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Preserving Capital Losses At Death By Gifting Embedded Loss Assets To Avoid A Step-Down In Basis

August 12, 2020 07:04 am 6 Comments CATEGORY: Taxes

Over the past couple of decades, Congress has passed several laws impacting the Federal estate tax exemption, resulting in a significant increase from $675,000 in 2001 to $11.58 million today. As a result, under the current rules, most taxpayers will not be subject to a Federal estate tax liability, and thus, the current focus of tax planning for one’s estate should generally focus on reducing Federal income tax liability. Basis management is a critical part of this process and includes strategies to both maximize the step-up in basis, as well as to minimize the loss of any unrealized and/or carryforward capital losses.

For spouses, two questions are important in determining adjustments to the basis of inherited (non-IRD) assets: 1) who owns the asset, and 2) whether the state of residence is a community property or separate property state. In separate property states, property ownership is generally determined by common law, which generally dictates that property is owned as it is actually titled. Thus, if an asset is in an account that belongs solely to the deceased spouse, then 100% of the asset is subject to a step-up (or step-down) basis adjustment; however, for assets held jointly (typically either as joint tenants with rights of survivorship or tenants by the entirety), the surviving spouse will typically receive a step-up/step-down basis adjustment on only one-half of the assets (the half of assets considered to have been owned by the deceased spouse).

By contrast, in states that follow the “community property” rules (AZ, CA, ID, LA, NV, NM, TX, WA, and WI; with AK also allowing couples to opt-in to community property treatment), most assets acquired during marriage, as well as those assets which are mutually agreed upon to be jointly owned or that can’t clearly be identified as either spouse’s separate property, are essentially treated as being simultaneously owned 100% by each spouse. Accordingly, these assets will automatically receive a full step-up/step-down adjustment on the entire value of the property upon the death of either spouse.

This basis adjustment of inherited assets at death can potentially result in losing out on the opportunity to benefit from realized capital losses, which can be used to offset capital gains and up to $3,000 ordinary income each year. However, by gifting assets prior to death, the original owner’s basis can be retained, and unrealized capital losses preserved!

For non-spouse beneficiaries, the benefits of gifting assets with potential capital losses are not quite as favorable as those for spouse beneficiaries but remain valuable, nonetheless. More specifically, when a non-spouse receives an asset with unrealized capital losses, the so-called ‘double basis’ rules apply. These rules use the value of a gifted asset on the date of the gift to calculate the amount of any capital loss. On the other hand, the donor’s basis at the time of the gift is used to calculate the amount of any capital gain.

Application of the ‘double basis’ rules results in three potential consequences for non-spouses who are gifted with assets that have unrealized capital losses: 1) If the sale price of the asset is less than the fair market value on the date of the gift, then the recipient of the gift can claim a loss equal to the difference between those two values; 2) If the sale price of the asset is more than the original owner’s basis on the gift date, then the recipient of the gift has a capital gain equal to the difference between those two values; and 3) If the sale price of the gifted asset is in between the fair market value on the gift date and the original owner’s basis, the recipient has neither a capital gain nor a capital loss.

Ultimately, the key point is that gifting assets is a simple yet effective strategy to preserve the economic value of unrealized capital losses that can be used to reduce future capital gains (and up to $3,000 of ordinary income, annually). As while the basis of inherited assets will generally receive a step-up (or step-down, depending on the FMV) adjustment at death, unrealized capital losses from inherited assets are essentially useless after the original owner’s death since they will no longer be available for use to offset any gains in tax years after death.

#FASuccess Ep 189: Experimenting With Advisor Marketing To Find The (Digital) Formula That Works For You, with Taylor Schulte

August 11, 2020 07:05 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 189th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Taylor Schulte. Taylor is the founder of Define Financial, an independent RIA based in San Diego, CA that oversees $76 million of assets under management for 60 families in or approaching retirement. What's unique about Taylor, though, is the way he's grown his practice by proactively spending on marketing, from hiring a branding and website design agency to a PR firm to running ongoing advisor marketing experiments, and everything from local SEO to email marketing automation.

In this episode, we talk in-depth about both the hits and the misses in marketing that Taylor has experienced along the way. From the initial $12,000 he invested into his original website that, in retrospect, wasn't focused enough to succeed, to the $24,000 he spent on a PR firm that was deemed valuable but not something he continued, how Taylor figured out how to turn podcast listeners into clients (but only after 3 years of trying), and the way all his marketing results accelerated once he decided to narrow to a more focused target clientele to pursue, even though it meant firing his mother and his grandfather from being clients, such that today, 75% of all of Taylor's new clients first reach out to him through his well-targeted website that speaks to his niche clientele.

We also talk about Taylor's own evolution within the business. How he hit the wall at $250,000 of revenue and got stuck, unable to grow further, not because of his marketing, but his operations limitations, the way he got through the blocking point by hiring an office manager to take over and focus on those operational aspects, the unique hiring process that Taylor used to find the ideal office manager, and the journal that Taylor now keeps to monitor what he should be doing and what he needs to start delegating.

And be certain to listen to the end, where Taylor shares how working with business coaches have helped him break through the key blocking points in his business, how he has come to rely on CRM workflows, even though Taylor in his own words is not operations-minded, and why Taylor's biggest regret is that he didn't focus on his niche clientele earlier, even as he recognizes that struggling without a niche focus for several years may have been the only way he could eventually accept why getting more focused would help the way that it has.

How Diversity Initiatives Often Fail In The Financial Planning Profession By Neglecting To Consider Inclusion

August 10, 2020 07:03 am 3 Comments CATEGORY: Planning Profession

Over the past several years, despite numerous programs from a wide range of organizations encouraging women, people of color, and minority groups to join the profession, the financial planning industry has struggled to increase diversity among its ranks. Which appears at least in part to be due to the fact that, while a 2019 CFP Professionals Survey showed strong job satisfaction among women, Black, and Latino CFP professionals, those satisfaction levels are still materially lower than for ‘traditional’ white male CFP professionals, signaling that the financial planning profession may be attracting more diversity but is also losing diverse CFP professionals at a faster rate… such that the overall diversity among CFP professionals has not increased despite a steady rise in both the total number of certificants and the number of diversity programs targeting them. Because the reality is that the problem is not necessarily one that can be addressed by increasing diversity efforts alone, and instead appears to be that increasing inclusion efforts is the key to increasing (and maintaining!) a more diverse pool of financial planners.

Whereas diversity efforts can be thought of as sending invitations to (more) guests to attend a party, inclusion efforts are separate from those of diversity and can be thought of as asking the guests who arrive to actually dance and engage with other guests. Inclusion involves helping individuals feel safe, involved in the group, respected, and valued. It also recognizes and honors cultural diversity, supporting individuals to express themselves authentically and as valued members of the organization. Furthermore, researchers have found that without efforts to facilitate inclusion, diversity policies can actually be damaging to an organization by upsetting the racial majority, who can tend to feel that the diversity programs are set up to unfairly discriminate against them.

Importantly, effective diversity and inclusion training programs are dynamic and necessarily take into account the unique potential prejudicial viewpoints of their participants, which can range from blatant (openly expressing prejudicial opinions) to symbolic (veiled but deliberately expressed) to aversive (subconsciously expressed). Depending on the participants involved and their respective viewpoints, good training programs can simply encourage individual self-reflection, or can incorporate philanthropic community engagement to give participants opportunities to interact with individuals from more and different cultural backgrounds.

Financial advisory firms looking for ways to increase diversity and inclusion can start by developing mentorship programs to support new financial planners of all backgrounds and by investing in scholarship programs to help aspiring CFPs meet their education and exam requirements. Even compensation can be structured to be more supportive of diversity and inclusion efforts, adopting different compensation models such as monthly or hourly subscription fees to help newer advisors who may initially lack the social structures to thrive on commission-based or AUM-based compensation models (that have disproportionately relied on new financial planners coming from backgrounds and ZIP codes that already have significant financial affluence to turn ‘friends and family’ into initial clients).

Ultimately, diversity and inclusion are important aspects of the financial planning industry that can only help businesses succeed. Not only does a diverse industry workforce better serve a diverse client base, it also helps firms retain diverse employee pools and gives them access to a richer pipeline when recruiting new talent. Despite the shortfall of diversity efforts in our industry so far, a growing focus on inclusion – particularly including mentoring, and organizing/attending conferences and events dedicated to supporting specific groups – can help the industry work towards achieving a net increase in diversity, and not simply bringing in more diverse financial planners only to continue to lose them a few years later.

Weekend Reading for Financial Planners (August 8-9)

August 7, 2020 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry buzz that Schwab has announced it will be retaining TD Ameritrade's iRebal solution in the merger, which is both a big relief to TD Ameritrade RIAs often reliant on the tool, a big opportunity for Schwab to expand adoption of the popular tool to its own even-larger base of Schwab advisors, and a big threat to independent rebalancing software providers currently serving Schwab RIAs that may soon find themselves threatened by Schwab's offer of another 'free' solution.

Also in the news this week is the latest industry trend data from FINRA, showing a record-low number of registered representatives joining broker-dealers in 2019, as more and more financial advisors don't simply leave broker-dealers for RIAs but join RIAs rather than coming into the brokerage side of the industry in the first place (while broker-dealers try to combat the trend by increasingly expanding their own hybrid platforms for those who want to and are willing to be dually registered with FINRA and as an RIA!).

From there, we have a number of additional articles about industry trends, including a consumer survey showing that while investors increasingly want to talk to their financial advisors about a broader range of topics, "investments" are still the dominant category for advice; highlights of the latest FA Insight practice management study showing that advisory firms still grew well in 2019 but organic growth continues to slow while operational overhead costs are on the rise; a mid-year "snapshot" study from Ensemble Practice noting that at least larger advisory firms have weathered the pandemic well with the median firm's revenue down barely 1% and only 4% of firms engaging in layoffs but a whopping 48% of advisory firms seeing at least one employee resign as the pandemic disrupts normal working (and parenting) habits; and a study finding that individual financial advisors shined over 'call center' advisors when it came to making personal connections that maintained client satisfaction in the midst of the pandemic.

We also have several articles on marketing, including why advisor marketing should be viewed as less of a magic formula to spot and more of an ongoing series of experiments to test and improve upon (with some ideas on where to start), tips from Influence expert Robert Cialdini on how to engage and be persuasive with prospects (especially when meeting with them virtually), and a look at how to create an advisory firm that is distinct for having a clear mission and a team that passionately believes in that mission.

We wrap up with three interesting articles, all around the theme of thinking hard about what "success" really means: the first explores how the traditional measure of wealth (accumulated assets) is a poor way to measure because success at wealth-building is really about the wealth you build relative to your income; the second also explores how we often use the wrong "proxy" to measure success; and the third takes an even deeper look at what it really means to be "successful" and what we should be considering when we try to measure the value of our own lives and what we've accomplished.

Enjoy the 'light' reading!

Using A Family Dynasty 529 Plan For Multigenerational College Planning

August 5, 2020 08:37 am 12 Comments CATEGORY: Estate Planning

According to the Bureau of Labor Statistics, individuals with 4-year college degrees earn, on average, almost $25,000 more per year than those who never attended college, while those with professional degrees earn over $60,000 per year more than those who never attended college. Yet, given the steep price of a college education and the high amount of education-related debt that many individuals end out carrying for decades after they graduate, the decision to attend college and earn a degree is often questioned, especially by those who have to pay their own way through school.

For those who are fortunate enough to have parents and/or grandparents with the desire and means to pay some or all of the cost of a higher education, however, 529 plans offer a tax-efficient means of saving and paying for college expenses. Notably, distributions from 529 plans are tax- and penalty-free to the extent that they are used for the beneficiary’s qualifying education costs.

They also enjoy a number of unique features that set them apart from other tax-favored accounts, such as an IRA or 401(k), in that there are no annual contribution limits, but rather, a total maximum balance (which varies by state), after which additional contributions are prohibited. However, not only are those maximums quite substantial (currently ranging between $235,000 and $529,000), but individuals can “own” more than one 529 plan account, there is no limit to how large those tax-deferred accounts can grow and, from time to time, both the beneficiary (which can be only one person at any given time) and the account owner can generally be changed… often without any tax consequences. Moreover, in the event that multiple family members have qualified education expenses at the same time, partial transfers of 529 plan assets to a new beneficiary can be made.

Which means that individuals who have both the means and desire can ‘overfund’ one or more 529 plan accounts (either by making periodic contributions over many years or by a large lump sum contribution), effectively creating a “Dynasty 529 Plan”, which can be used to pay for qualified education expenses of not only their children and grandchildren (or any number of qualified members in their extended family), but potentially for multiple generations of family members to come!

Given the potential for perpetual tax-free growth, a Dynasty 529 plan can be an attractive strategy that affluent families can use in order to provide a legacy of education for their family. Advisors, however, must use special care when implementing such a strategy, as there are potential gift tax and Generation-Skipping Transfer Tax (GSTT) implications to navigate, maximum contribution limits to consider, and different features across states (where some states consider changes in ownership a distributable event). Meanwhile, there’s also a risk that any number of future events may derail a carefully crafted Dynasty 529 plan, including potential changes in 529 plan transfer rules, the possibility that Congress could decide to make a college education available to everyone at no cost, and the chance that future account owners may decide to simply cash out the plan for their own use (which could be mitigated, however, by creating a trust, which could serve as the account owner).

Ultimately, the key point is that, while the cost of higher education is more expensive than ever, a college degree is still one of the most reliable predictors of future income and wealth, and as such, helping family members obtain one is a common goal for individuals who understand the importance of education and are in a position to offer their help. And especially for affluent families, a Dynasty 529 plan can be an effective tool to capitalize on the significant and unique tax benefits and flexibility offered by 529 plans, making them an attractive option for providing legacy educational support for many generations to come.

#FASuccess Ep 188: Leading With Directly-Held Real Estate Advice To Differentiate Traditional Wealth Management, with Rich Arzaga

August 4, 2020 07:26 am 6 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 188th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Rich Arzaga. Rich is the founder of Cornerstone Wealth Management, a hybrid advisory firm based in Northern California that oversees nearly $70 million of assets under management for 65 affluent clients. What's unique about Rich, though, is that he's one of just a handful of advisors across the country who in addition to being a CFP certificant, also holds the CCIM designation to advise clients on commercial real estate, and in practice has been able to turn his ability to advise on directly held real estate investments into opportunities to gain clients for his traditional wealth management services as well.

In this episode, we talk in-depth about how Rich incorporates advice on directly held real estate into his practice. The APOD, short for Annual Property Operating Data analysis he prepares to clients as part of their financial plan, the tools that Rich uses, from eMoney Advisor to separate Excel spreadsheets, to track and analyze directly held real estate for clients, and why Rich charges an upfront but not an ongoing financial planning fee for his real estate analysis.

We also talk about how Rich was able to turn his directly held real estate advice into a growth engine for his advisory business. The unique networking opportunities he was able to develop through the CCIM organization as a holder of their designation, why Rich used but now stays away from advising clients on REITs as an alternative to directly held real estate, and why Rich views advising on directly held real estate as a great way to open the door for clients, but traditional wealth management is a better approach for generating ongoing revenue as an advisor.

And be certain to listen to the end, where Rich shares how he turbocharged his advisory firm in the early years as a career changer coming into the financial advisor world. Why he pursued the education for both his CFP and CCIM designations before he launched his firm, even though he didn't have the experience to actually use either of the marks, how Rich became an adjunct professor teaching financial planning early in his career as a way to further establish his credibility, and why the financial advisory business can be challenging for career-changing entrepreneurs because in the end, even for successful advisors, the path to growth is rarely a good sprint and more commonly a very long marathon.

The Latest In Financial #AdvisorTech (August 2020)

August 3, 2020 07:05 am 2 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the August 2020 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition welcomes new co-author (and AdvisorTech guru) Craig Iskowitz, and kicks off with a look at the emergence of “AdvisorTech” as a financial technology software category unto itself. As the reality is that while “FinTech” has been on the venture capital and private equity map for nearly a decade now, the focus of FinTech continues to be payments, banking, blockchain, and a number of other applications that may be of great interest for the broader financial services world and their direct-to-consumer marketplace opportunities… but little relevance to financial advisors, with our unique (and uniquely fractured) business landscape, B2B (and B2B2C) provider needs, and specialized regulatory and integration needs. And as financial advisors increasingly shift away from the distribution of financial products and into the world of financial advice itself, “WealthTech” (and its investment-centric) focus is arguably still too narrow to capture the needs of the financial advisor ecosystem. And so, it’s time to recognize AdvisorTech as a category unto itself… a subset of the broader world of FinTech, but itself a label for the broader needs of financial advisors than WealthTech, AdviceTech, or RegTech alone can capture!

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

JD Power issues the results of their annual survey, finding that more than 90% of brokers deem their technology platforms as essential, but fewer than half find their broker-dealer’s own technology solutions to be “very valuable” in their businesses!
Envestnet integrates with FIX Flyer to expand individual bond trading capabilities for large RIAs
Refinitiv acquires Advisor Software to expand its rebalancing and portfolio management capabilities to compete for enterprise advisor platforms
With traditional industry conferences on hold, the AdvisorTech community self-organizes its own AdviceTech.LIVE virtual conference!

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Knudge launching a live beta to help financial advisors support their clients to implement ongoing financial planning recommendations, MoneyGuide launches RIA Planning Analytics but may have missed the mark on supporting relationship-based ongoing financial planning, AdvicePay integrates with MoneyGuide as interest continues to grow in offering (and generating advisor revenue from) fee-for-service financial planning, Holistiplan launches new tax planning tools as advisors focus more on the risk of rising tax rates, and Smarsh launches a new archiving solution for Zoom meetings… and in the process, highlights how the more digital advisor communications become, the more compliance expects to capture, archive, and review everything advisors communicate to their clients.

And be certain to read to the end, where we have provided an update to our popular new “Financial AdvisorTech Solutions Map” as well!

I hope you're continuing to find this column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (August 1-2)

July 31, 2020 02:57 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest on the HEALS Act, the proposed legislation from Senate Republicans that may become the 5th economic stimulus bill in response to the coronavirus pandemic but is currently still mired in debate, not only between Republicans and Democrats, but also within the Republican party, and raising questions of how quickly the trillion-dollar stimulus will actually get passed and what form it will end out taking.

Also in the news this week was an announcement by the Democrats of their official "Party Platform" should they take leadership in Washington, which for financial advisors includes a notable provision of lifting the standards for all financial advisors, effectively signaling that if the Democrats win in November, there may be a new movement in 2021 to replace Regulation Best Interest and/or the Department of Labor's proposed Reg-BI-coordinating changes and implement a more full-force fiduciary obligation for all investment advisers and broker-dealers.

From there, we have a number of articles about referral marketing, including the recognition that so few consumers are unhappy with their advisors that just waiting for prospects to ask an existing client "Do you know a good advisor?" (in the hopes of being referred by your client in the moment) probably isn't enough to drive referrals, how even great advisors fail to get referrals because they're not specific enough about the problems they solve, why advisors also often fail to get referrals because existing clients don't know who to watch for that would be appropriate to refer to their advisor (i.e., a lack of clear positioning in the marketplace), and how to increase referrals by (re-)focusing not on getting more referrals from everyone but just a few people who are most likely and interested to refer and may become 'power-referrers' for the advisor.

We also have several articles on insurance, including a look at how advisors and their clients are making health insurance decisions in the face of pandemic layoffs (including how to potentially 'game' the COBRA system with a newly-extended 120-day window to apply for coverage... but only if and when it's really needed?), how the pandemic may ironically be improving the financial health of long-term care insurers by sadly cutting claims short (but at least potentially stabilizing pricing in the process), and the rising concerns of how indexed universal life insurance is being illustrated (or potentially, over-illustrated) given the increased risk that returns for the coming decade will not be nearly as rosy as they were for the past 10 years.

We wrap up with three interesting articles, all around the theme of making slow but steady incremental improvements for ourselves: the first explores how the key to change is not about whether we engage in (new) activities every day or get the desired outcomes but whether we can honestly say we gave it our "best effort" (which creates the kind of 'focused practice' that ultimately leads to results); the second looks at the behaviors that best provide us resiliency in the face of the inevitable life setbacks that may come as we try to achieve our goals; and the last provides a powerful reminder that in the end, long-term success isn't just about going through the right routines but engaging in "practice" that helps us find and regain the focus we need to succeed (while recognizing that, as with any effort that requires practice, it will take time, and setbacks along the way and disruptions to the typical routine are normal and to be expected!).

Enjoy the 'light' reading!

Kitces & Carl Ep 39: Avoid Writer’s Block With Your Content Marketing By (Literally) Talking It Through

July 30, 2020 07:21 am 1 Comment CATEGORY: Kitces & Carl Podcast

Over the past several years, financial advisors have increasingly utilized digital channels as a part of their overall marketing strategies, as the more traditional tactics for generating new leads have become less effective (and especially in recent months amid the ongoing COVID pandemic). Of course, a key ingredient of digital marketing is content (whether it be a book, podcast, blog, video, or any number of content ‘artifacts’). For many financial advisors, however, content creation isn’t something that comes as naturally as, say, comparing decumulation strategies or analyzing Monte Carlo simulations, and it’s easy to hit a roadblock when staring at a blank screen.

In our 39th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards share some actionable steps that advisors can take to create content for digital marketing that can then be used to establish the advisor’s expertise with their existing (or prospective clients). Because the reality is that there are far more tools available for creating all sorts of content in a myriad of formats and packaging beyond simply typing out words one paragraph at a time into a long-form article.

As a starting point, it’s helpful to actively observe internal sticking points that may slow down the advisor’s capacity to create content, and then consciously turn them into ‘features’ instead. For instance, don’t have the capacity or desire to deal with the logistics of booking guests to have on a podcast? Decide instead to produce a short podcast without guests where the primary feature is the listener’s opportunity to hear from the advisor directly. Use the memo feature on your phone to remember stuff or take notes as someone who doesn’t like to write? Upload them to SoundCloud, and share them on social media or with a client newsletter as an audio recording that clients and prospects can listen to without needing to read it!

Another tried and true method for effective content creation is to simply keep track of the questions that clients already ask, and turning the answers into something (appropriately anonymized for the particulars of the situation) to share out with the broader base of clients and prospects. And (importantly) it doesn’t have to start as something that is written down. Instead, it can start as a spoken response, that is then transcribed and edited using any number of tools, or even produced as a podcast... or both! In fact, there are several services where freelance creatives are available to take raw content (the advisor’s expertise answering common client questions) and turn it into polished material, that can then be repurposed and distributed on different platforms.

Because the simple fact is that, for advisors who have decided that they have expertise that they feel would help a broader audience or a perspective on an issue that they want to share, there are a few relatively simple steps to take – track notable ideas and observations, block out just a little time each week to review those notes, record observations, and send that basic commentary along to a freelancer – to start regularly creating content. Because, after all, while many advisors get writer’s block, few get talker’s block!

Successor Beneficiary RMD Rules After The Death Of The Original Inherited Retirement Account’s Primary Beneficiary

July 29, 2020 07:33 am 11 Comments CATEGORY: Retirement Planning

In December of 2019, Congress passed the Setting Every Community Up For Retirement Enhancement (SECURE) Act, introducing substantial updates to the laws governing retirement accounts. Changes to post-death distribution rules resulted in the death of the ‘stretch’ provision for certain (most) non-spouse Designated Beneficiaries of inherited retirement accounts and introduced a new “10-Year Rule” for account distributions, which have important implications, not just for the Designated Beneficiaries of those retirement accounts, but also for their Successor Beneficiaries as well.

Prior to the passage of the SECURE Act, Designated Beneficiaries of retirement accounts were allowed to ‘stretch’ Required Minimum Distributions (RMDs) from the account over their own life expectancies. However, the SECURE Act eliminated the stretch option for most non-spouse Designated Beneficiaries, and instead, requires the account to be emptied by the end of the 10^th year following the year of the original owner’s death. The SECURE Act, however, also created a new category of beneficiaries – Eligible Designated Beneficiaries – that is still permitted to use the ‘stretch’ provision.

Any of these beneficiaries, of course, could, themselves, die prior to emptying their inherited retirement accounts, leaving the balance to a Successor Beneficiary. Accordingly, there are now three potential scenarios for Successor Beneficiaries of inherited retirement accounts: 1) Successor Beneficiaries of post-SECURE-Act-Eligible Designated Beneficiaries, 2) Successor Beneficiaries of pre-SECURE Act Designated Beneficiaries, and 3) Successor Beneficiaries of post-SECURE Act Non-Eligible Designated Beneficiaries.

In scenarios 1) and 2), Successor Beneficiaries will generally be subject to the full 10-Year Rule. One exception to this is if the post-SECURE Act Eligible Designated Beneficiary (or pre-SECURE Act Designated Beneficiary) is the surviving spouse of the original account owner and dies before the decedent would have been required to begin taking RMDs. In such cases, upon death, they are no longer be considered a “Designated Beneficiary” of the account, but instead, are treated as if they had been the original account owner. Thus, the Successor Beneficiary wouldn’t be treated as a Successor Beneficiary and would not be automatically subject to the 10-Year Rule (i.e., if they were able to qualify as an Eligible Designated Beneficiary, they could qualify to take advantage of the ‘stretch’ provision).

For scenario 3, Successor Beneficiaries who inherit from post-SECURE Act Non-Eligible Designated Beneficiaries are, like other Successor Beneficiaries, subject to the 10-Year Rule; however, unlike other Success Beneficiaries, they will not have their ‘own’ 10-Year timeframe. Instead, their distribution period is a continuation of the 10-Year period that started when the Successor Beneficiary inherited the account.

Although the SECURE Act may negatively impact some Successor Beneficiaries by limiting the time they are allowed to prolong their Required Minimum Distributions, some Successor Beneficiaries may actually be able to benefit from the Act’s changes. In some instances, the number of years a Successor Beneficiary may have to empty their inherited retirement account may be extended, while in other instances, they may simply have a similar amount of time, but more flexibility than was previously allowed prior to the passage of the SECURE Act.

For example, for a Designated Beneficiary who ‘stretched’ RMDs and lives for a long time yet still dies with a substantial account balance, their Successor Beneficiary may have been left with only a few short years to distribute the remaining assets had it been under pre-SECURE Act rules (as they would have been required to use the original beneficiary’s remaining Single Life Expectancy). However, the 10-Year Rule of the SECURE Act now allows these Successor Beneficiaries up to 10 full years to distribute their accounts.

Ultimately, the key point is that while most of the attention on the SECURE Act’s impact on retirement account rules has focused on Primary Beneficiaries, the reality is that Successor Beneficiaries are impacted by the SECURE Act changes as well. While Successor Beneficiaries who inherit accounts from beneficiaries taking RMDs using the ‘stretch’ provision will get the 10-Year Rule (from scratch), some Successor Beneficiaries (i.e., post-SECURE Act beneficiaries of Non-Eligible Designated Beneficiaries) will ‘only’ be able to step into the initial beneficiary’s shoes, and will have to empty the balance of the IRA by the end of the 10-year period established by the original 10-year rule (i.e., the Non-Eligible Designated Beneficiary’s 10-year window). For both the original account beneficiary and their own named Successor Beneficiaries, the SECURE Act has created changes and potential opportunities that impact them both.