The same is true in tax legislation and estate planning. What may have been an excellent estate planning strategy in one year; that same strategy may be compromised by recent events and changes of tax law/legislation.
A case in point and a legislative change that has a major impact in estate planning - the SECURE (Setting Up Every Community for Retirement Enhancement) ACT of 2020.
If you have an Individual Retirement Account (IRA) - The new legislation within the SECURE ACT requires that most non-spouse beneficiaries of an IRA must withdraw all the money in the IRA within 10 years of the IRA holder’s death.
This does not affect spouses who inherit an IRA. (And there are other exceptions.)
How the change affects beneficiaries of an IRA:
A very simplified example – John Doe is unmarried and the beneficiary of John’s IRA is Larry, aged 35 when John died in February, 2020. Prior to the passing of the SECURE ACT in 2020, Larry (the beneficiary) would have been allowed to ‘stretch’ the withdrawals of the IRA that Larry inherited from John. Larry could have taken the required withdrawals later in his life.
Under the new SECURE ACT legislation – Larry must take withdrawals within ten years of John’s death.
What this means – Larry is taking withdrawals from the inherited IRA during the years that Larry is earning the highest salary (and presumably his highest tax years )– i.e. when Larry is between 35 to 45 years of age. Larry pays tax on those withdrawals. The withdrawals from the IRA are ‘compressed’ over ten years, not over Larry’s expected lifetime.
The required withdrawals might even conceivably push Larry into a higher tax bracket.
In addition, if your IRA has a trust as a beneficiary, it is important to review with an estate planning attorney any changes that might be required.
When to review your estate plan:
A review of an estate plan is important whenever there is a significant change in the life of a person. Examples would be – a marriage; a death; a divorce/separation; a birth or adoption; a large acquisition or ‘windfall’ of money; an inheritance; a new business and… changes in TAX LEGISLATION.
Don’t leave your estate plan on “set it and forget it” mode or allow your plan to become ‘outdated.’
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