As if the passage of the SECURE Act on January 1^st of this year did not create enough upheaval in the world of qualified retirement plans, along came the “Coronavirus Aid, Relief and Economic Security” Act (the CARES Act) on March 27, 2020 and added even more.  The CARES Act upends the fundamental rules for who must, and who may, take distributions from qualified retirement plans such as IRAs, 401ks, 403(b)s and 457 plans in 2020.

A Refresher on Qualified Retirement Plans

Qualified retirement plans such as 401ks and IRAs allow people to set aside some of their earned income for their retirement in a tax-favored way by deferring the income tax due on the funds contributed to the plan until such time as the funds are withdrawn.  Roth plans work the opposite way – they are funded with post-tax dollars but no tax is owed on amounts withdrawn.   In both types of qualified retirement plans, the funds in the plan grow tax-free.

As the purpose of these plans is to encourage people to save for retirement, the law discourages withdrawals prior to age 59.5 by imposing a 10% penalty on amounts taken out of the plan before reaching that age.

On the flip side, since the government wants to collect the tax on these monies eventually, the rules governing qualified retirement plans require that a certain amount be withdrawn each year once the owner reaches age 70.5 (age 72 beginning in 2020 thanks to the SECURE Act).  The amount required to be withdrawn each year from a traditional retirement plan is the Required Minimum Distribution (RMD), sometimes called the Minimum Required Distribution (MRD).  (Note that individuals who fund a Roth IRA or 401K are not required to take withdrawals during their lifetimes.)  Whatever you call it, this amount MUST be withdrawn from the plan and the owner must pay income tax on the amount withdrawn.  In fact, the government is so adamant about this withdrawal that the law imposes a 50% penalty if someone fails to take the full amount of their RMD in any one year.  But not in 2020!

Individuals Required to Take Minimum Distributions are NOT Required to do so in 2020

The CARES Act eliminates the requirement that a person who has reached his required beginning date (i.e. age 70.5 before January 1, 2020) take an RMD in 2020.  For people with large retirement plans who do not need their RMD to pay their expenses, this is a tremendous benefit.  Not only will the amount of the RMD remain in the qualified retirement plan and continue to grow tax free, but the income tax due on the distribution is avoided.  For example, if the RMD on a $1 million IRA is $50,000, not having to take those funds might save $10,000 in tax (15% federal and 5% in Massachusetts).  This is not a deferral of the tax; this is a complete avoidance of it.

Individuals who took a Distribution in 2020 but Wished They hadn’t may put it back

Not only does CARES allow people to skip their RMD for 2020, but it allows people who took their RMD out of their IRAs earlier in the year to return the funds and avoid the tax.  However, you must return the funds to your IRA by August 31, 2020.  If you are in this situation, contact your tax advisor or the custodian of your retirement account as soon as possible to make sure you comply with the rules for returning the funds before the deadline.

Individuals who would have been Penalized for Taking Distributions from Qualified Retirement Plans may be able to do so without Penalty in 2020

Under CARES, if a person under the age of 59.5 is a ‘qualified individual’ he may withdraw up to $100,000 from qualified retirement plans in 2020 without incurring the 10% penalty.  In addition, a qualified individual may spread the tax due on the distribution over a 3-year period.  Alternatively, a qualified individual may re-pay the distribution to the plan within three years and never pay the tax on the distribution – kind-of like a tax-free loan from yourself.

Under CARES, a ‘qualified individual’ eligible for this favorable treatment, is:

Either a person who is diagnosed with COVID-19, or whose spouse or dependent is diagnosed with COVID-19;

Or,

Someone who experiences ‘adverse financial circumstances’ (or whose spouse or household member does) as a result of the pandemic.

The Act includes a number of examples under which ‘adverse financial circumstances’ may occur (being laid off or furloughed, losing child care, being quarantined, or experiencing a reduction in pay) and does not otherwise define adverse circumstances.

The provisions of the CARES Act applicable to qualified retirement accounts can provide significant financial benefit for people who find themselves in either of these circumstances – over age 70.5 and not in need of the annual RMD, or under age 59.5 and in need of funds.  The above is a summary of these rules and of course the devil is in the details.  If you want to learn more about your options under CARES, reach out to your tax or financial advisor to learn how the specific provisions of the Act apply to your situation.

Congratulations! You’ve been named as a Trustee by a loving family member. Now what?

Family members are often named to serve as Trustees without any explanation of their role and duties and sometimes without any notice. It is no surprise that family member Trustees make mistakes, some of which become lawsuits. Here’s an outline of the Trustee’s role and responsibilities and some common mistakes family member Trustees make.

Trustee Role and Responsibilities

Family estate plans often include Trusts because Trusts can accomplish many family goals. Real estate and other assets owned by a Trust avoid probate, the costly, time consuming and public process of carrying out instructions in a Will. Trusts can reduce estate taxes, achieve charitable goals, provide for young children or family members with special needs and accomplish other important purposes for families.

Trustees, the people named in Trusts to manage the affairs of the Trust, have administrative, investment and distribution roles. Trustee administrative roles include keeping records of what the Trust owns and reporting on the condition of Trust assets  to the Trust beneficiaries, as well as filing tax returns for the Trust. Trustee investment duties include managing investments directly or choosing and supervising investment advisors. A Trustee’s distribution role is to carry out the instructions in the Trust about what each beneficiary is entitled to receive and when the beneficiary is entitled to receive it.

Common Misunderstandings and Mistakes

Baby boomers are anticipated to transfer close to $70 TRILLION to the next generation. Given the complex nature of Trustee responsibilities, it is no surprise that lawsuits between family members are increasing, often caused by misunderstandings and mistakes by inexperienced family member Trustees. Here are some examples.

Misunderstanding Fiduciary Responsibilities

By law, Trustees have fiduciary level responsibility to beneficiaries of Trusts, not to the creators of Trusts. Fiduciary level responsibility means the Trustee must make decisions based on what is best for the beneficiaries; and, all Trustee conflicts must be disclosed and addressed in a fair way. This can be very tricky when a Trustee is also one of the beneficiaries.

When investments don’t produce enough money to accomplish Trust instructions to provide education or other costs for every one of several beneficiaries, carrying out fiduciary responsibility can challenge even experienced professional Trustees. And, another challenging situation occurs when investments produce much more money than was expected and potentially put a great deal of money in the hands of very young persons.

Investment Supervision Misunderstandings

Trusts can own life insurance, real estate, stocks, bonds, mutual funds and virtually any other assets. Trustees have a duty to supervise the performance of all investments, not simply be a record keeper and that requires knowledge and experience. For example, life insurance policies owned by Trusts, especially policies with cash value, should be reviewed annually, with updated performance information obtained from the insurance company. Stock, bonds and similar investments need even more frequent attention from Trustees. Trustees must be able to carefully select investment advisors as well as supervise the advisors and be well informed about laws and Trust instructions that guide or limit Trust investments.

Administrative Misunderstandings

Record keeping and taxation of Trust owned property and investments are very different than the same tasks for individually owned assets. For example, Trust income reaches the highest tax bracket (37%) for income over $ 12,950 compared with an individual taxpayer’s income that reaches the 37% bracket at $ 500,000.  When Trust income is distributed to individual beneficiaries, the income is instead taxable at the individual’s rate.

Payment of premium for Trust owned life insurance involves more than sending a check to an insurance company. The payments are usually funded by gifts to the Trust that have to be documented in a particular way and a mistake can void the tax benefit of the Trust.

When Trustees don’t provide periodic accountings to beneficiaries, the result can be more than hurt feelings of other family members. The same is true when Trustees pay themselves fees for their work as Trustees, depending on whether fees are authorized by the Trust and whether the fees are reasonable in relation to the work.

Approaches to Avoiding Trustee Misunderstandings

Future misunderstandings between family member Trustees and beneficiaries are not easily foreseen. Changes in families through marriage, divorce or unexpected financial reverses or gains can upend even the most stable, close family relationships.

People who intend to name family members as Trustees, can help avoid future misunderstandings by a range of methods.  A family member’s interest and willingness to learn about Trustee roles and duties may be an important clue to whether being a Trustee is a good fit for that person. Written materials about Trustee roles and duties are not hard to find and the family’s current legal, tax and financial advisors are another source of education. Selecting a professional Trustee is another choice some families may prefer. Consulting the family estate planning attorney and other close professional advisors is a good place to start in searching for good choices for Trustees.

Samuel Financial LLC is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781) 461-6886.  Securities and advisory services offered through Commonwealth Financial Network ®, member FINRA/SIPC, a registered investment adviser. www.samuelfinancial.com.

Legal services offered through Samuel, Sayward & Baler, LLC are separate and unrelated to Commonwealth.