Current Gift and Estate Tax Exemption

  • 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. 

 

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. 

 

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

It’s a new day for Oregon employers… and nursing moms! As of September 29, 2019, House Bill 2593 became effective, calling on every employer to provide nursing mothers with a reasonable (generally unpaid) rest period to express milk.  And those breaks must be provided each time the employee has a need to express milk.

The head of KP’s employment law department, Kurt Barker, recently covered this new law and much more in front of a record-setting crowd for HRACO (Human Resources Association of Central Oregon).

Here are two slides from Kurt’s September 18 HRACO legal update about all the new laws rolling in over the next year:

2019 Oregon Legislation Key Dates

New Laws Impact Oregon Employers

It’s a new day for Oregon employers… and nursing moms! As of September 29, 2019, House Bill 2593 became effective, calling on every employer to provide nursing mothers with a reasonable (generally unpaid) rest period to express milk.  And those breaks must be provided each time the employee has a need to express milk.

The head of KP’s employment law department, Kurt Barker, recently covered this new law and much more in front of a record-setting crowd for HRACO (Human Resources Association of Central Oregon).

Here are two slides from Kurt’s September 18 HRACO legal update about all the new laws rolling in over the next year:

2019 Oregon Legislation Key DatesHRAC Key Notice Requirements

Contact Kurt Barker for more information on these new laws and key 2019 Oregon Legislation dates.

 

Oregon’s 79th Legislative Assembly wrapped up its 2018 session early, on March 3 (before the Constitutionally-required sine die on March 11).  The session produced few laws that will have a direct impact on employers, managers or human resource professionals.  Here are the few that made the transition into law:

HB 4154:  Makes contractor liable for unpaid wages, including benefit payments or contributions, of employee of subcontractor at any tier. Permits a joint labor management committee and certain third parties to bring action on behalf of wage claimant against contractor.  PASSED in amended form

SB 1559:  Directs state agencies to establish procedures for employees to anonymously disclose certain information.  Expands reporting channels and protection for whistleblowing by public employees.  PASSED in amended form.

It also could be of interest that some gun-related legislation was passed, and signed on March 5 by Governor Kate Brown.  That new law expands the prohibition of gun ownership to include people convicted of domestic violence against non-married intimate partners (closing the so-called “boyfriend loophole”), and blocks people convicted of misdemeanor stalking from owning a gun.

 

Thanks for staying tuned.  Watch for more posts from our employment law team!

 

Kurt Barker, Jon Napier, and Ben Eckstein

The Oregon Legislature is now halfway through its 2018 session.  This even-year session may be a short one, but its agenda is jam-packed with bills that could impact employers across the state.

Topping most news reports is HJR 203, a bill that would amend the Oregon Constitution by declaring health care is a “fundamental right.”  The bill does not specifically target employers, but critics have emphasized that its financial impacts and funding sources are unclear.  It passed in the House last week, and is headed for a work session in the Senate later this month.  If approved by the Senate, it will appear on the Nov. 2018 ballot.

Here are some other bills under consideration that will impact Oregon employers:

  • HB 4160:  Creates family and medical leave insurance program to provide employee who is eligible for coverage with portion of wages while employee is on family medical leave or military leave. The program is funded by equal contributions by employees and employers not to exceed .5% of an employee’s wages, and would allow employees to take up to 12 weeks of leave per year for specified reasons.

 

  • HB 4154:  Makes contractor liable for unpaid wages, including benefit payments or contributions, of employee of subcontractor at any tier. Permits a joint labor management committee and certain third parties to bring action on behalf of wage claimant against contractor.

 

  • HB 4105:  Imposes penalty on employers with 50+ employees that offer health insurance coverage to employees but have employees working at least 30 hours/week who receive benefits of medical assistance program. Prohibits retaliation against an employee for participating in medical assistance program.

 

  • HB 4021:  Allows certain employers to permit employees to work more than 60 hours in one workweek to cover for employee absences. (This bill relates primarily to mill, factory, and other manufacturing establishments, and their particular limits on employee hours.)

 

  • SB 1559:  Directs state agencies to establish procedure for employees to anonymously disclose certain information. Expands reporting channels and protection for whistleblowing by public employees.  (More news coverage is here.)

 

  • SB 1524:  Prohibits union security agreements between public employer and union. Allows public employees to opt out of union membership and bargain employment terms and conditions separate from collective bargaining agreement.

 

Karnopp Petersen’s employment law team will report more after the session wraps in mid-March.  Stay tuned to see if any of these bills become law!

 

Kurt Barker, Ben Eckstein

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.