May 28, 2020
The novel coronavirus (COVID-19) pandemic has caused some people to contemplate their own mortality or that of a family member. For those whose life expectancies are short — because of COVID-19 or for other reasons — estate planning can be difficult. But while money matters may be the last thing you want to think about when time is limited, a little planning can offer you and your family financial peace of mind.
Action steps to take
Here are some (but by no means all) of the steps you should take if you have a short life expectancy. These steps are also helpful if a loved one has been told that time is limited.
Gather documents. Review all estate planning documents, including your:
- Revocable or “living” trust,
- Other trusts,
- General power of attorney, and
- Advance medical directive, such as a “living will” or health care power of attorney.
Make sure these documents are up-to-date and continue to meet your estate planning objectives. Modify them as appropriate.
Take inventory. Catalog all your assets and liabilities, estimate their value, and determine how assets are titled to ensure that they’ll pass to their intended recipients. For example, do you own assets jointly with your ex-spouse? If so, title will pass to your ex-spouse on your death. There may be steps you can take to separate your interest in the property and dispose of it as you see fit.
If you have a safe deposit box, make sure someone is authorized to open it. If you have a personal safe, be sure that someone you trust knows its location and combination.
Review beneficiary designations. Take another look at beneficiary designations in your IRAs, pension plans, 401(k) plans and other retirement accounts, insurance policies, annuities, deferred compensation plans and other assets. Make sure a beneficiary is named and that the designation continues to meet your wishes. For example, a divorced individual may find that an ex-spouse is still named as beneficiary of a life insurance policy.
Review digital assets. Ensure that your family or representatives will have access to digital assets, such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, social media accounts, websites, domain names, and cloud-based documents. You can do this by creating a list of usernames and passwords or by making arrangements with the custodians of these assets to provide access to your authorized representatives.
Gaining peace of mind
Although facing your own mortality can be difficult, great peace of mind can come from ensuring that your estate plan fulfills your wishes and minimizes the tax burden on your family. Contact us with any questions regarding your estate plan.
May 26, 2020
The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs).
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
In general, a high deductible health plan (HDHP) is a plan that has an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) cannot exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for 2021 contributions
In Revenue Procedure 2020-32, the IRS released the 2021 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2021, the annual contribution limitation for an individual with self-only coverage under a HDHP is $3,600. For an individual with family coverage, the amount is $7,200. This is up from $3,550 and $7,100, respectively, for 2020.
High deductible health plan defined. For calendar year 2021, an HDHP is a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2020). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) can’t exceed $7,000 for self-only coverage or $14,000 for family coverage (up from $6,900 and $13,800, respectively, for 2020).
A variety of benefits
There are many advantages to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year tax free and be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term-care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the work force. For more information about HSAs, contact your employee benefits and tax advisor.
May 26, 2020
Some of the most effective estate planning strategies involve setting up irrevocable trusts. For a trust to be deemed irrevocable, you, the grantor, lose all incidents of ownership of the trust’s assets. In other words, you’re effectively removing those assets from your taxable estate.
But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth? This may be an especially pertinent question in light of the current economic downturn resulting from the novel coronavirus (COVID-19) pandemic.
If you’re married, and feel as though your marriage is strong, a spousal lifetime access trust (SLAT) allows you to obtain the benefits of an irrevocable trust while creating a financial backup plan.
A SLAT in action
A SLAT is simply an irrevocable trust that authorizes the trustee to make distributions to your spouse if needs arise. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.58 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses.
The key benefit of a SLAT is that by naming your spouse as a lifetime beneficiary you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse.
To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations.
Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.
Understand the pitfalls
There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. One way to mitigate this risk is to use dual SLATs. In other words, you and your spouse each establish an irrevocable trust using your separate property and naming each other as lifetime beneficiaries.
If you’re considering using a SLAT, or would like to learn about other estate planning strategies, contact us to learn more about the benefits and risks.
May 19, 2020
The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both:
- The payment of the expense results in forgiveness of a loan made under the PPP, and
- The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations.
A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments.
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?
The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
No double tax benefit
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”
More possibly to come
Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment. Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible. Stay tuned.
May 14, 2020
There are several tools you can use to build flexibility into your estate plan. Flexibility is especially important now because of an uncertain estate planning environment.
The federal gift and estate tax exemption currently is an inflation-adjusted $11.58 million (the highest it’s ever been) but it’s scheduled to drop to its pre-2018 level of $5 million (indexed for inflation) on January 1, 2026. This window of opportunity could close sooner, however, depending on the results of this fall’s election. One of the most versatile tools available to add flexibility to your estate plan is the power of appointment.
How does it work?
A power of appointment is simply a provision in your estate plan that permits another person — a beneficiary, family member or trusted advisor, for example — to determine how, when and to whom certain assets in your estate or trust will be distributed. The person who receives a power of appointment is called the “holder.”
These powers come in several forms. A testamentary power of appointment allows the holder to direct the distribution of assets at death through his or her will or trust. An inter vivos power of appointment allows the holder to determine the disposition of assets during his or her lifetime.
Powers may be general or limited. A general power of appointment allows the holder to distribute assets to anyone, including him- or herself. A limited power has one or more restrictions. In most cases, limited powers don’t allow holders to distribute assets for their own benefit (unless distributions are strictly based on “ascertainable standards” related to the holder’s health, education or support). Typically, limited powers authorize the holder to distribute assets among a specific class of people. For example, you might give your daughter a limited power of appointment to distribute assets among her children.
The distinction between general and limited powers has significant tax implications. Assets subject to a general power are included in the holder’s taxable estate, even if the holder doesn’t execute the power. Limited powers generally don’t expose the holder to gift or estate tax liability.
Dealing with uncertainty
Powers of appointment provide flexibility and enhance the chances that you’ll achieve your estate planning goals. They allow you to postpone the determination of how your wealth will be distributed until the holder has all the relevant facts. If you’d like to build more certainty into your estate plan, please contact us.
May 13, 2020
In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:
The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).
What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.
The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
CARES Act questions
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.
May 7, 2020
The novel coronavirus (COVID-19) pandemic has refocused people’s thoughts on the health and safety of their families. In addition to taking the necessary steps today to protect your loved ones, it’s equally important to consider their financial security in the future.
If you don’t have a will, drafting one should be your first step in developing a comprehensive estate plan. Because of stay-at-home orders in many states, it may be tempting to turn to online do-it-yourself (DIY) tools that promise to help you create a will (and other estate planning documents). Even though this may be a relatively cheap option, using these online tools is risky except in the simplest cases.
A will that isn’t executed properly under state law isn’t legally binding. Therefore, your assets may be divided according to state intestacy laws, regardless of your intentions. And, if you have young children, a court may appoint their legal guardian.
No “one-size-fits-all” solution
Despite what you might have read online, there’s no single prototype for wills. It’s complicated because the laws can vary widely from state to state. For instance, some states recognize oral wills, while others don’t. Or a state may require two or even three attesting witnesses.
One common mistake of DIY wills is leaving out important provisions that can lead to challenges in the future. Case in point: If the will doesn’t include a residuary clause addressing amounts that are “left over” after estate debts and tax payments have been settled, an unspecified party could walk away with a large sum of money. It might even be a family member you had wanted to “disinherit.”
Turn to a professional
The bottom line is that there is too much risk by taking shortcuts when it comes to drafting your will. Have your will drafted and executed by a reputable attorney. Questions? Contact us.
April 30, 2020
If you have outstanding loans to your children, grandchildren or other family members, consider forgiving those loans to take advantage of the current, record-high $11.58 million gift and estate tax exemption. Bear in mind that in 2026, the exemption amount will revert to $5 million ($10 million for married couples), indexed for inflation.
Under the right circumstances, an intrafamily loan can be a powerful estate planning tool because it allows you to transfer wealth to your loved ones free of gift taxes — to the extent the loan proceeds achieve a certain level of returns. But an outright gift is a far more effective way to transfer wealth, provided you don’t need the interest income and have enough unused exemption to shield it from transfer taxes.
Do intrafamily loans save taxes?
Generally, to ensure the desired tax outcome, an intrafamily loan must have an interest rate that equals or exceeds the applicable federal rate (AFR) at the time the loan is made. The principal and interest are included in the lender’s estate, so the key to transferring wealth tax-free is for the borrower to invest the loan proceeds in a business, real estate or other opportunity whose returns outperform the AFR.
The excess of these investment returns over the interest expense is essentially a tax-free gift to the borrower. Intrafamily loans work best in a low-interest-rate environment, when it’s easier to outperform the AFR.
Why forgive a loan?
An intrafamily loan is an attractive estate planning tool if you’ve already used up your exemption or if you wish to save it for future transfers. But if you have exemption to spare, forgiving an intrafamily loan allows you to transfer the entire loan principal plus any accrued interest tax-free, not just the excess of the borrower’s returns over the AFR.
It can be a strategy for taking advantage of the increased exemption amount before it disappears at the end of 2025. Of course, if you need the funds for your own living expenses, loan forgiveness may not be an option.
What about income taxes?
Before you forgive an intrafamily loan, consider any potential income tax issues for you and the borrower. In most cases, forgiving a loan to a loved one is considered a gift, which generally has no income tax consequences for either party.
Although forgiveness of a loan sometimes results in cancellation of debt (COD) income to the borrower, the tax code recognizes an exception for debts canceled as a “gift, bequest, devise or inheritance.” There’s also an exception for a borrower who’s insolvent at the time the debt is forgiven. But be careful: If there’s evidence that forgiving a loan isn’t intended as a gift — for example, if the borrower doesn’t have the cash needed to make the loan payments but isn’t technically insolvent — the IRS may argue that the borrower has COD income.
We can assist you in determining whether forgiving loans is a good strategy and, if it is, help implement that strategy without triggering unwanted tax consequences.
April 23, 2020
Many people’s estates typically include IRAs. Be aware that two major laws passed into law recently, the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have had a direct effect on IRAs.
In a nutshell, the CARES Act waives required minimum distribution (RMD) rules for IRAs (and certain defined contribution plans) for calendar year 2020. If you’re fortunate enough that you don’t need to make withdraws from your IRA, there’s an opportunity to leave more for your heirs in your retirement plan. However, bear in mind that because the SECURE Act generally put an end to “stretch” IRAs, the estate planning benefits of inheriting IRAs are somewhat muted.
RMD rules waived
Not taking RMDs in 2020 is particularly advantageous because the amount of the distribution is based on year-end 2019 account values. Otherwise, you might be forced to liquidate account assets at depressed values during the stock market downturn.
The waiver covers both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.
“Stretch” IRAs eliminated
Perhaps more important for some estate plans, the SECURE Act eliminates so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited IRAs and defined contribution accounts to spread the distributions over their life expectancies. Younger beneficiaries could use the provision to take smaller distributions and defer taxes while their accounts grew.
Under the SECURE Act, most beneficiaries must withdraw the entire balance of an account within 10 years of the owner’s death. However, they don’t have to follow any set schedule. They can wait and withdraw the entire amount at the end of 10 years if they wish.
The new rules apply only to those inheriting from someone who died after 2019. Thus, if you inherited an IRA years ago, you won’t be subject to the new rules with respect to your RMDs. However, when your beneficiaries inherit the IRA from you, they’ll be subject to the new rules.
Review your plans
The changes made by the CARES Act and the SECURE Act may have an impact on your retirement and estate plans. We can help you review your plans to ensure that they continue to meet your objectives.
April 23, 2020
The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.
But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.
And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.
For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.