Are You and Your Children Prepared for What Could Be the Biggest Tax to Hit Your Estate Since 1913?
By David T. Phillips, CEO
Estate Planning Specialists
On February 3, 1913 Congress ratified the 16th Amendment, establishing the Federal income tax. While it has been changed many times through the years, one rule that has been a main stay, is the taxation of all funds that are extracted from your “Qualified Accounts” (Pension, IRA, 401k, Defined Benefit or Contribution Plans). Current law taxes ALL “Qualified” withdrawals as ordinary income due and payable on April 15th of the year following the distribution.
For many years now, we have been able to kick the tax bill “can” down the road until age 70 ½ when Required Minimum Distributions hit with a vengeance. Each December 31st the value of all accounts are tabulated and a tax is levied on that sum and your other income for the year.
When your children inherit your “Qualified” money, they too are subject to the same income tax rules. Since 2006, however, with the passage of the Pension Protection Act, our first-generation posterity has been able to choose to “Stretch” their “Qualified” inheritance over their lifetime. Unfortunately, just like the extinct Dodo bird, the “Stretch” blessing is soon to disappear right before our eyes, and the impact will be absolutely devasting to our children who, expectedly or unexpectedly, receive our “Qualified” funds as an inheritance.
On Thursday, May 23rd the U.S. House of Representatives, with a vote of 417 to 3, passed the Setting Every Community Up for Retirement Enhancement Act, referred to as the “SECURE Act.” It has now been sent to the Senate and according to Paul Richman, chief government and political affairs officer at the Insured Retirement Institute, “Because it has been “fast tracked” there is a good chance the SECURE Act will soon be put on the Senate floor and just like it did in the House, pass with a significant bipartisan vote.”
I have read the House version of the bill and frankly there are some elements that I like, such as increasing the age for RMDs to 72. But hidden deep within its’ pages is the abolishment of the “Stretch for our children.” And that’s an estate planning deal changer.
In the House bill, the entire “Qualified” account and any interest accumulated that is inherited by our children will be income taxed over a maximum of 10 years…… not over their lifetime. The Senate’s version is asking for the tax to occur at the end of 5 years.
Either way, just think of the huge tax implications. Let’s say the Senate version prevails and you have two children that equally inherit your $1 million IRA on the day of your passing, October 31, 2019. On December 31, 2019 they would have the option of dividing the funds in two and begin taking equal distributions of $100,000 per year, or wait until the 5th year and receive the entire IRA plus interest. If for example, the IRA earns 5% interest, it would grow to $1,276,281. The bottom line is that the children will be forced to inherit the IRA and will be taxed on the entire amount, interest included, over 5 years or as a lump sum.
The additional income will be added to their top line of income, not only requiring an income tax to be paid on the inherited sum, but thrusting them into a higher tax bracket and subjecting their regular earned income into stratospheric brackets.
In our example, first the tax will be due April 15, 2020 if they took distributions over the 5 years. This increased tax debacle will continue for the next four years, all because you didn’t spend your “Qualified” money fast enough and you left it to your children.
I am confident that the vast majority of Americans haven’t planned for this day. But the reality is that the new “Non-Stretch” rules are around the corner and we'd better wake up and plan for them or see a major portion of our “Qualified Funds” gobbled up by the IRS. I am sure that isn’t what you wanted to see happen when you painstakingly set aside that money for your retirement. Good grief, if you knew that the IRS was going to confiscate so much, you most likely would have spent it yourself.
Since 1988, we at Estate Planning Specialists have been preparing our clients for this day. In our Special Report, The Bombshell Battle Plan, How to Defend Against the IRS’ Secret Weapon that was recently written at the request of Dr. Mark Skousen, Forecasts & Strategies, we reveal the key defensive solutions we have been implementing for over 30 years.
It is so important that you know how to defend yourself from the SECURE Act, that we are making The Bombshell Battle Plan available to you for only $6.95 for the email version and $14.95 for the color printed and mailed version.
You need to arm yourself before the SECURE Act is signed by President Trump, which he has affirmed he will sign. Call our offices today to order your copy (1-888-892-1102) or CLICK HERE. Tell us how you would like to receive the report and we will rush it to you.
Remember, your IRA is simply an IOU to the IRS! You have assumed all of the investment risks through the years and your “Day of Reckoning” is at hand. You owe it to you and your posterity to know how to defend your wealth.
Call today, 1-888-892-1102, or VISIT this page.