A “Stretch” IRA is a system applicable in estate planning, by which an individual can extend the tax-deferred status of an inherited IRA by transferring it to a beneficiary other than his or her spouse. Instead of naming one’s partner as a beneficiary, one can name children or even grandchildren and by so doing, the duration of the IRA is thus stretched for decades, far beyond the expected lifetime of the original account owner. Some people do not apply the stretch effect by directly choosing younger beneficiaries. Instead, they name their spouse as the IRA beneficiary and this gives them access to the inherited IRA and help them obtain the RMD if up to 70 and a half years of age. The spouse can them name a child or any other younger loved one as a beneficiary, thus stretching the inherited IRA. A stretch IRA gives the advantage of extending the tax-deferred growth while avoiding a substantial tax bill by limiting required distributions on the inherited IRA. This is drawn from the fact that only a small Required Minimum Distribution (RMD) will apply to a younger beneficiary as compared to an elderly spouse, and as a result, the tax liability on the funds are lowered while the remainder of the inherited IRA can continue to grow and increase in value tax-deferred.
What then is the downside to this?
The Stretch IRA is well-known for aiding wealthy families avoid taxes while continuously amassing wealth. There are, of course, other ways with which the upper class can minimize their taxes on family assets such as with the use of insurance policies, but it would be quite unfair when they are allowed to completely avoid taxes on their retirement accounts by the use of Stretch IRA. For that reason, this estate planning system has received a lot of criticism and the House Ways and Means Committee has recently unveiled a new Act that will duly modify the regulations surrounding the Stretch IRA.
Effect of the modification
The HR 1994 bill was passed by Congress on March 29 to speed up IRA distributions and taxes on inherited IRAs. This law would force the beneficiaries of such accounts into a higher tax bracket by accelerating tax collections. Prior to this bill, stretch periods could last indefinitely but by reason of this bill, the period has been limited to 10 years, after which the inherited IRA would be depleted and all taxes which the IRA is subject to will have to be paid in full. This proposed legislation would see to it that higher taxes are paid as compared to the original Stretch IRA, and that the beneficiaries would be prevented from having their ever-growing funds tax-deferred. This consequently would reduce the compounding effect of the interest which such funds would provide.
Do you still desire to significantly cut down on estate taxes?
Despite the new regulations put in place to check the loopholes of the aforementioned estate planning system, there are other alternatives permitted by the proposed legislation, through which IRA account holders can pass on their IRAs to beneficiaries completely tax-free. As an estate planning lawyer would tell you, one of these alternatives is by creating a charitable remainder trust. This type of trust allows investors and IRA holders to transfer assets into the ownership of a beneficiary, after which the assets are then passed on to a charitable organization. The benefit of this alternative estate planning tool is that it allows the recipient to enjoy the proceeds from the assets before handing what’s left of the estate. Another alternative to transferring assets to beneficiaries tax-free is by entering into a Life insurance policy.
Contact an estate planning lawyer
The purpose for the new stretch IRA legislation is to cut down on the stretch period, thus reducing the possibilities of the wealthy taking advantage of the retirement system and going completely tax-free. You may not fall into this category of the upper class and may desire to have less taxes to pay when leaving assets for your beneficiaries. Estate planning is an important aspect of everyone’s life, and as almost every individual has one or more assets to their name, there is need to be cautious while leaving such assets for your loved ones in order to ensure they enjoy maximally from those assets after all taxes are paid. As have been said, there are alternative measures beside the Stretch IRA with which estate taxes can be significantly cut-down or avoided. Estate planning lawyers are lawyers specialized in the laws and regulations surrounding estate planning, and it’s in your best interests to contact the best estate planning lawyer near you who is well-versed in creating trusts, insurance policies and other estate planning documents which would help achieve your estate planning goals.