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Impact of the SECURE Act

If you have kept up with current events, you know that January 1st marked a significant change to retirement accounts. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).  The SECURE Act, which is effective January 1, 2020.   The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of your retirement accounts: The SECURE Act requires most non-spouse beneficiaries to withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death, rather than over their own life-expectancy.   The major impact, of course is the acceleration of the income tax due on any inherited accounts.   This is a win for Uncle Sam, as the government will receive the income tax on the retirement account faster; however, because of the acceleration, non-spouse beneficiaries will end up with less of the value than anticipated.

Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, or a divorcing spouse.  In order to protect your hard-earned retirement account and the ones you love, it is critical to act now. 
 
Review Intended Beneficiaries
 
With the changes to the laws surrounding retirement accounts, now is a great time to review and confirm your retirement account information.  Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly.  If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary.  If you want the primary beneficiary to be an individual, he or she must be named.  Ensure you have listed contingent beneficiaries as well.  If you have recently divorced or married, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.
 
Trusts as Beneficiaries of Accounts – Need for Updating
 
Prior to the SECURE act, so-called “conduit trust” provisions were commonly included in Revocable Living Trusts so that the trust would qualify as a ‘designated beneficiary’ so that the beneficiary’s life expectancy could be used for purposes of calculating the required distribution payout period.  If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death.  Under a conduit trust, any required minimum distributions (RMDs) would be paid directly to the trust’s beneficiaries over the calculated payout period, preventing premature liquidation of the account and leaving the retirement account itself safe from creditors.  With a 10 year mandatory liquidation of retirement accounts, conduit trusts will no longer provide the extended protection many account owners desire for their beneficiaries.  If you named your Revocable Living Trust as the beneficiary of your retirement accounts, you should revisit your plan and instead consider alternative planning options.  This will ensure that even with a 10-year required payout, the balance will remain protected within this trust for the benefit of your intended beneficiary–safe from creditors.
 
Charitable Giving As A Possible Solution
 

If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill these charitable desires.  Because charitable organizations do not feel the impact of the income tax problem, designating a charity as direct beneficiary of your qualified retirement accounts (rather than non-tax dollars) would be a tax efficient means to plan to provide for charities after your death.

Alternatively, a charitable remainder trust may provide a solution. Such a trust would allow you, the grantor, to retain or name beneficiaries to receive an annual income stream from the retirement account. At the end of the term, the remaining funds would go to a charity named in the trust agreement. When the trust is created, the net present value of the remainder interest must be at least 10 percent of the value of the initial contribution. It can be payable for a term of years, a single life, joint lives, or multiple lives. Upon the plan participant’s passing, the estate will receive a charitable deduction for distributing the retirement account to the trust. Depending on the value of the retirement account, the age of the trust beneficiaries, and the current tax rate, the deduction will likely cover a large portion of the retirement account.

There are still a lot of questions surrounding the SECURE Act and the extent of the impact on taxpayers.  Proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances is imperative to ensure your estate planning goals are accomplished.  Schedule an appointment today to meet with us for guidance on how the SECURE Act could impact your estate plan.

Protect your Business with a Buy-Sell Agreement

An unexpected death, disability, or retirement.  An irreconcilable dispute.  Divorce.  These triggering events may put your successful, stable business into a tailspin. Luckily, a buy-sell agreement can help you and your business be better prepared to handle these events.

What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding agreement between co-owners of a business that controls what happens if a co-owner leaves the business—think of it as a change management tool.

What Should a Buy-Sell Agreement Consider and Include?

We’ve created this checklist as a starting point for discussing business transition. These topics will help you identify the goals, needs, and commitment levels of individual business owners as well as the goals and needs of the business itself. Discussing these matters with your co-owners will help you identify planning opportunities and minimize the risk of future business disruption or, worse, business failure.

The Buy-Sell Checklist

  • Are there any non-owners on the management team?
  • Do all of the owners participate in management?
  • Are there procedures in place to help ensure continuity of management during a transition?
  • Is there a possibility of deadlock (for example, 50/50 ownership)?
  • Is there a workable mechanism to resolve a potential deadlock?
  • Does your buy-sell cover common triggering events?
    • Death
    • Disability
    • Retirement
    • Termination of employment
    • Sale to a non-owner (right of first refusal)
    • Marital dissolution
    • Deadlock
    • Expulsion of an owner
  • If a triggering event occurs, will the buyout be mandatory or optional?
  • If a triggering event occurs, how will the value of an interest be determined? By formula? Appraised value? Predetermined price? Other (documented) method?
  • If a triggering event occurs, how will payment be made for the departing owner’s interest? May a promissory note be used to pay over time? What is the down payment, interest rate, and term of the note? Is the note secured or unsecured?
  • Will the parties use life insurance to fund the buyout obligation? Who will own the insurance policies? Who will be the beneficiaries?
  • Have you discussed the tax consequences with your CPA?
  • Are there any professional licensing considerations to ensure that the equity passes to a qualified owner?
  • Do the owners want to restrict the transfer of ownership interests? Are all transfers prohibited unless approved by the other owners? Or are certain transfers (such as to family or to a revocable trust) permitted without owner approval?
  • If the business is taxed as an S corporation, do the owners understand the importance of including provisions that restrict the transfer of equity to ensure that the business does not become disqualified from Subchapter S status?

Key Considerations

  • What type of business is this?
  • Do you currently have a signed buy-sell agreement?
  • Who manages the business?
  • How do the owners want to address employment issues, such as:
    • Compensation
    • Non-competition agreements
    • Non-disclosure agreements
    • Non-solicitation agreements
    • Protection of intellectual property and intangible assets

Here’s What to Do Next

Spend a few minutes going through the checklist and list of key considerations. If you want to protect your business, but your business doesn’t have a buy-sell agreement or you’re not sure the buy-sell agreement you currently have in place is adequate, give us a call.

We will review this checklist with you to either let you know whether you’re protected with your current buy-sell agreement or help you design and draft a comprehensive agreement that protects you and the business.