In an October online article in The Wall Street Journal, the reporter described how Congress is examining large IRAs, and IRAs holding real estate and closely held business interests. Congress’ concern is that IRA income tax advantages are being used by the wealthy in ways beyond that contemplated by the original legislation. Traditional IRAs grow tax-free, with no distribution requirements until an individual attains 70 ½. Surviving spouses can receive tax free rollovers from a deceased spouse and thereby enjoy the same benefits. IRAs can also be "stretched" to provide income tax benefits for children and future generations. More recently, Roth IRAs, which are funded with after tax dollars, allow tax free withdrawals.
In current times, with social security funding concerns and most employers eliminating defined benefit plans, the need for individuals to plan for their own retirements is even more pressing. So why would Congress attack IRAs? Well, think Mitt Romney, with over $100 million in an IRA, and others with IRAs owning business assets that are growing without annual income tax. Of course, at Mr. Romney’s death, unless he leaves his IRA to charity, 40% will be paid to the IRS for estate tax, and his IRA beneficiaries will also be subject to income tax on withdrawals; so perhaps Congress should remember the Government will get their share sooner or later.
Notwithstanding, Congress and the President are examining whether limitations need to be placed on IRAs. For example, the President wants to prohibit contributions to IRAs that have more than $3 million of assets. Congress may eliminate stretch IRAs, mentioned above. Also, Congress is considering greater limitations on the types of assets that can be held by an IRA.
No, it is not R.I.P. for IRAs. But in this era of budget concerns, IRAs are another financial mainstay under attack.
Russ Alan Prince, for Forbes, published an article on October 13, titled "The Very Wealthy Embrace Severe Disaster Contingency Planning." The article outlined how today, "the exceptionally wealthy [are] vulnerable to geopolitical instability, market volatility, career criminals, and even unscrupulous associates." According to the article, how do the wealthy protect themselves? With a team of elite advisors, possessing expertise and training, who prepare for whatever crisis may arise (in theory).
How should the rest of us prepare for today's hazards? Well, perhaps we can't afford a team of elite advisors. But how about this for starters?
- Insurance: adequate life insurance, health insurance, disability insurance and property and casualty insurance, including umbrella coverage.
- Sufficient savings to pay the bills for a six month to one year period in the event of an illness or job loss.
- Basic estate documents, i.e., wills, revocable trusts, powers of attorney and medical directives.
- If there is tangible property (jewelry, china, items of sentimental value), that you intend to leave to individuals, such items and individuals should be specifically identified to avoid hard feelings later.
- And among a group consisting of your adult children, other family members, friends and advisors, one or more of them know where you keep your important records so that, upon the unexpected, your family is not engaged in detective work to find key documents and assets.
On September 16, 2014, my Post pertained to using Charitable Remainder Trusts and life insurance to provide significant income tax and estate tax advantages, as well as retirement and wealth replacement. I have attached a PowerPoint presentation prepared by Malibu Creek Group, LLC, in Pennsylvania, with information on the same topic.
Recent publications geared to tax and estate planning professionals have touted the advantages of Charitable Remainder Trusts ("CRT"), combined with life insurance, to accomplish tax, retirement, wealth replacement and charitable giving objectives. See, for example, the September 4, 2014 WRMarketplace, created for Association for Advanced Life Underwriting members, titled "Tax-Smart Diversification: Charitable Remainder Trusts & Life Insurance"; and the July 2014 edition of Trusts & Estates, titled "A Resurgence in Charitable Trusts."
We are hearing more about CRT's primarily because of increased income tax rates, which affect earned income, capital gains, and now net investment income. Throw in state income tax, and income tax rates can be as high as 50%. CRT's can help avoid or delay all of these taxes, and when combined with life insurance, can also help with retirement planning and wealth replacement in the event of a premature death. Charity also benefits because, at the end of the CRT, assets pass to charity.
Although there is now a "resurgence" in CRT's, often combined with life insurance, the strategy is not new. To read more about the strategy and life insurance and whether it is appropriate for your planning, below is a link to an article I wrote on this subject, which was originally published in 2008, in Advancing Philanthropy, a publication for the charitable planning community.