New Tax Proposed for Inherited IRAs

Senator Max Baucus, who is the chairman of the Senate Finance Committee, has proposed a new tax law provision that would require all persons inheriting assets held in an Individual Retirement Account, such as a 401(k) or a traditional IRA, to remove all assets from the accounts within five years and pay the income tax on the accounts. Currently, the Internal Revenue Code permits beneficiaries to stretch out the distribution of the retirement account assets over the life expectancy of the designated beneficiary. For example, a ten-year-old beneficiary could stretch out the required minimum distributions over a period of seventy-three years.

The logic of Senator Baucus is that Individual Retirement Accounts are designed for retirement and not inheritance. Senator Baucus’ proposal was attached to the Highway Investment, Job Creation and Economic Growth Act of 2012. However, it was removed in Committee. Even though the proposal was removed from the Act, Senator Baucus has indicated strongly that he does want to attach it to a future bill.

The impact of this legislation would be significant on estate planning for several families. In addition, the tax impact on beneficiaries inheriting IRAs would be significant. The proposed rule would not apply to surviving spouses and other specific classes of beneficiaries, including, children with special needs.

While recently, this legislative proposal appears dead for the time being, the idea could easily come up again as Congress seeks diligently for revenue increases to address the daunting federal deficit.

Long-Term Industry Continues to Change

The Long-Term Care Insurance market has experienced numerous changes over the last couple years. A few major companies have announced that they will discontinue selling long-term care policies. Among this group of insurers are Prudential Financial, Unum Group and Met Life. According to information that I follow, 10 out of the top 20 insurance companies have exited the long-term care market in the last five years.

Over the past several months, I have followed the changes to the long-term care industry. During this time, I kept thinking about John Hancock and wondering what this company would do to handle the rising out-flow of long-term care benefits. For the companies that have remained in the long-term care business, rate increases are becoming the norm and this now includes John Hancock. According to Roy Anderson, John Hancock’s Vice President of Corporate Communications, “The long-term care industry is still young, and only now is seeing actual usage data which indicate the need for rate increases.” Corresponding with this announcement, the Chicago Sun Times recently published a story about a couple in Illinois facing a 90% increase to their long-term care premium. Click on link to view full article: http://www.suntimes.com/business/savage/11378009-452/how-is-a-90-long-term-care-rate-hike-ok.html. The Star-Tribune in Minnesota recently reported a similar story.  Click on the following link: http://www.startribune.com/business/yourmoney/143267316.html?source=error.

Hopefully, this information helps you assist your clients with long-term care decisions and gives you insight into this volatile piece of the insurance market. I question whether any company can really make money in the long-term care market. With costs rising significantly, the option of long-term care insurance may become too difficult for people to stomach.