Retirement Planning Focus IX

by  /  News, Retirement Planning

We conclude our review of the recommendations in the Bipartisan Policy Center’s (“BPC’s”) report on the future of retirement security (the “Report”).

II. Promote Personal Savings for Short-Term Needs and to Preserve Retirement Savings for Older Age

  • The Report indicates that 57% of individuals are not financially prepared for an unexpected shock to their financials, requiring early withdrawals from retirement plans or reliance on payday lenders.
  • Minimize leakage from retirement plans from early withdrawals by harmonizing the early withdrawal penalties between IRAs and 401(k) Plans.
  • Simplify the process for transferring accounts from plan to plan, to avoid cash-outs. Make it easier for employers to allow savings and enrollments in multiple savings plans.

III. Facilitate Lifetime-Income Options to Reduce the Risk of Outliving Savings

  • Longevity risk presents one of the largest threats to retirement security.
    • Unlike Defined Benefit (“DB”) plans that provide retirement payments for life, Defined Contribution (“DC”) plans, such as 401(k) plans, provide no such guarantees. IRA and 401(k) plan balances are subject to market risks and can be significantly depleted in short order, such as occurred in 2008.
    • Tools addressing longevity risk are available in the marketplace, including insurance products (annuities) that guarantee payments for life, as well as non-guaranteed options that generate a sustainable regular payment that keeps up with inflation.
    • In 2014, the IRS allowed the use of Qualifying Longevity Annuity Contracts (“QLACs”) in DC plans. Up to 25% of plan assets may be used to purchase a longevity annuity that begins monthly payments as late as age 85 and continues for lifetime of a participant and a surviving spouse, thereby decreasing longevity risk.
  • The Report encourages
    • Safe harbors to encourage employers to include lifetime income alternatives in DC plans, by limiting fiduciary liabilities.
    • Enabling more DC plans to offer automatic installment purchases (laddering) of lifetime income products. This reduces the risk of buying an annuity contract at the wrong time, such as when interest rates and annuity payments are low.
    • Encourage sponsors of DC plans through safe harbors to educate participants about the benefits of using plan assets to defer claiming social security as long as possible. The 5-8% annual increase in monthly payments for deferring claiming from 62 to 70 present a significant return and hedge against longevity risk.

IV. Facilitate the Use of Home Equity for Retirement Consumption

  • Home Equity is a valuable retirement asset, which can be accessed through downsizing, home equity lines of credit (“HELOCs”) or reverse mortgages. Owners must be incentivized to retain their equity for use in retirement, rather than using it to support pre-retirement consumption.
  • The Report recommends that tax deductions be removed from mortgage interest on HELOCs, second home mortgages or refinancing transactions, thereby encouraging homeowners to retain their home equity for retirement security.
  • The Report encourages more use of reverse mortgages.

V. Improve Financial Capability Among All Americans

  • Incorporate personal finance into K-12 and university curriculums.
  • Better communicate the advantages of claiming social security later.

VI. Strengthen Social Security’s Finances and Modernize the Program

  • The Social Security Trust Fund is expected to run out of funds in 2035, so this is the most exhausting area of investigation and recommendation in the Report.
  • Matching proposals of increases of benefits for the lower paid with increased lifetime payments by the higher paid.
    • Establish a minimum benefit to keep all recipients out of poverty in retirement.
    • Index the retirement age to longevity, increasing full retirement age from 67 to 69 over many years.
    • Limit spousal benefits for higher earning couples.
    • Raise the maximum taxable earnings level from the current $118,500 to $195,000 in 2020 and index to wage growth thereafter.
    • Increase the payroll-tax rate by 1 percentage point by 2026, to 13.4%.
    • Increase taxes on benefits for high earners.
    • Improve the Disability Insurance Program before it is depleted at the end of 2016.

Modern employers were unable to afford the traditional DB Pension Plans offering guaranteed lifetime income payments, so DC Plans, such as 401(k) Plans, were implemented in the 1980s. The responsibility was transferred from employer to employee, but employee education and motivation as to the required level of funding to support retirement have been woefully inadequate. When Social Security was implemented in 1935, the retirement age was 65 and the average life expectancy in the United States was 61, versus 79.3 today. Social Security was designed as a safety net, not a retirement plan. The Report provides thoughtful recommendations on fixes for the funding issues, as well as the disbursement issues (annuities). The discussion on repairing social security is one of many, but has some excellent ideas. One need not accept all of the Report’s recommendations, but one must accept that the issues must be addressed in short order.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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End of Family Business Discount Transfers

by  /  Estate Planning, Estate Tax, News

We take a brief respite today from our retirement planning discussions to focus on BREAKING NEWS from the estate tax world.

  • On August 2, 2016 the IRS proposed new regulations under IRC Sec. 2704 (the “Regs”) that would, in most situations, prohibit the use of certain discounts customarily applied when valuing transfers of interests in family-owned corporations, partnerships and limited liability companies (“LLCs”).
  • A challenge faced by owners of closely-held businesses is how to transfer ownership to succeeding generations in a tax efficient manner (avoiding estate tax of 40%).
  • Taxpayers have traditionally taken valuation discounts for transfers of such interests of 25% to 40%, reflecting the fact that an interest in a family-owned business is restricted and not readily convertible into cash.
    • Owners of minority interests in a family business have been able to discount the value of the interest to reflect the reality that they do not have the voting power to control the entity and compel a dividend or a redemption of their interests.
    • Similarly, an owner of a minority interest in a family business has been able to claim a further discount for lack of marketability, reflecting that outsiders are reluctant to purchase an interest in another’s family business or the formation documents may limit any such transfer.
    • Discounting the value of the interest transferred by gift or inheritance, lowers the value that is subject to gift or estate tax, often referred to as discount or leveraged gifting.
  • Many estate planning techniques utilize valuation discounts to increase the amount of property that may be gifted or otherwise transferred to or in trust for family members. For example, Grantor Retained Annuity Trusts (“GRATs”) rely on discount gifting for much of their tax benefits.
  • Often these family limited partnerships (“FLPs”) and family limited liability companies (“FLLCs”) hold business, real estate or other commercial operations that are actually operated by multiple generations of the family, but sometimes FLLCs or FLPs are simply used as wrappers to hold marketable assets, such as publicly traded securities, in order to generate a discount value for transfer purposes. The IRS has long viewed such strategies as abusive, but has been unable to convince Congress to legislate the discounting away. Similarly, many court cases have focused on the reasonableness of the discounting, but still have permitted the practice. The Regs represent the IRS’s attempt to unilaterally end the discounts, without the help of Congress or the courts, similar to the effect of an executive order.
  • The Regs are very technical, but generally would treat the above restrictions to voting and transfers as if they would not be enforced by the family on its own members and, thus, would be disregarded when valuing the interest for transfer tax purposes.
    • The Regs would generally value an entity owned by family members by disregarding these discounts and valuing the owner’s interest as a pro-rata share of the total fair market value of the entity.
    • The Regs would also treat transfers made within three years of the transferor’s death as a date of death transfer, thereby increasing the estate value for transfer tax purposes.
  • After a ninety-day comment period, public hearings will be held on December 1st. The Regs may be effective as early as January 1, 2017.
  • This is yet another step in the limiting of estate tax planning techniques. Remember our earlier discussion of President Obama’s Budget Proposal provisions regarding:
    • reducing the unified credit from $5.4 to $3.5 million,
    • eliminating step-up in cost basis to date-of-death fair market value,
    • eliminating short-term GRATs and
    • eliminating dynasty trusts.

Watch for such of these items as may be enacted via regulation or executive order to be effected. These represent “low hanging fruit” for tax revenue enhancement.

  • Accordingly, any taxpayer owning or managing a family business has a closing window of opportunity in which to use the discount for minority interest and lack of marketability, thereby significantly lowering the value for transfer tax purposes. This represents the voiding by year-end of fundamental estate and gift planning tactics used for a long time. IF YOU OWN A FAMILY BUSINESS AND HAVE CONSIDERED ESTABLISHING, OR TRANSFERRING BUSINESS INTERESTS TO, AN FLP OR FLLC IN THE PAST, NOW IS THE TIME TO ACT… PLEASE CONTACT YOUR TAX ADVISOR ASAP. Advisors may be rather busy completing these projects for their clients before year-end. If you have issues we can help solve, please contact us.

Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Retirement Planning Focus VIII

by  /  Retirement Planning

It is time to review the much heralded recommendations to improve retirement security and personal savings in the Bipartisan Policy Center’s (“BPC’s”) report on the future of retirement security (the “Report”). The recommendations track the six challenges we have discussed previously.

Improve Access to Workplace Retirement Plans 

  1. Create Retirement Security Plans For Businesses Under 500 Employees
    • Allow small employers to band together to form and join well designed and low cost, ERISA-protected, Retirement Security Plans (“RSPs”).
    • RSPs would have safe-harbors to avoid discriminatory testing and would allow employers to delegate the fiduciary duties to professional managers, who would be certified and regulated by the Department of Labor (“DoL”).
  2. Enhance Automatic-Enrollment Contribution Safe Harbors
    • Exempt employers from testing if they automatically enroll employees in a plan with a default contribution rate between 3 and 10 percent of pay.
    • Employers could match up to 15% of pay, encouraging higher deferral rates by employees.
  3. Enhance the Existing myRA Program to Benefit Uncovered Workers – Treasury implemented myRAs in 2015 for part-time or low-paid employees. Report suggests codifying the myRA outside of ERISA and allowing automatic enrollment and employer contributions, easing the process for employers to adopt them.
  4. Introduce a National Minimum-coverage Standard to Pre-empt Disjointed State Standards
    • Effective in 2020, after the changes to RSPs and myRAs have been implemented, employers with over 50 employees must offer an ERISA plan (401(k)) or automatically enroll employees into either an RSP or a myRA.
    • Employers not wishing to adopt such a plan would simply forward contributions with their payroll taxes, to be segregated into a national or regional RSP.
  5. Encourage Plan Sponsors to Assist Participants in Allocating and Diversifying Investments – new safe harbor to limit legal liabilities for plans that automatically reallocate into qualified default investment alternatives that gradually adjust to a more conservative allocation over time.
  6. Allow Plan Sponsors to Establish Roth or Tax Deferred Default Treatment Depending on the Participant’s Tax Bracket.
  7. Create Lifetime Income Plans as a Solution to Shortfalls in Funding for Multi-employer (Union) Defined Benefit Plans – offer a solution to underfunded multi-employer plans that might default, making them more sustainable and reducing taxpayer liability for defaults. Benefits would be a monthly payment for life.
  8. Create a Private-Sector Retirement Security Clearinghouse to Help Individuals Consolidate Retirement Accounts and Assets – solve the problem of orphaned accounts at former employers and allow a more cohesive retirement network.
  9. Establish New Limits on Company Stock in Defined Contribution (“DC”) Plans to Avoid Investment Catastrophes
    • Remember Enron? Too much employer stock can increase risk that major drops in retirement account value coincide with a loss of employment.
    • Employees should be educated as to the risk and no more than 25% of any retirement account should be employer stock.
  10. Change Congressional Budgeting Rules to Use More Accurate, Longer Term Forecasts – official budget estimates limited to 10 years often overstate the impact of tax deferral of DC Plans because only the tax deferral is considered, not the later tax revenue when distributions occur.
  11. Promote Plan Adoption by Increasing New-Plan-Startup or Auto-Enrollment Tax Credits – increase the credit to $4,500 of Plan start-up expenses, but require automatic enrollment provisions be included.
  12. Change the Current Saver’s Credit to a Refundable Starter Saver’s Match to Incentivize Younger Savers – for lower earning workers aged 18-35, use a refundable (payable even with no tax liability) Starter Savers Match to match up to $500 contributions to a plan, with the match going directly into the plan.
  13. Establish an Overall Limit on Total Assets in Retirement Plans to Reduce Taxpayer Subsidies to Wealthy Americans
    • The federal GAO estimates 1100 taxpayers have IRA balances over $10 million.
    • Proposed that no more than $10 million (indexed for inflation) be allowed in tax-deferred accounts.
  14. End the “Stretch” IRA Technique – require non-spousal beneficiaries to distribute inherited retirement assets over a 5-year period, not their life expectancies. Accelerate payment of tax.
  15. Exempt Small DC Plans and IRA Balances (Up to $100,000) From Required Minimum Distribution Rules – simplify the process and preserve balances for emergencies.
  16. Exclude the First $25,000 of Savings in Retirement Plans from Means Tests for Public Support Programs – programs such as Food Stamps, Medicaid or SSI, are subject to means tests. Exempting the first $25,000 of retirement savings will encourage savings by many who most need the access to resources.

We will continue this review next time. I hope the reader appreciates the utility and practicality, yet creativity, of these recommendations by this expert Commission, despite this summary treatment. These ideas likely are a good representation (at least in part) of the future of retirement planning in the U.S. and are worthy of your consideration.

Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

read more