The Wiewel Law Firm

Will Your Estate Plan Work Now?

“Under the new law, not only must all of the tax on IRAs and plans benefits be paid much earlier than it was before, but the rate will likely be much higher too, since that income will be bundled into the recipients’ peak earning years.”

The demise of the stretch IRA is causing many IRA owners and their advisors to take a look at how their estate plans will work under the new law. An article from Financial Advisor titled “Navigating The New Estate Planning Realities” offers several different planning alternatives.

Take larger IRA distributions during your lifetime. If possible, take the IRA distributions and reinvest them in a Roth IRA or other assets that will receive a stepped-up income tax basis on the death of the account owner. The idea is to take out significant additional penalty-free amounts from IRAs during your lifetime, so you will hopefully be taxed at a lower rate than you would be otherwise, with the net after-tax funds then reinvested in either a Roth IRA or other assets that will receive a stepped-up income tax basis when you die.

Paying all or part of the IRA portion of the estate to lower-income tax bracket beneficiaries. The theory here is that if we have to learn to live with the new tax law, at least we can attempt to minimize the tax pain by doing estate planning with a focus on tax planning. If a person has four children, two in high-income tax brackets and two who are in lower tax brackets, leave the IRA portion of the assets to the children in the lower tax brackets and assets with a stepped-up basis to the higher earners.

Withdrawing additional funds early and using the after-tax amount to purchase income-tax-free life or long-term care insurance. Rather than withdrawing all of the IRA funds early, freeze the current value of the IRA, by withdrawing only the account growth or the RMD portion, whichever is greater. Note that this won’t work if the withdrawals push the person’s income into the next higher tax bracket. All or a portion of the after-tax withdrawals then go into an income-tax-free life insurance policy, including second-to-die life insurance that pays only upon the death of both spouses.

Paying IRA benefits to an income tax-exempt charitable remainder trust. This involves designating an income-tax exempt charitable remainder trust as the beneficiary of the IRA proceeds. Let’s say a $100,000 IRA is made payable to a charitable remainder unitrust that pays three adult children or their survivors 7.5% of the value of the trust corpus (determined annually) each year, until the last child dies. Assume this occurs over the course of 30 years, and that the trust grows at the same 7.5% rate for the next twenty years. The children would net nearly $400,000. Note that the principal of the trust may not be accessed, until it’s paid out to the children, according to the designated schedule.

Every situation is different, so it is important to sit down with your estate planning attorney and review your entire estate, tax liabilities under the new law and how different scenarios will work to both minimize taxes during your lifetime and for your heirs. It’s possible that your situation benefits from a combination of all four strategies.

Reference: Financial Advisor (Feb. 11, 2020) “Navigating The New Estate Planning Realities,”

Alternatives for Stretch IRA Strategies

“The elimination of the Stretch IRA is a game changer, especially for parents who were considering bequeathing savings in IRAs to their children.”

The majority of many people’s wealth is in their IRAs, that is saved from a lifetime of work. Their goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the state as well.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

Common Retiree Mistakes You Can Avoid

“Retirees preparing to file their taxes for this year should be aware of a number of common pitfalls, often-overlooked deductions and changes that stem from the tax overhaul two years ago.”

Did you know that there is a new federal income-tax form for seniors designed to make filing taxes easier this year, especially for those who don’t file electronically? It offers a larger font for easier reading and includes a chart designed to help taxpayers calculate their standard deduction. However, that’s not all that has changed. The Tax Cuts and Jobs Act of 2017 (TCJA) has made for many changes that are often overlooked, reports Barron’s in the article “Retiree Taxes: Pitfalls, Overlooked Deductions, Social Security Withholding”

People who turn 70½ in 2019 may take their required minimum distribution as late as April 1, 2020.  However, they must take their 2020 distribution by December 31, 2020, and a double distribution in one year may bump them into another tax bracket. Start planning now for your 2020 distributions. Here are more tips for the coming tax year.

Standard Deduction. Many itemized deductions from 2018-2025 have been eliminated or restricted, and the standard-deduction thresholds were raised. For many taxpayers, itemizing deductions simply doesn’t pay, especially for anyone who has paid off their mortgage and can’t include interest in their deductions. However, there is a way for seniors to benefit from charitable distributions. Those 70½ or older can donate up to $100,000 from their IRAs or Roth IRA directly to a charitable organization and that donation is not counted as taxable income. Note that the contribution must come directly from the custodian on the taxpayer’s behalf.

Medical Expenses. The threshold for medical expenses in tax year 2019 will revert to the prior level, after it was lowered in 2017 and 2018 by the new tax law. For 2019, taxpayers can deduct unreimbursed medical-care expenses that exceed 10% of their adjusted gross income—their taxable income minus any adjustments to include such as deductions, contributions to Health Savings Accounts, or contributions to traditional IRAs, among others.

Social Security Benefits Taxes. Whether Social Security benefits are taxable or not depends on the filer’s income level. If the person’s combined income—their adjusted gross income plus any tax-exempt interest plus half of their Social Security benefit—is more than $25,000 for those filing single, head of household or a qualifying widow or widower with a dependent child, or more than $32,000 for joint filer, their benefits will be taxed.

It may be too late for tax year 2019, but taxpayers can avoid a tax surprise in 2020, by having federal income taxes withheld from Social Security benefits using IRS Form W-4V or from their pension using form W-4P.

Reference: Barron’s (November 2, 2019) “Retiree Taxes: Pitfalls, Overlooked Deductions, Social Security Withholding”

What Is Best Way to Leave Assets to Charity?

There are good ways and bad ways to give to charities. It often depends on the charity.

People often decide to leave some or all of their assets to charity.  However, the best way to find out how to give to any specific charity is to talk to that charity, according to Mountain Xpress in "Local nonprofits work with donors for planned giving."

Many charities have specific language they like donors to use, when giving gifts in their wills or trusts. This helps the charity know how they can use the gifts legally. Donors can also benefit from this, since the charity might have different funds set up for its different charitable activities. Donors can direct that their gifts be used for the specific funds they choose to support.

Some charities even offer “benefits” now to people who promise to make a gift to the charity after they pass away. However, if you do not let the charity know about your plans, then you cannot get those benefits.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include leaving something behind for charity.

Reference: Mountain Xpress (May 12, 2018) "Local nonprofits work with donors for planned giving."

Dispute over John Adams' Trust?

Charitable trusts can continue for as long as there are assets in the trust and the trust is still able to carry out its mission. A trust created by President John Adams is still operating and there might be a dispute over control of it.

In 1822 John Adams created a trust to benefit the schoolchildren of Quincy, Massachusetts, his hometown. In the 1950s, by court decision the sole beneficiary of the trust became a private school in Quincy, The Woodward School for Girls.

For many years the city of Quincy managed the trust as trustee. However, in 2011, a probate court removed the city for mismanagement.

So far, the city has paid $1 million in damages to the trust and the school.

A trial is set to determine how much more the city owes.

Recently, a lawyer representing a descendent of Adams sent a letter to the current trustee demanding that control of the trust be returned to the Adams family.

Why?

Because Adams did not intend that the trust be used for the benefit of a school such as Woodward that accepts students from outside of the city of Quincy.

However, as of now, no court action has been taken on the demand.

The Patriot Ledger reported on the story in an article titled "No action from John Adams family over embattled trust."

When creating a charitable trust, it is almost impossible to know what the circumstances will be nearly two centuries later.

Nevertheless, it is important to think about what might happen and to plan how rigid or flexible you want the trust to be when adapting to changing circumstances.

Before he became a revolutionary and President, Adams was a well-known trial attorney so he might not have minded litigation over his trust 200 years later. On the other hand, most people would probably prefer that their trusts stay out of the courts.

When creating your charitable legacy, be sure to work with an experienced estate planning attorney who can help you think through these issues.

Reference: Patriot Ledger (May 13, 2015) "No action from John Adams family over embattled trust."

Charitable Giving Ideas

You don't have to be rich to set up the equivalent of a charitable foundation — one that can continue making donations even after your death. "Jonathan" was a successful corporate manager who received a big payday when a major firm acquired the company he worked for. With no children of his own, he’d arranged for most of his wealth to be divided between two favorite charities: a local boys club and an organization that helped homeless people train for work and find jobs. Life had been good to Jonathan, and he wanted to give back.

A recent Timearticle, titled "Give to Charity Like Bill Gates…Without Being Bill Gates,"describes the concerns of Jonathan, as recently there had been some management changes at the charity. Consequently, Jonathan was not confident that his gift would be well used. He was considering taking them out of his trust.

Leaving an ongoing charitable legacy is not just for the wealthy. You do not need to be Bill and Melinda Gates with a foundation that gave away $3.6 billion last year. Foundations offer trustees greater control over investing and distribution of gifts, but they can be expensive to create and maintain, with strict compliance rules.

However, one idea from the original article is to amend your trust, so that upon your death your funds go to a DAF—a donor-advised fund — a type of investment that manages contributions made by individual donors. Jonathan had not thought about donating all his wealth to a DAF after his death. With a DAF, he could map out a lasting legacy of continued giving beyond his own life. Also, since there is no organization named in the trust documents, you can change your mind about what charities you want to benefit.

DAFs are a simple and relatively low cost alternative with a built-in advisory board which makes them an ideal instrument for securing a financial legacy. Unlike foundations, there is no cost to create, and there are some tax advantages. The IRS allows greater tax deduction for gifts of cash, stock, or property to a donor-advised fund, compared to a foundation. Foundations must give away 5% of their assets annually; there are no distribution requirements for DAFs.

The original article explains that all DAFs have a board of directors, and many are willing to maintain the gifting goals of a donor after their death and insure that the recipient charities are eligible for annual grants. You have many options, and DAFs come in a variety of shapes and sizes. Independent brokerage firms have their own funds with minimum initial contributions typically as low as $5,000.

You can easily find a suitable home for your estate and leave a lasting legacy with the help of an estate planning attorney. Make an appointment today.

Reference: Time (Oct. 14, 2014) "Give to Charity Like Bill Gates…Without Being Bill Gates"

How Long Can Will Litigation Continue?

Litigation over most wills does not continue for a very long time as courts want to have everything settled as quickly as possible. However, there are some wills that can be litigated for years, including one in Pennsylvania that a judge recently called the most litigated will in history.

Stephen Girard passed away in 1831. In his will, Girard created a trust that was to be used to create a school, Girard College. Litigation over the provisions of this will and trust has been brought several times over the years. Recently a judge made yet another ruling in the matter.

Most of the litigation has been over expanding the scope of the school. Originally, it was supposed to be a residential school for orphan boys. Over the years, the courts have allowed that scope to expand to include minorities, female students and children with one living parent. A recent post in The Elder Law Prof Blog, titled "The Latest Ruling on 'The Most Litigated Will in History," has the story of the latest litigation over Girard's estate. This time the trustees wanted to change the trust to allow the school to offer classes to high school students and to do away with the residence hall. The court ruled that it would not allow that.

Obviously, Girard's will is unusual. Most trusts end long before litigation can continue for almost 200 years. However, charitable trusts are different. They can see ongoing litigation over the terms of the gift as circumstances change. When that happens, courts have to decide what to do.

Reference: Elder Law Prof Blog (August 28, 2014) "The Latest Ruling on 'The Most Litigated Will in History"

Give 'Til It Hurts?

Charitable gifts can help many people. Of course, they help the beneficiaries of charities. Well-planned gifts also can help the donor by reducing income taxes and by providing a stream of income from an asset that previously generated no income.

Helping a charity can make you feel good. However, helping a charity and getting a little something in return can make you feel great. But how do you go about doing that?

A recent article in Investing Daily, titled “Using Charitable Gifts to Increase Your Income,”provides some excellent answers to this question.

 

By creating a CRT or charitable remainder trust, you donate appreciated capital gain property to an irrevocable trust you create. The trust then sells the property free of any capital gains taxation and invests the proceeds to generate an income stream on principal not diminished by capital gains taxes.

The trust pays you (or your beneficiaries) income for some period of years (up to 20 years) or for life, whichever you decide. After this period is over, the remainder of the property in the trust passes to the charities you designated when you created the trust or changed thereafter.

To sweeten the arrangement even more, when you transfer property to the trust, you receive a charitable contribution deduction.

Interested?

This is not a do-it-yourself project, so consult with an experienced estate planning attorney to determine whether this technique is right for your unique circumstances.

Reference:  Investing Daily, February 13, 2014: “Using Charitable Gifts to Increase Your Income”