Tax issues

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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Many of our clients choose to create revocable living trusts as their primary estate planning vehicle to state their wishes for the management of their assets during life and what will happen to the assets after their death. Creating a revocable living trust establishes a separate legal entity that owns the property that is funded into the trust. In general, trusts are subject to taxation as separate entities and as a result they need to have their own identification number for tax purposes. However, for a revocable living trust a separate tax identification number typically is not necessary during the grantor's ("trustmaker's") lifetime. Revocable living trusts are treated as what the IRS calls "grantor" trusts, which allows them to use the Social Security number of the creator or grantor of the trust.

The money you contribute to a traditional Individual Retirement Account is not counted as income in the year you contribute it. As a result, the contribution is put into the account without paying any tax. The government allows you to delay paying tax in order to encourage you to save for your retirement. After you reach the age of 70 1/2, the IRS requires you to begin taking minimum distributions from your traditional retirement accounts. Roth accounts are not subject to RMDs.

On November 2 2017, Republicans in the House of Representatives released their version of the tax reform bill, The Tax Cuts and Jobs Act (the "GOP Act").  The GOP Act in its current form is still subject to revision, even before it goes to a vote, and is only the beginning of what it sure to become a legislative battle involving not only Republicans and Democrats, but also special interest groups.

The GOP act as it currently stands is the first draft of what could be the most comprehensive tax code revision in decades. From an estate planning standpoint, the GOP Act seeks to repeal both the estate and generation-skipping tax taxes for decedents dying and generation-skipping transfers occurring after December 31, 2023, with higher exclusions in the interim until then. This likely will be the subject of a future blog post.

The Consumer Price Index was released by the Labor Department in August 2017. For most, the release of the Consumer Price Index goes unnoticed. However, this allows the experts to predict the 2018 estate tax exemption and gift tax exclusion amounts.