I often use client stories in my columns, but I’m going to be right up front and tell you my own story here: Before the Secure Act was signed into law, my husband and I had a solid retirement and legacy plan.
Our plan centered around 401(k) and IRA distributions, long-term-care insurance, and thoughtful decisions about when to take Social Security — all with the understanding that sickness, crisis and unexpected financial costs could creep in now and again. The icing on the cake was our beneficiary designations and last will and testament to implement our final wishes.
Then everything changed. Secure Act 1.0, which became law on January 1, 2020, among other things eliminated stretch provisions for traditional IRAs, requiring most beneficiaries to withdraw the assets within 10 years rather than over their lifetimes. Secure Act 2.0, signed into law December 29, 2022, changed the rules again, adding even more complexity.
As an elder attorney, I focus on the impact of long-term-care events on individuals, their families and those they love, Like Benjamin Franklin, I pretty much take death and taxes in stride. But the Secure Act – parts 1 and 2 – have continued to shift the retirement landscape. It’s never been a better time to review estate planning with clients.
What has changed?
Secure 2.0 adds dozens of new twists and turns to retirement funding and planning. You need to have the Secure 2.0 talk with all clients who expect to receive distributions from 401(k), IRA and 403(b) accounts.
One “good” change is that required minimum distributions (RMDs) won’t kick in this year until age 73. And in 2033, the age for RMDs rises to 75. Roth IRAs get some more favorable treatments that can help in retirement planning and legacy planning.
But honestly, Secure 1.0’s elimination of the stretch provision is a lot bigger deal and still greatly impacting estate planning.
Changing the legacy landscape
Although the 10-year IRA withdrawal rule doesn’t apply to surviving spouses, it does apply in most cases to children and other beneficiaries. If you or your clients had hoped, as we did, to pass significant assets to children or grandchildren over their lifetime without losing the bulk of those accounts to income tax, that idea has changed dramatically.
What can I do, or what should I do?
To create generational wealth in the best way possible, we need to take a second look at our asset distribution. For example, I have clients who own beach houses. That real estate has gone up exponentially in value. Perhaps the beach house is the asset to protect and leave to children and grandchildren rather than the traditional IRA.
The advantage of leaving them the beach house is that they’ll get a step-up in basis after the owner dies — heirs won’t pay taxes on the capital gains that have accumulated over the decedent’s lifetime. On the other hand, withdrawals from a traditional IRA will be taxed.
However, your client needs to evaluate whether they want to hold on to the house and continue paying expenses and taxes, and that may be fine if they are continuing to use the house. If your client can no longer use the house (say they are too ill to travel any longer), they should have an accountant evaluate the property’s expenses vs. the capital gains they would pay from selling a second home.
How might I might use that IRA differently? For example, perhaps it’s time to consider that an IRA can be tapped into first to cover long-term-care expenses, which can be astronomical (up to $12,000 per month for a skilled nursing facility). A big advantage with this strategy is that medical expenses such as nursing home and home health care costs are deductible so this would help defray any income taxes.
As an elder lawyer, I see the exorbitant cost of care and bring those numbers to my clients. I see clients who are strongly attached to leaving a legacy. These two targets alone are important enough to discuss a significant change in plan.
To help fund the cost of care, many financial advisors are taking a new look at life insurance, special types of trusts, Roth conversions, and other options.
How can my planning be different, especially with long-term-care issues?
This is a loaded question for you. As an advisor, you need to get very personal with your clients, especially about long-term care. I hope that’s what you’re already doing. In this case, it is even more critical because you need to know, in the words of the Spice girls, What does your client want …what does she really, really want?
Three pieces of homework
Planning for your client, requires at least three things:
- Ask your client these key questions:
- Does she want to pay for all her care and not “burden” her children? How is she going to do that?
- Does she want to leave a legacy? If so, does she have other assets to achieve that if a large part of her IRA will be taken up in taxes?
- Does she want to pay for college for her grandchildren? (If she has money in a 529 plan for a grandchild that doesn’t use it, Secure Act 2.0 now allows those funds to be rolled into a Roth IRA for the beneficiary.)
- Does she want to live with her children and build mother-in-law quarters onto their house? Do theyknow that?
All of these issues are impacted by how your client plans to spend her money in a long-term care event.
- Do a deep-dive into 2.0. Continuously look at the impact of new rules and regulations.
- Reassessing your planning techniques. Figure out how to meet the changes your client doesn’t even yet know she needs to make. Ask yourself how the Secure Act, parts 1 and 2, affect you.
Cathy Sikorski, Esq., is an elder attorney, speaker and author who unravels the complex financial and legal problems of caregiving and aging. She has been a caregiver for eight people. Cathy uses her experience to educate, entertain and elevate the conversation around money, retirement, aging and caregiving. Her third book, “12 Conversations: How to Talk to Almost Anyone about Long-Term Care Planning,” was released in October 2021 by Corner Office Books and is available on Amazon.