What are Three Areas of Giving Not to Skip?

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It may be important to you that your family and the charities in which you believe, benefit from your success. Giving lets you practice your core values. However, for your giving to be meaningful, you need a plan to maximize your generosity.

Kiplinger’s recent article entitled “Gifting: 3 Areas You Shouldn’t Overlook” advises that there are many things to think about before gifting, and although there are benefits to estate planning, there are other issues to consider.

Think about your gifting goals. Any amount given to a family member, friend, or organization will no doubt be treasured, but ask yourself if the recipient really wants or values the gift, or it only satisfies your personal goals.

As far as giving to a charity, you should be certain that your donation is going to the right organization and will be used for your intended purpose. Your giving goals, objectives, and motivations should match the recipient’s best interests.

If gifting straight to a family member is not a goal for you now, but you want to engage your family in your giving strategy and decision making, there are several gifting vehicles you can employ, like annual gifts, estate plans, and trusts. Whichever one you elect to use, it will let you place an official process in the works for your strategy. Family engagement and a formalized structure can help your gift make the greatest impact.

There is more to gifting than just determining who and how much. It’s critical to be educated on the numbers, in order to maximize your gift value and decrease your tax exposure.

You can now gift up to $11.58 million to others ($23.16 million for a married couple) while alive, without any federal gift taxes. The amount of gift tax exemption used during your life also decreases your federal estate tax exemption. You should also be aware that this amount will fall back to $5 million (and $10 million for a married couple) indexed for inflation after 2025, unless renewed.

If you transfer your wealth to heirs and beneficiaries early and letting it compound over time, you can avoid significant estate taxes. In addition, note the annual gift exemption because, with it, you can gift up to $15,000 ($30,000 as a married couple) to anyone or any kind of trust every year without taxes.

An experienced estate planning attorney can help you create a giving strategy to achieve success for you and those you are benefiting.

Reference: Kiplinger (March 19, 2020) “Gifting: 3 Areas You Shouldn’t Overlook”

Should I Use My 401(k) Now in the Pandemic?

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Many Americans are struggling with what to do with their retirement savings, as we endure the COVID-19 pandemic. Many don’t know if they should stand pat or cash in their savings.

The new CARES Act makes it easier for us to tap our 401(k) and retirement accounts. However, there may be significant long-term effects for your financial security.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress signed into law by President Trump on March 27. The law provides more than $2 trillion in economic relief to protect the American people from the public health and economic impacts of COVID-19. The Act provides fast and direct economic assistance for American workers, families, and small businesses, as well as preserving jobs for American industries.

CNBC’s recent article entitled “Tapping Your 401(k): Is now the right time to do it?” says that if you need emergency cash, and your 401(k) is your only source of funds in this pandemic, taking a short-term loan from your retirement account as a “last resort” may be a wise option.

While you will be repaying yourself rather than paying 11% interest on average on a personal loan, know that you’re borrowing from your financial future and possibly risking your financial security in retirement.

The CARES Act lets you borrow up to $100,000 (double the previous loan limit of $50,000) from your 401(k) and delay repayment for up to a year. After you borrow, you’ll typically have to repay the loan within five years, depending on the terms of your 401(k) plan. Under the CARES Act, loan payments due in 2020 can be delayed for up to a year from the time you take out the loan. However, if you can’t pay back the loan within the time frame designated by your plan, your outstanding balance will be taxed like a withdrawal. That means you’ll also pay a 10% early withdrawal penalty.

If you leave your job — regardless of whether by choice — there’s a good chance your plan will require you to repay the money back quickly. If you don’t, your account balance will be decreased by the amount owed and considered a taxable distribution. This choice must factor in the length of time before you need your money, your ability to save, and your comfort level with risk.

You can also take a penalty-free distribution from your IRA or 401(k) of up to 100% of your balance or $100,000, whichever is less. You aren’t required to pay the 10% early withdrawal penalty, if you’re under age 59½ and you can pay taxes on the money you take out over a period of three years or pay no tax, if you pay it all back. However, your employer must agree to adopt these new rules for your existing 401(k) plan.

Reference: CNBC (April 20, 2020) “Tapping Your 401(k): Is now the right time to do it?”

What’s the Difference between Revocable and Irrevocable Trusts?

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A trust is an estate planning tool that you might discuss with an experienced estate planning attorney, beyond drafting a last will and testament.

KAKE.com’s recent article entitled “Revocable vs. Irrevocable Trusts” explains that a living trust can be revocable or irrevocable.

You can act as your own trustee or designate another person. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. These are the people you name to benefit from the trust.

There are three main benefits to including a trust as part of an estate plan.

  1. Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs both time and money.
  2. Creditor protection. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts.
  3. Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate and inheritance taxes, preserving more of your wealth for future generations.

What’s the Difference Between Revocable and Irrevocable Trusts?

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.

An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That’s a big difference from a revocable trust: flexibility.

Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.

Reference: KAKE.com (March 31, 2020) “Revocable vs. Irrevocable Trusts”

IRS Postpones Gift and GST Tax Deadline to July 15

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The IRS has expanded the list of deadline extensions for federal taxes and tax returns to include gift and generation-skipping transfer (GST) tax returns. An earlier notice had applied only to federal income tax returns and payments (including self-employment tax payments) due April 15, 2020, for 2019 tax years, and to estimated income tax payments due April 15, 2020, for 2020 tax years.

Notice 2020-20 updates earlier guidance to include the gift and GST deadline extensions.

What Are Gift and GST Taxes?

Gift Taxes. The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion, currently $15,000 per person. You can give away the amount of the exclusion each year without incurring a tax. The giver is responsible for paying this tax, not the recipient.

GST Taxes. The generation-skipping transfer (GST) tax can be incurred when grandparents directly transfer money or property to their grandchildren without first leaving it to their parents. These types of transfers share the same lifetime exemption as the federal estate and gift taxes, and are also subject to an annual exclusion limit of $15,000 per person.

Resource: Financial Planning, IRS postpones deadline for gift and GST taxes due to coronavirus, https://www.financial-planning.com/news/irs-offers-relief-on-gift-and-generation-skipping-transfer-taxes-due-to-coronavirus

C19 UPDATE: Delay Payroll Taxes OR Get Paycheck Protection?

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These are tough times for everyone, but if you are a business owner you have a few more tough decisions to make right now regarding payroll taxes and paycheck protection.

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which passed on March 27, authorized a number of relief and aid programs for individuals and businesses. But figuring out how to move forward with applications and quickly getting needed relief is not easy.

Case in point – the CARES Act authorizes businesses to defer paying the employer contribution of payroll taxes (approximately 7 percent of payroll) through the end of this year with what is essentially a short-term, interest-free loan. This money must eventually be paid. Half is due on December 31st, 2021, and the other half on December 31st, 2022. While this sounds good and allows businesses to hang on to some cash during these difficult times, there is another program that may be more helpful … and you cannot use both. In other words, these offers cannot be combined.

The Paycheck Protection Program, also authorized in the CARES Act, allows small businesses to apply for a loan that can be partially or completely forgiven. The loan can be up to 2.5 times your average monthly payroll and associated costs.  The loan amount will be based upon 2019 expenses for wages paid by your business (up to $100,000 per employee), costs for retirement plans, health insurance, self-employment earnings (again capped at $100,000/year), and state or local taxes imposed on wages. There have been some concerns over the funding running out, but Congress has take additional action to increase the funding of this program, so contact your banks for more information.

Resource: COVID-19 Emergency Legislation Offers Substantial Relief to Employers (CARES Act), https://www.adp.com/spark/articles/2020/03/covid-19-emergency-legislation-offers-substantial-relief-to-employers.aspx and US Department of the Treasury, Assistance for Small Businesses, https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

The High Cost of Medicare Mistakes

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A 68-year-old woman knew that she had to sign up at age 65 for Medicare Part A for hospital care and Part B for outpatient care, since she did not have employer-provided health insurance from an employer with 20 or more employees. She knew also that if she did not have health insurance from an employer and didn’t sign up immediately, she’d face a penalty with higher Part B and Part D premiums for the rest of her life when eventually she did sign up, reports Forbes in the article “Beware Medicare’s Part B Premium Penalty And Surcharge Traps.”

Here’s where it got sticky: she thought that Medicare provided an eight-month special enrollment period after one job ended to apply penalty-free. She is employed on a sporadic basis, so she thought she had a window of time. Between the ages of 65 and 68, she had several jobs with large employers and was never out of work for more than eight months.

She was out of work for 25 months total between ages 65 and 68, when she was not enrolled in Medicare. She thought that since she was never out of work for more than eight months, she didn’t have to sign up until she officially stopped working and would then enroll penalty-free in traditional Medicare Parts A, B, and D.

She had read information on the Medicare website and her interpretation of the information was wrong. It was a costly mistake.

In determining whether you need to permanently pay a Medicare Part B penalty, Medicare counts up all the months between age 65 and the month you first enroll in Part B, even if you have a job with a large employer with no gaps in employment for more than eight months.

She got hit with a 20% lifetime Medicare Part B premium penalty. For every 12 months that you’re not covered by Medicare B after reaching 65 and before you enroll, the penalty is an additional 10%. And making things worse, she was hit with a Medicare Part B penalty based on the cumulative (not consecutive, which is an important difference) 25 months that she went without credible prescription drug coverage.

This is the sort of problem that does not self-resolve or get better over time. In this case, another mistake in timing is going to hurt her. She sold some assets and realized a capital gain in 2018, which increased her Modified Adjusted Gross Income (MAGI). In 2020, she’s going to have to pay the Income Related Monthly Adjustment Amount (IRMAA). If your MAGI, two years before the current year, is less than $87,000, you are exempt from IRMAA in the current year. Her cost: $1,735.20 more this year. Had she instead realized those capital gains over the course of several years, her 2018 MAGI might not have crossed the $87,000 threshold. Most people are not aware of the IRMAA and take capital gains in larger amounts than they need.

This is a harsh lesson to learn, at a time in life when there’s not a lot of flexibility or time to catch up. Talking with an estate planning lawyer about Medicare and about tax planning, as well as having an estate plan created, would have spared this woman, and countless others, from the harsh consequences of her mistakes.

Reference: Forbes (Jan. 29, 2020) “Beware Medicare’s Part B Premium Penalty And Surcharge Traps”

Employers Now May Help Employees with Tax-Free Direct Disaster Relief Assistance

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As the coronavirus pandemic emergency unfolds, it’s clear that increasing numbers of employees will likely suffer financial impacts … from quarantines, illnesses, workplace closings, etc. President Trump’s declaration of a national emergency on March 13 now allows employers to make direct disaster-relief payments to assist employees affected by the virus.

These types of payments are not treated as income/wages to the employees and are deductible to the employer as ordinary and necessary business expenses. There is no specific cap on the amount of assistance that may be provided to an employee other than it must be “reasonable and necessary” and must not be for an expense reimbursable by the employee’s insurance.

Section 139 of the Internal Revenue Code, allows that a “qualified disaster relief payment” of any amount may be paid to reimburse or pay reasonable and necessary personal, family, living or funeral expenses (not otherwise compensated for by insurance) incurred because of a “qualified disaster.” The term “qualified disaster” includes a federally declared disaster or emergency under the Stafford Act. Accordingly, due to the Declaration, Coronavirus is now a “qualified disaster” for Section 139 purposes, so disaster relief may be provided to employees on a tax-free basis (assuming all the requirements of Section 139 are satisfied).

As always check with your CPA or attorney before implementing any tax planning strategy for your business.

Read more at The National Review, Coronavirus National Emergency Declaration Permits Employers to Offer Tax-Favored Financial Assistance to Employees, March 14, 2020

How Does the SECURE Act Change Your Estate Plan?

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The SECURE Act has made big changes to how IRA distributions are passed on after a participant’s death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need to be taken.

Some of the changes include reviewing wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive. Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.

It may be necessary to rethink and possibly completely restructure the planning for IRA accounts. This may mean changing the beneficiary of an account to a charity, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.

Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.

The biggest change in the SECURE Act being examined by many estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One reason why Congress enacted this law was to generate tax revenues that would become collectible far sooner. In the past, the ability to stretch an IRA out over many years, even decades, allowed individuals to pass their tax deferral on significant IRA growth to their family members, which meant that tax revenue due from the assets’ growth could not be collected.

Another interesting change is that there are now no periodic mandatory withdrawals when an IRA is inherited. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid. Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, and disabled heirs. Minor children are also considered eligible beneficiaries during the time that they are minors (as defined by the tax code), but when they reach the age of majority, the ten-year distribution rule then applies to them. For example, a child who has reached the age of majority at 18 must take all assets from the IRA by the time they are 28 and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

Will My Heirs Pay Inheritance Tax?

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Will My Heirs Pay Inheritance Tax?
Tax return check on 1040 form background

U.S. News & World Report explains in its article, “What Is Inheritance Tax?” that estate taxes and inheritance taxes are often mentioned as if they’re the same thing. However, they’re really very different in concept and practice.

Remember that not every estate is required to pay estate taxes, and not every heir will pay inheritance tax. Let’s discuss how to determine whether these taxes impact you.

Inheritance is considered to be taxable to heirs. Whether heirs need to pay this is based upon the state in which the deceased lived and the heirs’ relationship to the benefactor.

Inheritance tax is a tax imposed by the state on a portion of the value of a deceased person’s estate that is paid by the inheritor of the estate. There is no federal inheritance tax. Currently, there are only six states that impose an inheritance tax, according to the American College of Trust and Estate Counsel. The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Inheritance tax laws and exemption amounts are different in each of these six states. In Pennsylvania, there’s no inheritance tax charged to a surviving spouse, a son or daughter age 21 or younger and certain charitable and exempt organizations. Otherwise, the inheritance tax is charged on a tiered system. Direct descendants and lineal heirs pay 4.5%, siblings pay 12% and other heirs pay a hefty 15%.

Whether inheritance tax applies is determined by the state in which the deceased lived. Estate taxes are deducted from the deceased’s estate after death and aren’t the responsibility of the heirs. Some states also charge their own estate taxes on assets more than a certain value. The states that charge their own estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and Washington, D.C.

Decreasing estate taxes are the responsibility of the deceased prior to his or her death. They should work with an estate planning attorney to map out strategies that can lessen or eliminate estate taxes for certain assets.

Remember that inheritance taxes are state taxes. They are imposed by only six states and are the responsibility of the heirs of the estate, even if they live in another state. In contrast, estate taxes are federal and state taxes. The federal estate tax is a 40% tax on assets more than $11.58 million for 2020 ($23.16 million for married couples). This is charged, regardless of where you live. Some states have additional estate taxes with their own thresholds.

Inheritance taxes are paid by the heirs, and estate taxes are paid by the estate. An estate planning attorney can help to find ways to reduce taxes and transfer money efficiently.

Reference: U.S. News & World Report (October 8, 2019) “What Is Inheritance Tax?”

How Will the New SECURE Act Impact My IRAs and 401(k)?

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The SECURE Act is the most substantial change to our retirement savings system in over a decade, says Covering Katy (TX) News’ recent article entitled “Laws Change for IRA and 401K Retirement Savings Plans.” The new law, called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, includes several important changes. Let’s take a look at them.

Increased RMD Age. There is now a higher age for RMDs. The old law said that you must start taking withdrawals or required minimum distributions from your traditional IRA and 401(k) or similar employer-sponsored plan when you turn 70½. The new law delays this to age 72, so you can hold on to your retirement savings a while longer.

No age limit for contributions to traditional IRAs. Before the new law, you could only contribute to your traditional IRA until you were 70½. Under the new SECURE Act, you can now fund your traditional IRA for as long as you have taxable earned income.

Stretch IRA Limitations. Previously, beneficiaries could stretch taxable distributions from an inherited retirement account over his or her lifetime. Under the SECURE Act, spouse beneficiaries can still take advantage of this “stretch” distribution, but most non-spouse beneficiaries will have to take out the entire balance of the IRA by the end of the 10th year after the account owner dies. Therefore, non-spouse beneficiaries who inherit an IRA or other retirement plans could have significant income tax consequences due to the larger distributions that must be received within a shorter amount of time.

Exception to early withdrawal penalty for a new child. As a general rule, a plan participant must pay a 10% penalty when funds are withdrawn from IRA or 401(k) accounts prior to 59½. However, the new legislation allows you take out up to $5,000 from your retirement plan without paying the early withdrawal penalty if it is taken out for the costs of a new child, and the money is taken out within a year of a child being born or if an adoption becomes final.

There are provisions of the SECURE Act that primarily impact business owners, which include the following:

New multi-employer retirement plans. The new law allows unrelated companies to coordinate to offer employees a 401(k) plan with less administrative work, lower costs and fewer fiduciary responsibilities than individual employers used to have when offering their own retirement plans.

Tax credit for automatic enrollment. There’s now a tax credit of $500 for some small businesses that create automatic enrollment in their retirement plans. A tax credit for establishing a retirement plan has also been increased from $500 to $5,000.

Annuities in 401(k) plans. The Act makes it easier for employers to add annuities as an investment option within 401(k) plans. Before the SECURE Act, businesses avoided annuities in these plans because of the liability related to the annuity provider. However, the new rules should help decrease any concerns.

Talk to an experienced estate planning attorney to examine the potential impact on your investment strategies and determine any possible tax and estate planning implications of the SECURE Act.

Reference: Covering Katy (TX) News “Laws Change for IRA and 401K Retirement Savings Plans”