The IRS Released the SECURE Act Regulations

On February 23, 2022, the new regulations for the SECURE Act became public. This release offers guidance on the many rules. It includes a few surprises that will impact your estate planning.

The combination of new legislation and the leadership changes in both the White House and Congress stands to dramatically increase your loved ones’ income taxes. They will have to pay on inherited retirement accounts as well as increasing the income taxes you owe on your taxable investments. However, purchasing life insurance may offer you the opportunity to minimize the effect of these developments on your estate planning.

To this end, if you hold assets in a retirement account, you need to review your financial plan and estate plan as soon as possible to determine if investing in life insurance or some other strategy may offer tax-saving benefits for you and your family. To help you with this process, we’ll discuss how these new developments might affect the taxes owed by you and your heirs, and how investing in life insurance can be part of your estate planning strategy. It may help offset the tax impact of these new changes.

The Secure Act's Impact on Estate Planning

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law and effectively put an end to the so-called “stretch IRA.” Under prior law, beneficiaries of your retirement account could choose to stretch out distributions of an inherited retirement account over their own life expectancy to minimize the income taxes owed on those distributions.

For example, an 18-year-old beneficiary expected to live an additional 65 years could inherit an IRA and stretch out the distributions for 65 years, paying income tax on just the portion withdrawn each year. In that case, the income tax law would encourage the child not to withdraw and spend the inherited assets all at once.

Under the new law, most designated beneficiaries of inherited IRAs and similar tax-deferred qualified retirement accounts are now required to withdraw all of the assets from the inherited account—and pay income taxes on those withdrawals—within 10 years of the account owner’s death. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.

But this is just the first development that stands to affect the amount of taxes your heirs might face in the near future on inherited investments.

Future Tax Legislation

The election of Joe Biden as President and subsequent Democratic takeover of the Senate will likely result in the passage of new tax legislation that could have a significant impact on your family’s financial and estate planning considerations.

Specifically, it’s likely that within the next two years Democrats will pass legislation aimed at eliminating many of the tax cuts enacted through the 2017 Tax Cuts and Jobs Act. As part of this tax legislation, we’re expecting significantly lower federal estate tax exemptions. It will likely mean the elimination of the step-up in cost basis on inherited assets, as well as an increase in the top personal income and capital-gains tax rates.

One way you may be able to minimize the new taxes on both your tax-deferred retirement accounts and taxable investments is by investing in cash-value life insurance. This is important to any estate plan. Let’s break down exactly what this strategy might look like.

Using Life Insurance in Your Estate Planning Strategy

Consider the estate planning strategy that makes sense for you given the new distribution requirements for inherited IRAs. You may want to withdraw funds from your retirement account now, pay the tax, and invest the remainder in cash-value life insurance. From there, you can access the accumulated cash-surrender value of the life insurance policy income tax-free during your lifetime via tax-free withdrawals and/or loans. And upon your death, the death benefit of your life insurance policy would be income tax-free for your heirs.

By annually investing in a cash-value life insurance contract what you may have otherwise put into tax-deferred retirement accounts, you can improve your estate planning. By taking taxable withdrawals from your tax-deferred retirement accounts over time, then reinvesting them can effectively move these funds into a tax-free (rather than tax-deferred) investment vehicle.

This strategy could not only minimize the income taxes you pay over your lifetime, but it could also significantly reduce the tax bill imposed on your designated beneficiaries after your death, since life insurance proceeds are income-tax free.

This approach can also help you to offset the effects of the proposed loss of income tax basis step-up upon your death, which we’re likely to see enacted through Democrat-backed legislation. This strategy would also minimize your current income taxes on what otherwise would have been taxable income from your investments because growth on investments inside a life insurance policy are not subject to income tax, including any capital gains.

If you stand to be affected by the proposed decrease of the federal estate-tax exemption, which is currently set at $11.7 million, placing the life insurance policy inside an irrevocable life insurance trust, you can remove the death benefit paid out to your beneficiaries from your taxable estate. In doing so, you would still be able to access the cash value of the insurance policy during your lifetime, either via a so-called “spousal access trust,” if you are married, or via a traditional irrevocable life insurance trust, if you are not married.

Rethinking Your Estate Planning with Life Insurance

Although the SECURE Act and the proposed new legislation stand to have adverse effects on the tax consequences for your retirement and estate planning, investing in life insurance may offer you a valuable tax-saving opportunity. Keep in mind that you can only take advantage of this opportunity if you plan for it.

If you fail to revise your plan to address the SECURE Act’s new requirements and the proposed legislation that’s likely to be passed by the Democratic administration, you and your family could face a significantly higher tax bill. To prevent this from happening, schedule a Family Wealth Planning Session™ or an existing estate-plan review today.

We will work with you and your financial advisor to analyze all of the ways your retirement accounts might be impacted by the SECURE Act and the new proposed legislation. Together, we will outline the most effective estate planning strategies for passing your assets to your loved ones in the most tax-advantaged manner possible, while ensuring your current tax liabilities are similarly minimized. 

This article is a service of Artisan Law. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. If you like what you’ve read here and would like to learn more contact us at 212-548-4874 or at