Saturday, December 28, 2019

Grandparents are hiding out until January 1.

Why, you ask, are grandparents hiding out until January 1, 2020?

Is it because they gave their three-year-old grandson that fire truck he loves with the VERY LOUD siren and his parents are steaming mad? While that generational payback may not have been appreciated, the answer is more sinister.

It’s because Congress and President Trump put a temporary target on some older Americans that only lasts until the first clock-tick of 2020.

Only those oldsters with significant IRAs they are leaving to their children and grandchildren need worry. Congress established IRAs (Individual Retirement Accounts) in 1974 to help workers save for retirement. Lawyers did what lawyers are paid to do and found ways for wealthy individuals to use their IRAs as estate-planning devices to minimize taxes and pass on the maximum amount to heirs.

How so?

Under the old rules, if you bequeath your IRA to your grandchild, the minimum they must withdraw each year is based on life expectancies. The rules are complicated, especially with multiple beneficiaries, so I’ll gloss over the details and move right to a simplified example:

Grandma’s IRA is worth $1.0 million bucks. She leaves it to her twelve-year-old grandchild. Under 2019 rules, the kid must take out a minimum distribution the first year of $14,124. And each year thereafter the child will need to take out similar amounts (the amount depending on investment returns). For simplicity, let’s just call it $14,000 a year adjusted for inflation for life. That’s the minimum, the beneficiary can withdraw it faster if they choose.

Under the new rules, non-spousal IRAs inherited after December 31, 2019 must be distributed within 10 years. (There are a few exceptions, one of which is that the ten years doesn’t start until the child of the IRA hold becomes an adult). So, in our example, Grandma dies and our 12-year-old grandchild must take all the money out by the time she is 22! If done evenly, that means $100,000 a year (adjusted for investment returns).

Talk about an early tax bite (which is why Congress added the provision; they wanted to pay for other things they wanted).

But that’s not the only complication: How are colleges going to look at financial aid for a kid with an inherited IRA that they must draw down? Worse, if Grandma structured it so the kid could only take the minimum distribution until they were (say) age 35 (when Grandma hoped the child would be mature enough to have access to all the money) it’s a financial disaster. There is no minimum distribution until the end of ten years and the child must take it all! Uncle Sam is rubbing his fingers in delight because the highest tax rates will apply to most of that $1 million.

But, if Grandma just happened to die before the end of 2019. These problems go away.

So wary grandparents and parents across the land are booking last minute trips to destinations kept secret from the family. Or they’re holing up in that bunker they built in the 1950s to save the family from nuclear attack. Or the new one constructed for the Zombie Wars.

Rather than considering ways to bump off Grandma, it might be prudent to check the estate plan and get those high-priced lawyers working on the next best way to avoid taxes.

Here’s wishing you and yours a terrific 2020.