also began to realize how many things in life increase by compounding: knowledge, learning, relationships, and building good habits, to name a few.

It’s important to take the time to make sure all of the non-financial goals in your life also compound in growth if you believe, “The real measure of your wealth is how much you’d be worth if you lost all your money."

The one thing that has impressed me the most as I've joined CCM is the collaborative team approach we engage in to serve our clients. Having six or seven financial advisors, each with different areas of expertise, work on a client’s financial plan is clearly the best approach - producing results similar to the concept of compounding.

Dan Edwards
Dan Edwards, CPA
Director of Estate Planning

The nature of estate planning is that it is truly an ongoing process. It’s prudent to review and periodically update plans in light of numerous factors. Health, family changes, and changes in related laws are a few of the most common reasons you may want to update your plan. A recent law, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, includes significant changes that could have an impact on your estate plan. It is therefore very important that existing documents be reviewed with the provisions of the new law in mind. The SECURE Act is quite robust. Following are just several examples where the SECURE Act intersects with some key estate planning opportunities and considerations.

Taxes on Inherited Retirement Accounts

One very key aspect of the SECURE Act is that it changes the requirements regarding the timing of distributions from an inherited IRA/tax-qualified retirement account going to a non-spouse beneficiary. The new law reduces the distribution period to ten years. This means most non-spouse beneficiaries must withdraw IRA/tax-qualified retirement plan balances after the death of the owner of the account within ten years. A prior law allowed many beneficiaries of IRAs/tax-qualified retirement plans, and properly structured trusts set up for those beneficiaries, to withdraw the account balances in installments spread over the designated beneficiaries’ lifetimes. The inherited retirement account assets could (and still can) be withdrawn more quickly, but the benefit of the prior law was that it allowed the assets to be distributed over the beneficiary’s life expectancy.

The ability to withdraw relatively small amounts from an inherited retirement account in the early years of a beneficiary’s lifetime resulted in the bulk of the IRA/tax-qualified plan remaining in the account for a significant period, growing on an income-tax-free basis. This tax deferral benefit made “stretch” planning very popular. For many of our clients, a significant portion of their assets are held in IRAs or tax-qualified retirement plans. Therefore, a significant portion of their current estate plan may be focused on maximizing the potential benefits heirs will receive from the inherited retirement accounts. An additional benefit of this planning was that it could maximize the amount left in inherited retirement accounts by choosing the order in which assets are consumed. It was common to suggest heirs balance distributions from taxable assets and nontaxable assets to provide the best tax result.

Planning for the New Ten-Year Rule

Planning centered around stretching out distributions will need to be revisited to consider the new accelerated ten-year distribution period. The result of this new law may be such that, along with your accumulated wealth, if you bequeath substantial IRA/tax-qualified retirement accounts to your adult children, you may be leaving them a large tax burden. As previously mentioned, these new rules also apply to trusts that are beneficiaries of retirement account assets. If you have a trust as a beneficiary or contingent beneficiary of your retirement accounts, it’s very important to review the terms of the trust. There can be negative tax consequences if the trust does not have the flexibility to distribute, out of the trust, the required retirement account distributions during the ten-year period.

The Extra Benefit of Leaving a Roth IRA to Your Heirs

Non-spouse beneficiaries who inherit Roth IRAs will also have to take the money out of the retirement account within ten years, thereby losing the benefit of tax-free growth for the prior stretch period. However, since there is no tax impact for Roth IRA distributions, it may be advisable to wait to distribute the full account in the tenth year and enjoy a full ten years of tax deferral. Estates containing Roth IRAs clearly have an advantage over estates with only non-Roth retirement accounts. Most heirs will likely withdraw one-tenth of a non-Roth retirement account every year for ten years to spread out the tax impact. Depending on your situation, a Roth conversion might be a good option not only to minimize your heirs’ tax burden, but also to sustain the growth of your retirement nest egg, thus increasing your ultimate legacy. This planning should take into consideration your current and future tax brackets, as well as the future tax brackets of your heirs.

Gifts, Loans, and Low Interest Rates

The COVID-19 pandemic and the resulting market volatility, is having a significant financial impact on the value of certain assets. Depending on the type of business, the value of many small businesses has dramatically declined. In addition, some real estate has seen significant decline in the value. Hopefully, these reductions are temporary and will revert to normal levels when the pandemic subsides. Until then, you may consider transferring reduced value assets to your heirs at the current lower values. These transfers, whether by gift or loan, could allow for potentially significant growth, outside of your estate, and the opportunity to avoid gift and estate tax when values do return to a higher level. In addition, interest rates used for intra-family loans and more sophisticated estate planning techniques (e.g. Grantor Retained Annuity Trusts) are at an all-time low. In summary, this may be a good time to make gifts and/or loans due to the current suppressed values and interest rates.

Next Steps

While many unpredictable factors related to the pandemic remain, acting ahead of an economic recovery could allow you to leave more of your hard-earned wealth to your beneficiaries and lose less to taxes. To learn more about estate planning opportunities during this time, please contact your CCM advisor to engage our team in your situation. Our team looks forward to helping you navigate the intricacies of the SECURE Act. We are happy to assist in applying the related considerations and opportunities to your estate plans such that they are best positioned to carry out your wishes and intentions.

For more content on the SECURE Act, read a previously published piece by Kevin Koski, CPA, Principal Tax Advisor, How the SECURE Act Could Impact You.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

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Published June 18, 2020 Topics: Estate Planning, Estate Tax, IRAs, Roth IRA

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