Tax issues

With the tax filing season having started on February 12, 2021, for individual tax return filers, here is a reminder to all filers that, in 2015, Congress enacted the Taxpayer Bill of Rights in Section 7803(a)(3) of the Internal Revenue Code to ensure that all taxpayers have rights in dealing with the IRS. Here is the link to the full description of these rights as set forth on the IRS website: www.irs.gov/taxpayer-bill-of-rights  

As codified, these rights are as follows: 

The Internal Revenue Service announced at the end of October the official estate and gift tax limits for 2021: The estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield $23.

The 2020 election is almost upon us. The past has taught us that trying to predict the results of an election are futile at best. Still, estate planning clients need timely counsel as to how the election may impact their financial futures. Estate planning attorneys strive to help clients stay informed and suggest opportunities for clients to respond to changes. While we do not know exactly what the future holds, we do have strong clues as to what the tax laws may look like if the balance of power shifts in 2021 from Republican to Democrat hands.

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The Act became effective on January 1, 2020 and impacts retirement accounts. Among other things, the Act increases the start date for required minimum distributions (RMDs) from 70 ½ years of age to 72 years of age, eliminates the contribution age limit for qualified accounts, and allows penalty-free withdrawals of $5,000 for the birth or adoption of a new child. One of the more  significant and key provisions of the Act changes the way designated beneficiaries receive the funds after the account owner has died. 

In the past, designated beneficiaries had the opportunity to “stretch the account” – taking distributions over their individual life expectancy.
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A 529 plan, otherwise known as a qualified tuition plan, is a tax-sheltered way of saving for education. 529 plans are sponsored by states, state agencies, or educational institutions, and offer several estate planning benefits.

Distributions from the 529 plan, if used for the beneficiary’s qualified education expenses, including tuition, fees, books, supplies, equipment, and a limited amount of room and board, for students at colleges, junior colleges, technical schools, and even, with limitations, primary and secondary schools, are income tax-free.

Even though you can change beneficiaries or get your money back, 529 plan contributions are considered “completed gifts” for federal gift tax purposes.  As such, they are eligible for gift tax annual exclusion, currently $15,000 per year per person, $30,000 for married couples, for any number of recipients.
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Many kinds of trusts are used in estate planning.  Trusts can be revocable or irrevocable, and their primary purpose may be to provide for such things as a means for planning for incapacity or disability, minimizing or eliminating estate tax, promoting a charitable purpose, or even avoiding probate, to name a few.  They can be set up for the use and benefit of the creator of the trust or for other individuals. The creator of a trust is known as the grantor.  The person or a member of the class of people for whom the trust assets  are intended to benefit is known as the beneficiary (which could be or include the grantor), and the person or entity that manages the trust is the trustee.
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On June 21, 2019, the US Supreme Court ruled in North Carolina Department of Revenue v. Kaestner 1992 Family Trust that the presence of in-state beneficiaries alone does not permit a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have (1) no right to demand the income and (2) no guarantee that they would eventually receive the income from the trust. 

In 1992, Joseph Lee Rice III created a trust for the benefit of his children. The trust was to be governed by New York law (Rice’s home state), with the initial trustee residing in New York and the trust custodians residing in Massachusetts. The original trust provided that the trustee would have “absolute discretion” to distribute the assets to the beneficiaries “in such amounts and proportions” as the trustee might “from time to time” decide.
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This is a written summary of the availability of “portability” under the federal estate tax laws.  

“Portability” refers to the process of transferring a deceased spouse’s unused federal estate tax exclusion or exemption to the surviving spouse.  This allows the surviving spouse to add the deceased spouse’s unused exclusion to their own personal federal estate tax exclusion thus allowing the surviving spouse to increase the amount they can transfer on their death, without incurring federal estate tax.

Currently, the federal estate tax rate is 40%.  As a general rule, all assets a person owns at the time of their death are subject to federal estate tax.
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