Estate Planning and the SECURE Act

On January 1, 2020, the “Setting Every Community Up for Retirement Act of 2019” (the “SECURE” Act) went into effect. This Act ushered in the first major retirement reform in over a decade. The Act makes substantial changes to the rules governing retirement accounts, including IRAs and 401(k)s, which affect account owners and beneficiaries of those accounts.

  • The age for Required Minimum Distributions is now age 72. Participants will no longer be required to withdraw assets from their retirement accounts at age 70 ½.
  • The Act eliminates the maximum age cap (70 ½) for traditional IRA contributions.
  • The Inherited “Stretch IRA” is eliminated. SECURE replaces the life expectancy payout with a 10 year payout (unless the beneficiary is a surviving spouse, a minor child, is disabled and chronically ill, or a beneficiary who is less than 10 years younger than the deceased participant).

Estate Planning and the SECURE Act: Many of our clients have designated their children as primary or contingent beneficiaries (after the death of their spouse) of their retirement accounts with the goal of “stretching” the IRA out over the lifetime of their children and providing children with a source of income. The new 10 year payout rule for Inherited IRA’s will accelerate the payout of the IRA and may push the beneficiary into a higher income tax bracket resulting in increased taxes.

In the past, we may have recommended to a client who was concerned about a beneficiary receiving an Inherited IRA outright upon their death (due to the age, disability or financial indiscretion of the beneficiary) to establish a trust and designate the trust as the beneficiary of their IRAs. However, our recommendations may now change since the SECURE Act requires a 10 year distribution period for trust beneficiaries. The Trustee is not required to pay out all of the IRA to the beneficiary within 10 years (unless mandated by the trust agreement), and the Trust may accumulate the IRA distributions in trust for the beneficiary, but the Trust will have to pay the income tax on the IRA distributions over the 10 year distribution period. The income tax bracket for trusts are compressed. Trusts are taxed at the highest marginal income tax rate (37%) once trust income exceeds $12,950. Thus, the Trust may pay out more in income taxes on the Inherited IRA distribution than if the IRA named an individual as a beneficiary.

If you have named a Trust as a beneficiary of your IRA or retirement account, or if are concerned about an individual beneficiary receiving an Inherited IRA on an accelerated basis over 10 years, please contact the firm to discuss your estate plan, trusts and options for your IRAs.

 

Connecticut/Massachusetts 2019 Year End Estate and Gift Tax Planning Update

State and Federal laws have significantly increased estate tax exemptions.  We recommend clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

NEW Connecticut Uniform Trust Code. In the past twenty years the use of trusts as Will substitutes, for tax planning and asset management has continued to grow around the country. To date, 35 states (including Massachusetts, Vermont, New Hampshire, Maine and Florida) have enacted various forms of the Uniform Trust Code (“UTC”). Connecticut’s version of the UTC goes  into  effect  January  1,  2020.   The  act  encompasses  four  major  changes to Connecticut trust law and significantly enhances the options for and administration of trusts in Connecticut.

  • Domestic Asset Protection Trusts are now permitted. Under specific circumstances one may transfer assets into a trust for their own benefit and those assets are not generally available to creditors of the trust creator (not available for Title XIX planning).
  • Directed Trusts are now permitted. A non-trustee may direct a trustee to act with regard to distributions, investment decisions and other matters. For example, a trust which owns a closely held corporation may have a management advisor who directs the operation of the business (rather than the institutional trustee).
  • The Rule Against Perpetuities has been modified to allow for trust duration of up to 800 years (for new trusts).
  • Codification of trust law. Probate courts have expanded jurisdiction over inter vivos trusts (such as revocable trusts). New provisions affect notice to beneficiaries, accountings, non-judicial settlement agreements, modifications and terminations of trusts.

Federal Estate and Gift Taxes. On January 1, 2020, the federal estate tax exemption will rise to $11.58M per person ($23.16M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate. If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to $3.5M.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.

Federal Gift Tax Annual Exclusion. The federal gift tax annual exclusion is $15,000 per recipient for 2019 and 2020. There is an unlimited gift tax marital deduction for U.S. citizen spouses. The annual exclusion for gifts to non-citizen spouses is $155,000 for 2019 and $157,000 for 2020.

Connecticut Estate and Gift Tax: Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).  The Connecticut estate and gift tax exemption rose to $3.6M in 2019 and will rise to $5.1M in 2020, $7.1M in 2021, $9.1M in 2022 and match the federal exemption in 2023 (currently $11.4M but indexed for inflation).  The federal exemption will revert back to $5.1M in 2026. The tax rate ranges from 7.8% to 12% with a cap on the maximum estate/gift tax of $15M.

Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person with tax rates ranging from 0.08% to 16%.

Update Your Estate Planning Documents: Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die. In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax which could result in an over-funded Family Trust and/or significant state estate tax. In newer plans, the funding formula may have been based upon the maximum state estate tax exemption. With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.

2018 Year End Estate and Gift Tax Planning Update

In the beginning of the year we alerted our clients to changes in the federal and state estate and gift tax laws.  As we approach the end of the year we want to remind you of year-end gifting opportunities as well as some state estate tax revisions enacted during the year.

We recommend that clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

Federal Estate and Gift Taxes.  On January 1, 2018, the federal estate tax exemption doubled to $11.2M per person ($22.4M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate.  If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to current levels.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.  The Act provides for regulations to be implemented to prevent the gifts which utilized the additional exemptions from being “clawed back” at death in the event the exemption sunsets (as it is scheduled to do in 2025).

Federal Gift Tax Annual Exclusion.  The federal gift tax annual exclusion is $15,000 per recipient for 2018 (increased from $14,000 due to an adjustment for inflation).  There is an unlimited gift tax marital deduction for U.S. citizen spouses.  The annual exclusion for gifts to non-citizen spouses is $152,000 for 2018.

State Estate and Gift Taxes.  States that impose their own estate tax will not be affected by the Act.  Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).

  • Connecticut Estate and Gift Tax: The Connecticut estate and gift tax exemption rose to $2.6M in 2018.  The exemption is scheduled to rise to $3.6M in 2019, $5.1M in 2020, $7.1M in 2021, $9.1M in 2022 and match the federal exemption in 2023 (currently $11.8M but indexed for inflation).  The federal exemption will revert back to $5.1M in 2026. In addition, beginning January 1, 2019, the cap on the maximum estate tax imposed on the estates of decedents dying on or after January 1, 2019, and the maximum gift tax imposed on taxable gifts made on or after January 1, 2019, will lower from $20M to $15M.
  • Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person.
  • New Jersey Estate and Inheritance Tax: Effective January 1, 2018, New Jersey eliminated its estate tax, but the inheritance tax remains in effect.  Transfers to spouses, children and grandchildren will remain inheritance tax-free, however, any transfers to a sibling, aunt/uncle, niece/nephew, friend, etc., would be subject to the inheritance tax.  Many professionals believe the estate tax may be re-introduced by a new legislature.
  • New York Estate Tax: The New York Estate Tax exemption is S5.25M for 2018.  In 2019 the New York estate tax exemption will be about $5.5M adjusted for inflation.  If your estate exceeds the exemption, then the entire estate is subject to the estate tax.

Update Your Estate Planning Documents:  Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die.  In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax.  The doubling of the federal estate tax exemption could result in significant state estate tax.  In newer plans, the funding formula may have been based upon the maximum state estate tax exemption.  With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.  Clients should contact the Firm to review and update their estate plans.

The Tax Cuts and Jobs Act is a Major Change to Estate Planning

The Tax Cuts and Jobs Act is a major change to estate planning.  We encourage you to contact the Firm to review and update your estate plan.  We recommend that clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

Federal Estate and Gift Taxes.  On January 1, 2018, the federal estate tax exemption doubled to $11.2M per person ($22.4M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate.  If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to current levels.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.  The Act provides for regulations to be implemented to prevent the gifts which utilized the additional exemptions from being “clawed back” at death in the event the exemption sunsets (as it is scheduled to do in 2025).

Federal Gift Tax Annual Exclusion.  The federal gift tax annual exclusion is $15,000 per recipient for 2018 (increased from $14,000 due to an adjustment for inflation).  There is an unlimited gift tax marital deduction for U.S. citizen spouses.  The annual exclusion for gifts to non-citizen spouses is $152,000 for 2018.

State Estate and Gift Taxes.  States that impose their own estate tax will not be affected by the Act.  Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).

  • Connecticut Estate and Gift Tax: The Connecticut estate and gift tax exemption rose to $2.6M in 2018.  The exemption is scheduled to rise to $3.6M in 2019 and then match the federal exemption in 2020.   In addition, beginning January 1, 2019, the cap on the maximum estate tax imposed on the estates of decedents dying on or after January 1, 2019, and the maximum gift tax imposed on taxable gifts made on or after January 1, 2019, will lower from $20M to $15M.
  • Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person.
  • New Jersey Estate and Inheritance Tax: Effective January 1, 2018, New Jersey eliminated its estate tax, but the inheritance tax remains in effect.  Transfers to spouses, children and grandchildren will remain inheritance tax-free, however, any transfers to a sibling, aunt/uncle, niece/nephew, friend, etc., would be subject to the inheritance tax.
  • New York Estate Tax: The New York Estate Tax exemption is $5.25M for 2018 and it is scheduled to match the federal exemption starting January 1, 2019.

Update Your Estate Planning Documents:  Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die.  In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax.  The doubling of the federal estate tax exemption could result in significant state estate tax.  In newer plans, the funding formula may have been based upon the maximum state estate tax exemption.  With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.  Clients should contact the Firm to review and update their estate plans.