https://www.actec.org/estate-planning/how-the-secure-act-may-impact-your-retirement-plan/

The SECURE Act (Setting Every Community Up for Retirement Enhancement), enacted in December 2019, changes how we do estate planning with retirement benefits. Check out this video to learn more about the IRA age distribution requirement, the impact to beneficiaries, changes to the “stretch” and individuals exempt from the limitation.

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

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.

Karnopp Petersen LLP is pleased to announce that Partner Erin Keys MacDonald was recently elected New Fellow of the American College of Trust and Estates Counsel (ACTEC).

ACTEC is an organization of peer-elected lawyers and law professors who are skilled and experienced in the preparation of wills and trusts, estate planning, and probate procedure; and administration of trusts and estates of decedents, minors, and incompetents.

MacDonald is one of 36 new Fellows elected to the counsel from across the United States, England, and Canada.

To qualify for membership, a lawyer must have no less than 10 years’ experience in the active practice of probate and trust law or estate planning. Lawyers and law professors are elected to be Fellows based on their outstanding reputation, exceptional skill, and substantial contributions to the field by lecturing, writing, teaching, and participating in bar leadership or legislative activities. It is their aim to improve and reform probate, trust and tax laws, procedures, and professional responsibility.

About her election to the counsel, MacDonald said, “I’m honored to be part of ACTEC, an organization with the highest caliber of members in the estate planning profession, and look forward to networking with the other Fellows, and continuing my educational and professional development to help me better serve my clients.”

MacDonald is a graduate of Lewis and Clark Law School and is a partner in the Trusts and Estates Department of Karnopp Petersen LLP. She regularly counsels clients in the areas of estate planning, probate and trust administration, tax planning and charitable giving.