Estate Planning and Income Tax Updates You Need to Know

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  1. Tax filing deadline. The Internal Revenue Service has issued Notice 2020-18 extending both the federal income tax filing and payment due dates for 2019 income tax returns from April 15, 2020 to July 15, 2020. These extensions automatically apply to all taxpayers (including individuals, trusts and estates). The extension applies to 2019 federal income tax returns as well as federal income tax payments due on April 15, 2020. Taxpayers do not need to file additional forms to receive these extensions.

    For taxpayers with 2019 federal income tax due for 2019, there is no limit to the amount that may be postponed from April 15, 2020 to July 15, 2020, and no interest or penalty will be assessed or accrued during the extension. Estimated payments for 2020 federal income taxes, which otherwise would be due on April 15, 2020, may also be postponed until July 15, 2020.

    For filers who authorized electronic funds withdrawal, those payments may be cancelled by contacting the U.S. Treasury Financial Agent at 888-353-4537. Payment cancellation requests must be made no later than 11:59 p.m. ET two business days before the scheduled payment date. The automatic payment should be rescheduled or a check should be mailed to the IRS. Taxpayers who scheduled an automatic payment by credit or debit card should contact the card company to change the payment date.

    The deadline for 2019 IRA contributions has also been extended to July 15, 2020.

    Taxpayers with filing deadlines other than April 15, 2020 have not been granted extensions, and normal filing deadlines apply to estate tax returns.

    State and local taxing authorities may be following this extension, but it is important to check in each jurisdiction in which you file a state income tax return.

  2. Gift tax filing and payment relief. In Notice 2020-20, the IRS has “amplified” Notice 2020-18 to provide the same three-month automatic deferral for gift tax (and generation-skipping tax) returns and payments. However, to obtain an additional three month extension to October 15, 2020 to file the gift tax return, you must file Form 8892 by July 15, 2020, but any federal gift and generation-skipping transfer tax payments postponed by the notice will still be due on July 15, 2020.
  3. Low interest rates create planning opportunities. Every month the IRS issues a “7520 rate” (named after the Internal Revenue Code section-to which it relates), also known as the applicable federal rate, which is used as an assumed rate of return to measure the values of gifts in certain advanced estate planning techniques. The 7520 rate for March is at a low 1.8%, and April’s is even lower at 1.2%.

    Generally, many estate planning techniques succeed when assets transferred outperform the 7520 rate, and, therefore, when the rates are low, there is more opportunity to beat the 7520 rate. Some strategies to consider would include creating or refinancing inter-family loans, selling assets to grantor trusts, or creating GRATs.

    Please let us know if you would like to discuss any of these strategies.

  4. Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The SECURE Act was signed into law on December 20, 2019. Key features of the new law include the following:
    • IRAs and qualified retirement plan assets must generally be distributed within 10 years after death, eliminating the life expectancy rule for distributions.
    • The required beginning date has been extended to age 72 from 70½.
    • The maximum age limitation for making contributions to traditional IRAs has been repealed.

    The benefit of the lifetime expectancy rule was that distributions from the retirement plan would span the beneficiary’s life expectancy. Income tax would be paid as distributions were made, reducing the overall tax hit. With the elimination of the stretch IRA, the entire plan will, in most cases, be distributed over 10 years, resulting in higher income tax rates for most beneficiaries.

    The elimination of the stretch IRA does not apply in all cases. Certain “eligible designated beneficiaries” may still stretch distributions over their life expectancies. Surviving spouses who are designated as beneficiaries will continue to benefit from lifetime distributions as will disabled and chronically ill beneficiaries and individual beneficiaries who are not more than 10 years younger than the plan owner. Minor children of the plan owner may take distributions over their life expectancies until they attain the age of majority (18 in Oregon or perhaps older if the child is a full-time student).1

    Importantly, if you have a disabled or chronically ill child, you may still take advantage of an accumulation trust. By naming certain qualified trusts as beneficiary of your retirement plan, your plan may be distributed to the trust over the course of the beneficiary’s lifetime. A minor child will also benefit from the life expectancy rule until he or she attains majority age, at which time the 10-year rule begins to apply.

    Under the new law, distributions to any human beneficiary who is not an eligible designated beneficiary must occur 10 years from date of death. Adult children will be subject to this rule even if the plan owner previously designated a trust for their benefit. If you designated a trust as your beneficiary, you should speak with your advisors about whether a change is appropriate. If you wish for the retirement assets to accumulate for the benefit of your beneficiary, you may still use a trust, but you must weigh the income tax implications against the benefit of postponing distributions.

    Now may be a good time to consider converting your traditional IRA to a Roth. By converting some portion of your IRA each year, the income tax may be lower on conversion than at death, especially when paired with the estate tax.

    If you are charitably inclined, you may want to take advantage of the qualified charitable distribution for contributions from your IRA directly to eligible charities of up to $100,000 per year and consider designating one or more charities as beneficiary(ies) of your retirement plan assets.

    We urge all clients to review their beneficiary designations and ask us if those designations still make the most sense for you and whether there is a better planning strategy to employ going forward. As always, we appreciate collaborating with your financial planners and tax advisors to determine the best approach.

  5. Required minimum distributions. Under the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act, a retiree has the option not to take a required minimum distribution in 2020, a potentially important provision if financial markets are slow to recover from their recent steep declines.
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1 Minor grandchildren do not qualify for this exception and must take their required minimum distributions over 10 years.

Key Contributors

Susan B. Bock
Wendy S. Goffe
Emily V. Karr
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