Policy changes at the state and federal levels often have implications on New York estate planning. For example, we have frequently discussed the uncertainty that exists over the estate tax. Exemption levels and tax rates may very well hinge on exactly who wins various federal elections in November. While it may dominate headlines, the estate tax is not the only policy with implications for local residents’ estate planning. For example, yesterday Bloomberg Businessweek discussed the latest news regarding proposed legislation that would impact inherited IRAs.
Inherited Individual Retirement Accounts (Inherited IRAs) are accounts left to a beneficiary after the owner’s death. As the name implies, these are accounts that an individual has contributed to over a lifetime in order to provide financial resources upon retirement. More often than not a spouse is named as the beneficiary. The IRA offers a variety of tax benefits depending on how the account is “cashed out.” As it currently stands, a beneficiary can stretch the ultimate income tax payment over a lifetime. Because of this benefit, our New York estate planning attorneys know that IRAs often act as an important way for individuals to pass on assets to loved ones while saving on taxes.
However, some federal lawmakers are seeking to limit the tax benefits of Inherited IRAs for beneficiaries. Various proposals are being offered, but in general they all seek to prevent beneficiaries from stretching out the income tax payment over a lifetime. Instead, some legislators have proposed changing the law so that those who inherit the IRA have to distribute (cash out) the sum over five years. The practical effect of the change is that beneficiaries would be required to pay more taxes on the income from that inherited account. All versions of the change thus far would exempt spouses from this requirement.
One analyst noted that the proposal would “really change the whole playing field for retirement planning. That would make things simpler, but it would really put a crimp in the whole legacy planning people do for IRAs.”
Proponents of the change suggest that it would net federal coffers roughly $4.6 billion over the next ten years. The bill’s main sponsor, U.S. Senate Finance Committee Chairman Max Baucus, said that he’d like to use the funds to pay for a federal highway bill that is currently being considered. However, the bill has a long way to go before passage, and most suspect that the current proposals to change IRA rules will not become law. In fact, Senator Baucus himself has suggested that he will ease off the proposed changes for now and seek alternative revenue sources for the highway bill.
Even if the measure does not pass this year, the fact that the bill was put forward at all suggests that lawmakers are considering various legal changes that could affect retirement planning in years to come.
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