Category Archives: Estate Planning

Gift and Estate Tax Exemptions – 2020 Information

CURRENT GIFT AND ESTATE TAX EXEMPTIONS

 

  • Federal Estate Tax Exemption: $11.58 million per individual
  • Federal Gift Tax Exemption: $11.58 million per individual
  • Federal Generation-Skipping Tax Exemption: $11.58 million per individual
  • Federal Unlimited Marital Deduction for gifts and transfers to spouses
  • Annual Gift Exclusion Amount: $15,000 per individual, per donee, per year
  • Oregon Estate Tax Exemption: $1 million per individual
  • Oregon does not have a gift tax
  • Oregon Unlimited Marital Deduction for gifts and transfers to spouses

To the extent that you have available unused exclusion and are interested in gifting the full $11.58 million exemption currently available, please contact us sooner rather than later to take advantage of what is likely a temporarily increased exclusion. 

Gift Tax Credits, Exclusion Amounts and “Claw Backs” of Lifetime Gifts in 2026

 

CLAWBACK OF FEDERAL ESTATE AND GIFT TAX EXEMPTION

 

On November 22, 2019, the IRS issued permanent regulations clarifying that there would be no “clawback” of large lifetime gifts. More specifically, the Tax Cuts and Jobs Act of 2017 increased the basic transfer tax exclusion amount from $5 million per person to $10 million per person, indexed for inflation.  For 2020, the inflation-adjusted basic exclusion amount is $11.58 million, meaning that an individual can gift a total of $11.58 million during lifetime or at death without paying federal gift or estate tax.  In 2026, absent a change in the law, the exclusion amount is set to revert to the original $5 million per person indexed for inflation.

There has been uncertainty as to what would happen if someone took advantage of the temporarily increased exclusion amount to avoid gift tax on transfers but then died when the exclusion amount was much lower.  Would the lifetime gifts be “clawed back” into the estate and taxed anyway in a post-2026 estate tax calculation?  The regulations issued in November provide that no such clawback will occur.  The rules allow the estate of a decedent to calculate the estate tax credit using the higher of the basic exclusion amount applicable to gifts actually made during lifetime or the basic exclusion amount applicable at death.

To the extent that you have available unused exclusion and are interested in gifting the full $11.58 million exemption currently available, please contact us sooner rather than later to take advantage of what is likely a temporarily increased exclusion. 

Legislative Updates 2020: Secure Act Changes Impact Retirement Account Beneficiaries

SECURE ACT: CHANGES IMPACTING YOUR RETIREMENT ACCOUNT BENEFICIARIES

On December 20, 2019, the SECURE Act was signed into law, triggering potential implications for your estate planning.  In particular, the SECURE Act impacts retirement benefits and beneficiary designations in the following significant ways:

1.                The Good:  RMDs and Contributions.  The Act postpones the age at which a plan participant in an IRA or other qualified retirement account must begin taking required minimum distributions (“RMDs”) from age 70½ to the year in which a plan participant turns 72.  For those not yet taking RMDs, this change means that you will have a few more years without mandatory distributions.  For those already taking RMDs, this change will not impact you.  In addition, the Act has repealed the “age cap” on contributions to a traditional IRA so that participants can make tax-deductible IRA contributions without age restriction.

2.                The Bad:  Elimination of Stretch IRA for Non-Spouse Beneficiaries.  Under the prior law, when a non-spouse beneficiary inherited an IRA, the beneficiary had the option of stretching out the RMDs from the IRA, and the corresponding income tax burden, over the beneficiary’s life expectancy.  For example, a 50-year old beneficiary inheriting an IRA in 2019 had 34.2 years to stretch out RMDs.  Under the new law, the deferral is much more limited.  Now, non-spouse beneficiaries will have to withdraw IRA proceeds within just ten years, imposing potentially higher tax brackets and the loss of tax deferral.  A few comments about the RMD change:

  • Spouses. There is no change in the law for surviving spouses.  A surviving spouse still has the ability to roll the deceased spouse’s IRA into his or her own IRA, and treat the IRA as if it is the surviving spouse’s own for purposes of taking out RMDs.  A spousal trust will also continue to qualify for a lifetime stretch out so long as appropriately drafted.
  • Trusts. A non-spouse beneficiary includes any trust listed as a beneficiary, other than a trust for a surviving spouse or excepted beneficiary listed in (c) below. Under the previous version of the law, if a trust qualified as a “see-through trust,” then the life expectancy of the beneficiary could be used for purposes of stretching out the RMDs.  This once favorable strategy no longer works for all trusts.  RMDs have to be distributed to the trust within the 10- year time period unless an exception applies.  To the extent that the trust retains the distributions from the IRA, those distributions will be treated as ordinary income. Moreover, given a trust’s higher tax brackets, the trust will pay significantly more income tax on that income as compared to an individual beneficiary.  In sum, naming a trust as a beneficiary under the new law, particularly as a primary beneficiary, could have unintended, adverse outcomes.  You should review all your beneficiary designations, particularly if you named a trust as a beneficiary (often the case for younger beneficiaries or beneficiaries with financial management issues).
  • Exceptions to the Ten-Year Payout Rule.  There are exceptions to the 10-year payout rule for children who are minors and for disabled or chronically ill beneficiaries.  For minor children, the life expectancy payout rules apply until the child reaches the age of majority and then the 10-year rule begins.  The life expectancy payout rule applies to a disabled or chronically ill beneficiary (and an accumulation trust for their benefit, which is an important change for special needs beneficiaries). When the disabled or chronically ill beneficiary dies, the remainder of the account passes pursuant to the 10-year rule.
  • Timing of Distributions.  Under prior law (allowing lifetime stretch out), a beneficiary had to begin taking distributions in the year following the plan participant’s death. Under the new 10-year rule, a beneficiary can defer any and all distributions until the end of the period.  Such a deferral would allow for continued tax-deferred growth in the account but must be calculated with care as a larger, later distribution could increase the tax payable (depending on the amount of the distribution and the beneficiary’s tax brackets).

3.                Planning Strategies.  Naming a surviving spouse the primary beneficiary of a retirement account remains the most favorable income tax option (though other factors, such as a second marriage, could complicate the decision).  For contingent beneficiaries, the planning environment has become much more complex.  In some instances, conversion to a Roth might be advisable in order to soften the income tax consequences of the new rules.  For those who have named trusts as beneficiaries, the trust provisions will need to be altered to avoid unintended consequences and to maximize flexibility for the trustee and the beneficiaries.  For those who are charitably inclined, a retirement account could name a Charitable Remainder Trust as a “remainder” beneficiary in order to stretch out distribution for an individual beneficiary longer than the 10-year period (up to the lifetime of that beneficiary), with the understanding that the remainder of the account will be distributed to charity at the individual beneficiary’s death.

We recommend that you review your beneficiary designations and the provisions in your estate planning documents to confirm that your beneficiary designations are up-to-date and still the most appropriate option given the recent changes to the law.  If you would like us to assist you with this review, please contact us to schedule an appointment.

Five Reasons to Update Your Estate Plan

Learn when life changes may necessitate an update to your Will or Revocable Trust, such as after a move, divorce, birth or death of a beneficiary or fiduciary, or if the size and composition of your estate has changed. Watch here to learn more.

Erin MacDonald to speak at Oregon State Bar Estate Planning Seminar

Erin MacDonald, a partner in Karnopp Petersen’s Trust and Estates Practice, will speak in Portland on November 15th on the topic of estate tax portability, which became a permanent part of the tax code in the American Taxpayer Relief Act of 2012.  The all-day seminar presented by the Oregon State Bar, “Basic Estate Planning for Oregon Taxable Estates,” will provide education to estate planning attorneys from across the state on topics such as credit shelter trusts, marital deductions, disclaimer tax planning, portability, lifetime gifting, and more. Erin is a member of the Executive Committee of the Estate Planning & Administration Section of the Oregon State Bar.

An Introduction to Individual Charitable Deductions

A podcast about what you need to know regarding income tax charitable deductions for individuals following the 2017 Tax Cuts and Job Act from an estate planning expert:

 

 

Listen here:

How does a revocable trust avoid probate?

2017 Tax Reform Alert

As you may be aware, the tax reform legislation from 2017 impacts not only the federal income tax but also other taxes potentially affecting your estate plan (such as the estate, gift, and generation-skipping transfer taxes (“GST”)).

The legislation doubles the estate, gift and GST tax exclusion amounts to $11.2 million in 2018 (to be adjusted for inflation from a base year of 2010).  These increases are effective for decedents dying and transfers made after 2017 and before 2026.  Due to these changes, it may be necessary to adjust certain provisions in your plans where you may have previously created formulas for gifting and estate allocation based on lower estate tax exemption amounts.  Such older formulas could result in unintended consequences in this higher federal estate tax exemption environment, including unintended disinheritance of certain beneficiaries or higher taxes if certain gifts are “overfunded” because of the new exemption amounts.

After 2025, the increased federal estate tax exemption amount is scheduled to sunset, returning the exclusion amount to an amount calculated under current law ($5.49 million for 2017).  Please note that Oregon’s estate tax exemption remains at $1,000,000 and is not indexed for inflation.

Additional changes to individual, corporate, and pass-through entity taxation provisions may also impact estate plans. Some of the provisions included in the law that may affect your plans include:

  • New deduction for certain business income earned through pass-through entities.  The legislation creates a new deduction for individuals, generally equal to 20% of the qualified business income received by the individual from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) have special limitations, and there are other income limits and conditions placed on the receipt of the deduction that we should discuss if you earn income from such entities.
  • Increase in charitable contribution limit for cash donations.  The legislation increases the amount of cash contributions to charitable organizations that may be deducted from 50% of a taxpayer’s contribution base (generally equal to adjusted gross income) to 60% of the contribution base for tax years after 2017 and before 2026.
  • Extension of the holding period for “carried interest.”  The legislation prevents individuals holding so-called carried interest in private equity or hedge funds or similar investment vehicles from claiming long-term capital gain treatment on gains realized from the disposition of such an interest until the interest has been held for three years (compared to the one-year holding period required for other capital assets). The legislation also creates certain restrictions on related-party transfers of carried interest during a similar three-year period.

In light of the numerous changes made by this tax legislation, we recommend a review of your estate plan to make sure that it continues to satisfy your tax- and family-related objectives while remaining as flexible as possible.  If it has been a few years since you have updated your plan, now would also be a good time to touch base with us to make sure trust funding, beneficiary designations, and other details are up to date.

Leaving a Legacy – A Team Approach

Gifting is the cornerstone of a comprehensive estate plan for many families.  Planned giving can create a legacy by providing benefits to loved ones and meaningful causes, while also reaping significant tax savings.  But actually achieving those ends requires careful planning. Your needs, values, and whether you wish to retain control over gifted assets are all important considerations in a gifting plan.

As you consider gifting, keep in mind that because of the differing effects of income, capital gain and estate taxes on various types of assets, not all gifts have the same tax impact—even if the gifted assets have the same value (more on that in a future post). Your attorney, accountant, and financial advisor can help you identify appropriate assets for gifting to maximize your tax savings while preserving wealth to maintain your standard of living.  Outright gifts may be the simplest approach, but other methods such as gifting through a trust, foundation, or donor advised fund can yield significant additional tax advantages and control.  For gifts to friends and family, you may also consider making direct payments to education and medical providers or contributing to an education savings plan.  Your attorney can help you determine the appropriate gifting vehicle given your individual circumstances.

If you are unsure about a fitting charitable recipient, a private philanthropy advisor or community foundation can help you identify charitable organizations that align with your interest and intent. Such advisors can help you identify and vet charitable organizations, draw up a gift agreement, and then periodically review and assess your gift for alignment with your intent.

Depending on the kinds of gifts you make, your accountant or attorney can assist you with tax compliance by proper documentation and reporting to ensure completion of the tax planning aspect of your gifts.  Faulty documentation can reduce or eliminate the benefits a well-planned gift ought to achieve. The importance of careful and accurate tax reporting cannot be overemphasized.

There are many twists, turns, and caveats in the gifting world.  Relying on your team of professionals is a sure way to leave a lasting legacy.

TOD Deeds

Oregon law now permits a Transfer on Death Deed (“TOD Deed”) that allows the owner or owners of real property to execute a deed that names one or more beneficiaries who will succeed to ownership at the owner’s death without a probate. However, as with any estate planning device, TOD Deeds have several pros and cons to consider. A TOD Deed creates no current legal or equitable interest in a beneficiary, can be revoked at any time, and does not affect the rights of the transferor’s creditors. As such, the completion and recordation of a TOD Deed is not a completed gift for tax purposes. The owner retains control over the property and cannot only revoke the deed, but can transfer title to third parties. Accordingly, the TOD Deed is superior in many ways to tenancies with right of survivorship or life estates as the transferor retains control and ownership.

  • When a TOD Deed May Be Indicated. TOD Deeds are most likely to be advantageous for smaller estates with simple dispositive plans without multiple beneficiaries or contingencies. The TOD Deed may also be useful for unmarried or unregistered partners as it can be easily revoked if the relationship does not continue. In addition, a TOD Deed could be used for funding a revocable trust when lifetime transfers are problematic, such as property being marketed for sale, or property encumbered by a trust deed or other security instrument that prevents a current change of title.
  • When to Avoid a TOD Deed. The TOD Deed may be unsuitable for larger estates, particularly if the estate plan is complex and/or the transferor desires to provide for even fairly basic contingencies. For example, people with several children typically want to provide that grandchildren would take a parent’s share in the event the parent were to predecease the transferor – easily done with a will or trust. A TOD Deed cannot accomplish such contingency planning very effectively (at least as the law is currently drafted). Alternate beneficiaries take a share only if none of the primary beneficiaries survive the transferor. Also, a blended family may not be an appropriate situation for a TOD Deed given that the surviving spouse would still retain the ability to revoke or execute a new TOD Deed naming only his or her surviving children. Finally, when a transferor anticipates that the beneficiaries will want to sell the property quickly, a TOD Deed is not ideal. Under the TOD law, interested persons and creditors have 18 months in which to contest or make claims on property transferred by a TOD Deed. Such uncertainties make title insurance very difficult to obtain during the 18-month period, thus making the property equally difficult to sell. In contrast, a traditional probate or trust administration allows sale almost immediately.
  • Practical Points. Professional guidance is still important even if a TOD Deed seems to be a good fit, both to confirm that a TOD Deed does makes sense in the circumstances and to ensure that the actual language of the TOD Deed accomplishes the transferor’s wishes. There are many aspects of TOD Deeds that are unlike conventional deeds and beneficiary designations – making them tricky to draft. Beneficiaries of a TOD Deed must be identified by name – class gifts (such as “to my children”) are void. Similar to wills and trusts, if a transferor’s marriage is dissolved after the recording of the deed and the transferor’s spouse is named as beneficiary, all provisions in favor of the former spouse are revoked by law unless the deed specifically provides otherwise. On the other hand, an omitted spouse or child is not protected under the TOD Deed statute. A subsequent marriage or birth after the execution of a TOD Deed does not change the TOD designation. Further, when multiple concurrent interests are transferred to designated beneficiaries, the designated beneficiaries receive equal and undivided interests with no right of survivorship – there is no mechanism for providing different percentages of ownership among beneficiaries. A trust can be a beneficiary of a TOD Deed, but one should be careful to name a specific trustee along with the trust rather than simply “the XYZ trust” as the statute requires naming of specific persons rather than a class of persons. Keep in mind also that the title transferred by a TOD Deed is subject to all existing mortgages or others liens, so the transfer needs to be coordinated with other elements of an overall estate plan. Finally, note that a TOD Deed must be recorded prior to the transferor’s death in order to be effective.

In summary, TOD Deeds can be a useful tool, but must be used wisely. Given that real property is often the single largest portion of any decedent’s estate, TOD Deeds should be considered and drafted as carefully as a traditional will or trust.