Before this year started, you could bequeath your IRAs to anyone you wanted. The recipient had to take “required minimum distributions” every year — but those distributions — which are taxable — were stretched out based on the recipient’s presumed life span. The younger the recipient, the smaller the distributions the inheritor had to take.
Under the new rules — which took effect Jan. 1, less than two weeks after the Secure Act became law — stretch IRAs for non-spouses were pretty much eliminated.
However, if you’ve got the money and the incentive, you can probably create what I call a “synthetic stretch IRA.” For example, you can set up a trust to which you bequeath your IRA, with the trust instructed to pay lifetime income to whomever you choose on whatever terms you like.
I’m sure there are other, less obvious workarounds, all of which — at least for now — are high-cost and possibly legally risky. But over time, I’m sure, specialists will find loopholes for their clients’ IRAs to squeeze through.
People with tons of money — let’s call them the rich — will be able to afford to play the games required to create synthetic stretch IRAs. People with pounds of money — the middle class and upper-middle class — won’t be able to play.
To be sure — three of my favorite weasel words — being able to sit on an inherited IRA for up to 10 years without being required to take annual distributions isn’t ungenerous. But it’s nowhere as generous as the old rules, which lots of people, including me, used as part of their estate planning.
I’ve got no problem with people who say — correctly — it was ridiculous for IRA holders who were saving for their own retirement to be able to bequeath IRAs to people two or three generations behind them.
But I’ve got a big problem with the way that Congress and President Trump changed the rules, which had been in effect since 1985, with essentially no notice. The change took effect on Jan. 1 — a mere 12 days after the Secure Act became law.
I would have had no problem with cutting back stretch IRAs had there been a phase-in period of several years. Or better yet, if the new rules applied only to IRAs created after the legislation was passed.
However, Congress and Trump felt the need to limit stretch IRAs to make up for federal revenue losses created by raising the age at which IRA holders have to begin taking required minimum distributions to 72 from the previous 70 ½ .
That change was fair, given the rising life spans for people who make it into their eighth decade. Why Congress and Trump felt the need to make up the revenue losses from this change — but not from reducing estate taxes in 2017 — is beyond me.
The Secure Act was the second time in three years that the government changed long-standing tax rules — with little notice — that people relied on. The first one, of course, was the tax law that Trump and congressional Republicans passed in late 2017 that limited federal deductions for state and local taxes to $10,000 a year. Those deductions had been unlimited since the creation of the federal income tax in 1913.
I’ll spare you my customary rant about this law, which Trump signed on Dec. 22 and which took effect 10 days later. It has hurt people who live in high-home-price, high-tax blue states, including my home state of New Jersey, and homeowners all over the country. And as I wrote in October, the law has held home equity — the biggest financial asset for tens of millions of homeowners — about $1 trillion below where it would otherwise have been.
I’m linking the Secure Act and the 2017 tax law because in both cases, long-standing federal tax benefits were stripped away almost overnight.
The stretch IRA situation is especially interesting. According to Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, stretch IRAs were created by the Deficit Reduction Act of 1984 and took effect on Jan. 1, 1985. Before that, any non-spouse inheritor of an IRA had to liquidate it within five years.
Congress’s intention, Rosenthal said, based on information he found in the Congressional Joint Committee on Taxation’s 1984 Bluebook, was to help participants plan their estates better. Which is ironic, considering what the Secure Act has now done.
The bottom line here? “Perhaps Congress should add ‘buyer beware’ to any legislated tax benefits,” Rosenthal said.
To which I can only add: Amen.