The SECURE Act. An Understanding of the Tax Law Changes in 2020 and Your Estate Planning.
This is the time of year we all start going through an annual ritual called taxes. Our W-2’s have been received, 1099’s are coming, K-1’s are being finalized, and April 15th is fast approaching. Have you thought about your estate planning too?
Additionally, it seems each year the tax rules and deductions change, whether through updates to the tax code or mere cost of living adjustments. This makes it vital for most people to seek out competent tax advice and help in preparing their individual tax returns.
April 15, 2020 will be no different as we organize and start preparing the information tax preparers will need to complete our 2019 tax returns.
A few of the adjustments that have been made for tax year 2019 are:
Standard Deductions have increased from 2018 to 2019 as follows:
Single: $12,000 to $12,200
Married: $24,000 to $24,400
Head of Household: $18,000 to $18,350
Allowable individual contributions to a 401(k) retirement account have increased from 2018 to 2019:
Under Age 50: $19,000 to $19,500
Over Age 50: $25,000 to $26,000
This time of year is also a wonderful opportunity to revisit your estate plan and determine whether there are any new tax laws that may affect your family and your estate. If you have not already done so in 2020, we suggest an annual review or “check-up” of your estate plan to make sure that everything is current and up to date. Think of it as your annual “wellness visit” for your estate plan.
Some relevant adjustments in the estate tax laws for 2020, enacted under The Tax Cut and Jobs Act of 2017, are:
Annual Gift Exemption: $15,000 per grantor
Estate Tax Exemption: $11,580,000 per grantor
Top Estate Tax Rate: 40%
Portability Election: Yes still available
Remember that the 2017 Tax Act is scheduled to expire on December 31, 2026, and the current estate tax rate and exemptions will revert back to the pre-2017 Tax Act numbers.
The biggest change that may affect your estate plan in 2020 is the “Setting Every Community Up For Retirement Enhancement Act,” which is commonly referred to as “The SECURE Act.”
Signed into law on December 20, 2019 and made effective on January 1, 2020, The SECURE Act is the most significant change we have seen in retirement planning in decades.
Although we recommend that you seek specific individual advice on how these changes may affect your current retirement plan, the key basic changes of The SECURE Act are:
- 1. RBD Date Increased: Increases the required beginning date (RBD) for required minimum distributions (RMD) from retirement based plans from 70 ½ to 72 years of age;
2. Contribution Age Limit Increased: Removes the age limit that an individual can contribute to a retirement plan from 70 ½ to unlimited as long as the participant is employed;
3. Penalty Free Withdrawals: You may now make penalty free withdrawals from a retirement plan before you turn 59 ½ for expenses related to the birth or adoption of a child; and
4. Partial Elimination of the Stretch: Under the old rules, most non-spouse beneficiaries could “stretch” withdrawals from an inherited retirement account over a period of time. This rule has changed substantially where now most “designated beneficiaries” (most individuals other than a few exceptions who may qualify as an “eligible designated beneficiary”) are now required to withdraw 100% of the retirement plan proceeds within 10 years of the participant’s death. Therefore, the “stretch IRA” has basically been eliminated for most people.
- Exceptions to the 10 Year Payout Rule: With every tax law, there are usually a few exceptions to the rule. If an individual qualifies as an “eligible designated beneficiary” (which is different than an “designated beneficiary”) then that individual may get some form of “stretch”:
- Surviving Spouse: The surviving spouse of the participant can still use the life expectancy payout rules. Upon his or her death however, the 10 year payout rule kicks in.
- Minor Child of Participant: A minor child of the participant may use a life expectancy payout rules, until the minor child reaches the age of majority, at which time the 10 year rule kicks in.
- Disabled Beneficiary: The life expectancy payout rules applies to a beneficiary who is disabled. Upon his or her death however, the 10 year rule kicks in.
- Chronically Ill Individual: The life expectancy payout rules applies to a designated beneficiary who is chronically ill. Again, upon his or her death the 10 year rule kicks in.
- Beneficiary is Less than 10 Years Younger than Participant: If a designated beneficiary is less than 10 years younger than the participant, the life expectancy payout rules apply. Upon his or her death however, the 10 year rule kicks in.
As we prepare for our annual income tax ritual, please make note of these changes and how they may affect your family and estate plan goals.
This time of year is a good time to discuss these issues with your CPA, financial advisor, retirement plan custodian and estate planning attorney. Just like going to the doctor, an annual financial and estate plan “check-up” may be able to prevent a looming financial sickness or problems in the future.
If you have any questions regarding family based estate planning, Arizona probate administration, trust administration or any other legal issues, please call the attorneys at Rowley, Chapman & Barney, Ltd. (480) 833-1113 .