In this episode, Tim describes planning options for “qualified assets,” and details the opportunities and pitfalls regarding ongoing tax-deferred growth.
Podcast transcript:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law PC an estate planning probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentary focuses on the central aspects of estate planning, such as wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
IRAs, 401K's, and other similar vehicles used for retirement planning offer some of the greatest opportunities and some of the greatest pitfalls in all of estate planning. Effective planning balances opportunities for tax-deferred growth with asset protection. Moreover, the landscape for planning has changed significantly since the passage of the Secure Act in 2020, as modified by the Secure Act 2.0 in 2023. So if someone planned with these assets prior to 2020, what they did back then may no longer be appropriate. Let's start by making sure we're all thinking about the same type of assets, because it can be confusing. Traditional individual retirement accounts, also known as IRAs, are self-funded savings or investment accounts where investments are made with pretax dollars, the investments grow tax-free and the investments are not taxed until withdrawn. Qualified plans are basically treated the same. The only difference being that unlike an IRA, which is self-funded, a qualified plan is typically offered through an employer. Qualified plans include 401ks, 403bs and 457s. By the way, those numbers refer to sections of the Internal Revenue Code. So you're now evermore ready for trivia night. The magic of IRAs and qualified plans is tax-deferred growth. The prevailing wisdom is that the longer an asset can grow tax-deferred, the bigger it gets. While the owner of a traditional IRA or qualified plan is living, the rules are pretty straightforward. Any withdrawals taken before age 59.5 are subject to an early withdrawal penalty, and the owner must generally start taking required minimum distributions in the year they turn 72 or 73 if you reach 72 after December 31st, 2022. Finally, it should be noted that while the owner of an IRA or qualified plan is living, the owner enjoys strong creditor protections. For example, there are limits on the extent to which these assets can be lost to a judgment creditor subject to a collections action, or, in New York, lost to pay for long-term care costs.
With all that background in place, let's now shift the conversation and talk about what happens to these tax-deferred assets when the original owner dies. The extent to which tax-deferred growth may continue depends on the beneficiary who is designated. That's a key concept. So let me say it again. The extent to which a tax-deferred growth may continue depends on the beneficiary who is designated. If you designate your spouse, then the spouse receives what is called a rollover IRA, and the surviving spouse is treated as if the surviving spouse were the original owner. That is, required minimum distributions can be calculated pursuant to the surviving spouse's remaining life expectancy. Favorable tax treatment is also available by designating what the IRS calls other eligible designated beneficiaries, such as a minor child of the owner, such as someone fewer than ten years younger than the original owner, such as someone with a disability, or such as someone who is chronically ill. For any other designated beneficiary, the maximum period for any continued tax deferral is ten years. Perhaps the greatest opportunity, tax-wise, for designating a beneficiary is to choose a charity or other entity with a 501c3 status, such as WRVO, where an IRA or qualified plan owner does so, the assets will never be subject to any income tax. Perhaps the worst outcome, tax-wise, is to fail to designate any beneficiary at all. When that happens, the asset moves through the decedent's estate, and opportunities to extend tax-deferred growth are pretty much lost, resulting in a large present tax bill. Finally, it is sometimes worthwhile to consider designating a trust as a designated beneficiary. Doing so can provide asset protection for whomever inherits the asset. Be warned, though, the trust must be carefully drafted to preserve tax-deferred growth. Planning with IRAs in qualified plans is tricky. By taking the time to get it right. Clients can optimize their tax position and asset protection with respect to these unique assets.
