STATs and MARI-CRUTs and TEA POTs – Oh My!

Your obedient blogger retired just in time – never had to learn about various trust arrangements devised to take advantage of the late, lamented stretch IRA rules. Judging from this Forbes column, that was lucky.

How do you suppose a Flip NIMCRUT works? On second thought, never mind.

Scam Alert for Wealth Managers

Users of financial services are obvious targets for scammers. So are the providers of those services. “It’s almost as if many of the fraudsters have worked in financial services in the past,” says a Finra official.

Wealth managers, keep your guard up!

Did Stretch IRAs Deserve to Die?

Individual Retirement Accounts began as simple way to put aside a few bucks. With the passing years, limits on annual IRA contributions increased and top income earners started moving megabucks into rollover IRAs.  Estate planners took notice.

Assets remaining in IRAs and 401(k)s at the owner’s death could be passed to a named beneficiary, and not necessarily in a lump sum. Distributions could be stretched over the beneficiary’s lifetime. Planners saw the potential for “inheritances" that offered many years of tax-deferred investment growth. Potentially, owners of seven-figure rollover IRAs could leave the grandkids a growing income for life.

Just one problem: Bright, imaginative grandchildren weren’t going to let a stretch IRA dribble out payments decade after decade. They would empty the account and use the after-tax proceeds to buy a beach house, start a business, back a Broadway musical. or who knows what.

The challenge for estate planners: Create trust provisions that deterred or prevented such impulsiveness, while also complying with IRA regulations. They rose to the challenge. Now the SECURE act has made their ingenuity almost useless. Except for spouses and with certain other limited exceptions, the SECURE act eliminates stretch IRAs. Most beneficiaries are now required to empty their IRAs within ten years.

The Editorial Board of The Wall Street Journal was not amused by the stretch IRA's demise, accusing Congress of playing a dirty trick on “the 90-year-old banking on this strategy." But the WSJ conceded, "there’s a reasonable case that IRAs weren’t meant to outlive their owners by decades.”

Michelle Singletary in The Washington Post agrees. IRAs weren’t intended to be estate planning vehicles.

There is nothing wrong with trying to minimize your taxes or the tax bill for your heirs. That’s a smart money move. However, IRAs and 401(k)s weren’t meant to be used as a way to transfer wealth. They were designed to encourage people to save by giving plan participants and/or account holders — not their children or children’s children — a tax break. The loophole created by the law that has allowed beneficiaries to stretch out their tax burden was a bonus, not an entitlement that should never be touched.

I’m with Singletary. The death of the stretch IRA is timely.

Tax Wealth by Taxing the “Squatters”?

When it comes to taxing wealth, Eugene Steuerle believes we should pay more attention to three issues.

1. A stockholder’s investment income is already taxed twice, at the corporate and personal levels. Current proposals for an annual wealth tax would result in what amounts to triple taxation.

2. If most returns on investment wealth receive a stepped-up basis at the owner’s death, why are inherited investment gains taxed when the heir withdraws them from an IRA?

3. The best time to tax the returns from wealth is at the owner’s death, as productive New Money passes to heirs and becomes less productive Old Money.

To bolster his last point, Steuerle quotes Winston Churchill:

 “The process of creation of new wealth is beneficial to the whole community. The process of squatting on old wealth though valuable is a far less lively agent.”

The most remarkable decade

I'm not talking about the stock market, though that was good also.  This article by Matt Ridley in The Spectator has been noticed by several bloggers and a NYTimes columnist, and I'm doing my own version for Wealth Management.