New Tax Rules Bring Significant Changes To Family Estate Planning For Physicians

The 2019 Secure Act made substantial changes to Family Estate Planning. These new tax rules on inherited tax-deferred retirement accounts: Traditional IRAs, 403(B)s and 401(k)s, greatly impact Physicians.

Under the previous rules, heirs had their entire lives to draw down tax-deferred retirement accounts. With this regulation, tax impacts could be minimized in any one year and heirs could avoid a bracket jump in by stretching out their drawings.

The new changes require heirs to draw down their accounts within 10 years of the benefactor’s death, with few exceptions for certain situations. Due to this requirement, individual income tax rates can rise from a bracket jump from distributions.

Physicians with highly appreciated retirement accounts may have to restructure bequests. Consider these strategies for minimizing tax impact:

1. For children who are doing less well than their siblings, consider leaving them taxable accounts and evening out the dollar-value of bequests using other assets, leaving tax-friendly assets to children with high incomes.

2. Leave all the children a collective Roth IRA account.

   • Since these accounts are funded with post-tax money, withdrawals don’t incur tax or add to taxable income even though they must also be distributed within 10 years. Keep in mind, conversions can involve considerable expense – calculate and weigh the numbers for your situation.

3. Leave retirement assets to a Trust rather than an outright beneficiary

• As a benefactor, you can include language in the Trust directing when and how the assets are to be distributed from the Trust. However, this will depend on the type of Trust and whether See-Through Trust rules apply.

With all of this in mind, the most important thing you can do is to plan. Analyze your financial situation and understand what options you have when it comes to retirement. It can be possible to lessen an additional tax liability from these new rules with strategic planning in place.

Sources:

1. https://www.medicaleconomics.com/view/new-tax-rules-are-a-game-changer-for-family-estate-planning

2. https://www.fidelity.com/viewpoints/wealth-management/insights/iras-left-to-a-trust

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