Congress and President Trump recently enacted legislation that, while providing some candy in the average taxpayer’s Christmas stocking, also includes a small lump of coal. This post (i) makes you aware of the recent legislation that marks the official death of the so-called “stretch IRA,” and (ii) provides the relevant federal and Minnesota state transfer tax thresholds for 2020.
The Death of the Stretch IRA
On December 20, 2019, President Trump signed the “Setting Every Community Up for Retirement Enhancement” Act (“SECURE” Act) into law. While the SECURE Act provides many taxpayer-friendly changes from a retirement planning perspective, the most important change from an estate planning perspective is a negative one, and that is the official elimination of the so-called “stretch IRA.” For deaths occurring after January 1, 2020, a surviving spouse is still entitled to “roll over” the deceased spouse’s remaining retirement account assets and “stretch” required minimum distributions (“RMDs”) across the surviving spouse’s remaining lifetime. However, except in certain limited hardship cases, all other surviving family members will now be required to withdraw a deceased account owner’s retirement account assets within 10 years. It is therefore no longer possible to “stretch” a parent or grandparent’s retirement account across a beneficiary’s remaining life expectancy in an effort to minimize income taxes. The Congressional Budget Office estimated in April of last year that the elimination of the stretch IRA would raise nearly $16.0 billion in additional revenue in the next 10 years.
As I summarized in a monthly email update sent I sent this summer, the elimination of the stretch IRA as an option should impact retirement planning and estate planning discussions with clients who own substantial assets in retirement accounts. As clients consider their retirement planning, the loss of the post-death “stretch” option for beneficiaries makes the continued use of a tax-deferred retirement account vehicle more expensive as a means to pass wealth to the next generation. To the extent that retirement planning requires that clients continue to use retirement accounts, clients should consider anew how retirement account assets pass at the second death between a married couple. By way of example, (i) if clients are charitably inclined, clients should consider using retirement account assets to fund charitable objectives, and/or (ii) if clients want to provide for multiple generations of family members, such as grandchildren, clients could direct retirement account assets to these younger generations, or trusts for their benefit.
Looking Ahead: Key 2020 Transfer Tax Amounts
As we look ahead to 2020, here are the key estate and gift tax amounts:
- Federal Unified Credit. The unified credit against federal estate and gift tax will increase next year from $11,580,000 per person to $11,400,000. As I noted in my email summary of last month, high-net-worth clients might consider how they might “lock in” this unified credit amount.
- Annual Exclusion Gifts. The federal annual exclusion gift stays the same as it was in 2019, which was $15,000 per beneficiary per year. The benefit of an annual exclusion gift is that any gift made of up to $15,000 per beneficiary in any calendar year will not be counted against one’s unified credit. For Minnesota residents, these gifts will not be considered to have been made at death even if the resident dies within three years of making the gift.
- Minnesota Estate Tax Exemption. The Minnesota estate tax exemption will increase to $3.0 million for deaths occurring in 2020. This is an increase of $300,000 from the Minnesota estate tax exemption amount in place in 2019 ($2.7 million). Unlike the federal unified credit, which is scheduled to increase every year through 2025, the Minnesota estate tax exemption is now set permanently at $3.0 million, with no scheduled increases in the exemption.
- Gifting By Minnesota Residents. It is worthwhile to remind high-net-worth Minnesota residents that while there is no Minnesota gift tax, gifts made by Minnesota residents in excess of annual exclusion amounts and within three years of death are considered to have been made at death. In contrast, gifts made at least three years before death will not be counted as made at death, and therefore not reduce his or her $3.0 million Minnesota estate tax exemption.