The Old and New Worlds: COVID-19 and Estate Planning

Times have changed. The old way of living has given way for the time being to what has been deemed “the new norm.” Yet, as many experts are saying, the new norm for the near future is nowhere close to being defined.

No one is immune to the changes of this unique time. The newly acquired skill of social distancing has compelled businesses, communities and families to adapt to a new way of interacting with others and the world at large.  Time will tell how many of the changes resulting from COVID-19 will weave their way into the tapestry of what will ultimately be the new norm.

The estate planning community is no stranger to the new norm emerging from COVID-19. As allowed under emergency orders in many jurisdictions, trusts and estates lawyers have learned how to conduct virtual execution meetings wherein documents can be witnessed and notarized from a distance. Probate courts in some jurisdictions are now considering virtual court appearances to manage their dockets. Law firms have been forced to learn how to work remotely. Despite these changes, the work that estate planning professionals are engaged to complete for clients remains valuable and is certainly doable, even during an economic shutdown.

What should you be doing with respect to estate planning during these very unusual and changing times?

The first response to this question is obvious:  if you have not defined your estate planning objectives and executed a plan, then there is no better time than the present to do so. An effective estate plan accomplishes the following objectives:  (a) the appointment of individuals to serve in fiduciary capacities in the event you cannot act for yourself (i.e., as agent under power of attorney for property and health care and as executor/successor trustee of your estate/trust after your death); (b) the avoidance of probate in the administration of your estate after death, if desired; (c) the minimization of estate and income tax to the maximum extent allowable under current law and, where possible, as it may exist in future years; (d) the most efficient means of post-death transfer and administration of wealth.  Putting forth the effort to address these objectives during life often saves resources and unnecessary frustration during a time where you may become incapacitated and after your death.    

If you have an estate plan that was prepared some time ago, then now may be a good time to review what was done in order to ensure that your plan is consistent with your wishes and achieves your objectives. There have been significant changes in tax law that have made some plans obsolete or ineffective. For example, the 2017 Tax Act significantly increased the federal estate tax exemption amount, making estate tax planning not as relevant for estates below approximately $11 million ($22 million for married couples). Additionally, Congress passed what is known as the SECURE Act at the beginning of this year. This new law drastically changed the way inherited retirement accounts are paid to beneficiaries after the death of the original account owner.  Lastly, those who are Illinois residents now must now consider the impact of the newly enacted Illinois Trust Code on their personal estate planning. Other states have enacted similar laws governing trusts that warrant further consideration regarding their impact on the governance of trusts.

Estate tax planning remains very effective during these economic times. Low interest rates provide unique opportunities for individuals wishing to transfer wealth during life. Intra-family loans, sales to grantor trusts, grantor retained annuity trusts and other inter vivos estate tax planning techniques remain effective tools in transferring assets out of an estate that will most likely be subject to federal estate tax.

Despite the evolving “new norm,” the fundamentals of estate planning remain the same and are very relevant during this changing landscape. In fact, now might be the best time to complete or continue your estate planning.

Christopher Floss is a partner at Hoogendoorn & Talbot LLP, a Chicago based law firm. His practice concentrates on matters pertaining to trusts and estates, namely estate planning, estate administration, and gift, estate and income tax planning.  For further information on his practice, you may view his biography at the following link:  http://www.htlaw.com/lawyer/christopher-floss/

Only 250 Hours? Sec. 199A and Rental Real Estate.

While most of the posts on this blog pertain to estate planning topics, there are a few income tax related items that are making the tax headlines.

Tax professionals are in the midst of sorting through the nuances of the Tax Cuts and Jobs Act of 2017 (the “Act”) as they begin to prepare 2018 income tax returns.  A notable addition to the Internal Revenue Code (the “Code”) as a result of the Act is Sec. 199A, which allows a deduction up to 20 percent of a non-corporate taxpayer’s qualified business income.  This new deduction only applies to a qualified trade or business other than a specified service trade (as further defined).  The definition of a trade or business remains consistent with Sec. 162’s standard.

The Department of Treasury has proposed regulations for this new section.  Additionally, the Internal Revenue Service has issued guidance on several items related to the new deduction, one of which is a separate safe harbor for owners of rental real estate who wish to avail themselves of the deduction.

IRS Notice 2019-07 (the “Notice”) provides that a rental real estate enterprise will be treated as a trade or business for purposes of Sec. 199A if the following requirements are satisfied during the taxable year:

(1)  separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

(2)  for tax years prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise; for tax years after December 31, 2022, 250 or more hours of rental services are performed in any three of the five consecutive taxable years; and

(3)  the taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:  (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.

According to the Notice, a rental real estate enterprise is an interest in real property held for the production of rents and may consist of an interest in multiple properties.

Keep in mind that these requirements are solely for purposes of determining the eligibility of the taxpayer’s QBI deduction under Sec. 199A.

Rental real estate owners should recognize most of these requirements since they are very similar to the real estate professional rules under the Sec. 469 Regulations.  However, the reduction of the hour requirement may provide an additional tax incentive to those taxpayers who devote 250 hours of activity to rental real estate activities.

It is strongly advised that taxpayers consult with their tax counsel to ensure compliance with this new safe harbor.

An $11 Million Exemption?! Estate Planning Considerations and the Tax Cuts and Jobs Act of 2017

January 1, 2018 ushered in more than a new year for taxpaying Americans. Tax professionals of all areas of concentration continue to study the changes to the Internal Revenue Code enacted by the Tax Cuts and Jobs Act of 2017.  Most media reports have focused on the changes affecting income tax, such as doubling the standard deduction, eliminating personal exemptions, cutting back on certain deductions and adding a new treatment of “passthrough” income.  Few reports have addressed the one change in the federal estate tax:  doubling the exemption amount.  While this change is not nearly as exciting as the changes to the income tax, it does warrant consideration as taxpayers of varying degrees of net worth attempt to implement tax efficient estate plans.

Under the new law, individuals now have approximately $11 million of exemption before they are subject to federal estate tax. The “portability” of a spouse’s unused exemption has not been changed, which means that a married couple has a collective exemption amount of approximately $22 million.  Note, however, that the new law sunsets on January 1, 2026, with a reversion to the pre-2018 exemption amount thereafter.  So, what does one do?

Taxpayers whose net worth is above the new exemption amount should consider using the increased exemption amount as a further opportunity to continue moving value out of their estates. The use of irrevocable gift trusts, grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), transfers to intentionally defective grantor trusts (IDGTs) and  family limited partnerships (FLPs) are still viable methods to move value (particularly rapidly appreciating assets) from one generation to the next by minimizing the sting of the estate tax.

Also, taxpayers subject to a state estate tax should determine whether the change in the federal law also increases the exemption at the state level. For example, Illinois has a fixed exemption amount of $4 million that is not indexed to the federal exemption amount.  Other states, such as Connecticut, Massachusetts, Minnesota, New Jersey, Oregon, Rhode Island, Vermont and Washington, also have exemptions significantly less than the federal exemption.  Delaware, Washington D.C., Hawaii, and Maine currently have exemption amounts that are indexed to the federal exemption amount.  Maryland and New York are set to have exemption amounts indexed to the federal exemption as of January 1, 2019.

Furthermore, taxpayers who are no longer affected by the estate tax due to the increase in exemption, but have previously implemented value-based estate planning techniques to remove value from their estates, should consider options to utilize the step-up in basis wherever possible. Assets that are considered part of a decedent’s estate at death receive a “step-up” in basis to the fair market value of such assets as of the decedent’s date of death.  Effectively utilizing this rule will be more important so as to minimize post-death capital gains tax.

Taxpayers with a net worth significantly less than both the federal and, if applicable, state estate tax exemptions should still be concerned with post-death income tax planning considerations, such as an effective use of the step-up rule to minimize post-death capital gains (as discussed above) and the transfer of income to taxpayers who are taxed at a lower income tax rate.

Finally, annual per donee exclusion gifting is still an option for making gifts to individuals. An individual may gift up to $15,000 per year to an individual without any gift tax implications.

Opportunity exists for planning at all levels and the implications of the increased federal estate tax exemption should be considered in the context of a taxpayer’s specific circumstances.

Legacy Planning + Decision Making Planning + Tax Planning = Estate Planning

Goals are important. Having a roadmap to achieve them is even more important.

Estate planning professionals often spend most of their time assisting clients with forming goals and developing structures to facilitate the achievement of them.

Estate planning goals typically fall into the following categories: legacy planning, decision making planning, and tax planning. All three categories are often interrelated, yet each has its own nuances which, as a whole, weave together to create a comprehensive estate plan.

Legacy Planning

General Goal: to provide for loved ones or charitable organizations after death. 

Legacy creation begins through the investment of time, talent and treasure in the people, causes and institutions for which a person has developed an affinity during life. Legacy planning defines how this investment will survive the test of time. Estate planning tools, such as living trusts and irrevocable trusts, are often used to solidify a person’s concept of legacy when it comes to managing and distributing assets after death.

 Decision Making Planning

General Goal: to appoint a trusted individual or organization to manage financial assets and make decisions during incapacity or after death.

Choosing a trusted individual or organization to serve as an agent during incapacity or as a fiduciary after death is a fundamental goal in the estate planning process. Individuals or organizations who are appointed as agents under powers of attorney or as fiduciaries in a will or trust should be chosen carefully and fully apprised of the principal’s goals.

 Tax Planning

General Goal: to minimize the impact of income and estate tax after death.

Individuals who have a net worth in excess of the applicable federal (and state) estate tax exemption amounts often set goals to minimize the impact of the estate tax at death through lifetime gifting and the use of value planning techniques.

Furthermore, goals pertaining to the minimization of income tax at death typically involve the utilization of the step-up in basis for highly appreciated assets and the proper structuring of income and capital gain distributions in trusts.

Establishing clear and personalized goals under each of the categories mentioned above provides the foundation for a comprehensive estate plan.

Trump Won The Election – Now What?

About the author:

Christopher Floss is a Chicago-based attorney concentrating on estate planning and tax planning matters.  He enjoys working with clients who are seeking to plan for the future through a comprehensive estate plan that addresses the client’s short-term and long-term objectives.  Chris’s thought leadership can be found on this blog, as well as on other social media platforms.  Notably, the American Bar Association’s Section on Taxation published Chris’s law review article, “Does 3.8% Change Anything?  The Intersection of the Net Investment Income Tax and Fiduciary Income Tax,” in its Winter 2016 edition of The Tax Lawyer.  For further information on the contents of this blog, Chris may be contacted at 312-786-2250 or at cfloss@htlaw.com        

With the rise of the Trump era, estate planning professionals are struggling to field a common question which is being cast from a vast group of clientele: will I have to re-do my estate plan now that Trump is president? As in all things legal, the right answer to this question is “it depends.”

During his campaign, Trump proposed an entire repeal of the federal estate tax. If this repeal occurs, many of the tax planning techniques currently used by estate planners will be extinct, such as: (1) the balancing of the federal estate tax exemption and the use of the marital deduction through marital and family trusts, (2) the extensive valuation planning for clients who have a net worth in excess of the federal exemption amount, and (3) the use of complex charitable giving vehicles to transfer wealth to charity in a tax-friendly manner.

Furthermore, clients who have taken extensive measures to plan for the impact of the current federal estate tax may find themselves revisiting the transfer techniques employed in their current plans in order to maximize income tax planning, which, in some instances, has taken a “back seat” to the estate tax planning in higher net worth scenarios. With all of these factors at issue, what does one do?

At this point, there’s no need to deviate from the planning that occurs under current law. Single-find QTIPs, A-B Trusts, GRATs, CLTs, FLPs – the tools for which these acronyms stand are still in good use until further notice. However, if a repeal of the federal estate tax occurs, it may be wise to revisit one’s estate plan so that the planning structure allows for the utilization of basis step-up at death and the most effective means to minimize income tax at the fiduciary level.

As anyone who has engaged in the estate planning process knows, federal tax planning is not the only concern addressed in the planning process. Other issues, such as state estate tax planning (if applicable), asset protection and control, and planning for incapacity, still remain very pertinent to the estate planning process.

Most commentators suggest that a repeal of the federal estate tax will not be proposed right away. Some actually indicate that such a proposal will not occur until the latter years of Trump’s presidency. In any case, estate planning professionals will be “standing by” until further notice.

 

 

Trump’s Victory and Tax Planning

President-elect Trump proposed several changes to the tax code during his campaign.  Is there anything that you can do now to prepare for their proposed adoption in the coming years?  Forbes contributor Phil DeMuth offers a few planning techniques that may be worthwhile to consider as the year-end approaches.  View Mr. Demuth’s article here:   http://www.forbes.com/sites/phildemuth/2016/11/14/four-post-trump-tax-moves-to-make-today/#54a790d61e5c

 

Politics and The Estate Tax: Who’s Version Will Win?

To tax or not to tax?  This is the recurring question as another campaign season moves into full swing.  The federal estate tax appears to be at issue as both presidential candidates begin  unveiling their proposals for tax reform.  See the following link to an article written by Forbes contributor Robert W. Wood for a concise summary of each candidate’s position on the proposed future of the estate tax:  http://www.forbes.com/sites/robertwood/2016/08/09/hillary-vows-estate-tax-hikes-while-trump-vows-repeal/#5656dc75c0f3