There is no time like the present for investors to consider their financial situations and planning and act to make changes under current rules. With the national debt sky-high, the economy ravaged by COVID lockdowns and everyone seemingly asking for funding of a wide variety of pet projects, the one thing that seems certain is that the government will be squeezing more revenue out of taxpayers. Make no mistake: this revenue seeking won’t simply impact high income and wealthy taxpayers. Taxpayers at all levels of the economy will be facing increased government demands not simply for income tax but for increased taxes on services, on the sale and consumption of goods, on ownership of real and intangible property and more. Even if your income is in the bottom quintile, you will feel the pain of the tax bite on everyday living even if you manage to avoid the income tax itself.

Planning related to income may include moving income into the current year when rates are likely to be lower than next year (or at least equal, making sure contributions to qualified retirement plans are maximized, taking capital gains to the extent they qualify for the zero tax rate or even when they fall below the maximum rate and so on. Other tax planning might include making gifts up to the annual exclusion to family members, charitable gifts as desired and taxable gifts in trust to take advantage of the high lifetime exclusions.  Note that making gifts in kind to family members, they take the cost basis the donor had in the gifted securities and if basis is low, those recipients could also benefit tax-wise from the low capital gains rate for low and middle income taxpayers.

Finally, tax planning may include decisions to accelerate decisions on purchases with an eye to take advantage of current sales and other taxes. It follows that upon the advent of various tax increases one would reduce or postpone various forms of consumption and with those choices experience a reduction in the total taxes you pay in future.

Most IRA owners have named one or more primary beneficiaries to the account in the event of the owner’s death. Oftentimes successor beneficiaries are also named to ensure the funds pass as desired where the primary beneficiary has died as well. The beneficiaries will be required to take distributions as specified in the tax code and pay the associated taxes, though they may also take additional distributions as desired. The distributed funds are not protected from the beneficiary’s creditors and a spendthrift may quickly exhaust the IRA. This lack of control may not be the ideal result in every case and the IRA owner may wish to consider further planning for the IRA account(s).

IRA trusts allow for some flexibility in terms of how the funds are distributed to the beneficiaries following the plan owner’s death. Most typical is the conduit trust which passes the full amount of the required minimum distributions directly to the beneficiary, together with any additional distributions received by the trust from the IRA. The trust can provide that any additional distributions (above the RMD) must satisfy conditions stated in the trust, protecting the funds from being dissipated quickly.

The accumulation trust is more restrictive for the beneficiary as it does not pass the entire RMD to the beneficiary and instead retains a portion of the RMD in the trust. This has the benefit of allowing the trust to grow while the assets in the trust benefit from continued asset protection. The downside, of course, is that the trust will be required to pay the taxes on the retained RMD and other distributions and usually at a much higher rate than an individual beneficiary.

Where there may be a need to exercise some control over the IRA and preserve asset protection, an IRA trust may be a valid consideration. Consult with your tax professional and other advisors to ensure that this approach could work and how it will further your estate and tax planning goals. This is a constantly changing area of the law and what might have worked in the past may not work going forward. 

As the pandemic with its related restrictions and uncertainties drags along, we are seeing more clients changing their near-term plans and goals.  Initially, many of us simply deferred activities, presumably for a few months while the pandemic (hopefully) ran its course. Now, with no clear end to the pandemic nor any return to something approaching normalcy in sight, people are making significant changes to their plans. These changes are wide ranging and appear to have affected different age groups in markedly different ways.

These changes can be very significant, including changes in employment status, residence location, major purchases and the like, all driven by the impacts of the pandemic. Other types of changes, also important, focus more on our leisure time, including reduction or elimination of participation in entertainment and sporting events, vacation travel, and of course dining and other socializing. All of these factors affect our personal levels of stress and any sense of well being and that, in turn, will definitely affect our planning going forward.

If you are feeling that the pandemic has changed things enough that you should consider making significant changes in your life plans, talk with your friends and family and don’t forget to reach out to your advisers as well. For those of us who are advisers, remember that when advising clients on their planning for investment, retirement and other aspects of their lives, we need to be aware of these changes that clients may be considering (or may even have avoided considering) so that we can best advise them on how to adjust their planning to meet changing needs and expectations. 

A feature of many 401(k) plans (as well as 403(b) and 457 plans) is the ability of the plan participant to take a loan from the plan to assist in meeting near term goals. This is particularly effective where there is no other desirable source of funds and the participant has stable employment. Such a loan can be a real benefit in times like the present where the pandemic has caused stress and change from what used to be normal.

The primary reason for considering this source of funding is the ability to avoid having the loan treated as a taxable distribution from the plan and so not subject to either regular income taxation or to the ten percent penalty assessed on early distributions for those younger than age 59½. Of course, in order to enjoy the benefits of such a loan, it is necessary for the plan participant to repay the loan to the plan, typically within five years while making regular payments on a quarterly basis.

The rules governing the loans are also limiting in terms of the amount which may be withdrawn from the plan as a loan. The maximum amount is $50,000 and the loan cannot exceed 50% of the value of the plan account or $10,000, whichever is less. This means that large plan balances will not be usable to fund large loans but smaller amounts – more in keeping with most short term cash needs – can be funded to the extent noted above.

The biggest risk to a plan participant is, not surprisingly, job loss. If the employment is terminated, then the outstanding balance of the loan generally must be repaid to the plan. Prior law required this repayment to occur within 60 days if the participant wished to avoid income tax and penalties on the unpaid amount. Current law now extends that time frame to the date of the tax filing deadline for the year in which the termination of employment (or of the plan itself) occurred. There are other situations in which the participant may be subject to taxation and penalties, such as where the installment payments on the loan are not made timely. Care should be taken to fulfill all the requirements of the loan for this technique to prove useful.

The question of what happens with one’s assets at death is a major aspect of planning for many of us. Necessarily, that planning must address the possibility of death being earlier or later than what normally might be expected and so directions should be in place to meet any eventuality. Of course, the beauty of the planning is that in most cases we can revisit the plan and update as circumstances change and time passes.

That brings us to those who have invested in qualified retirement plans and who have children who are presently minors. In order to provide for those children, it is not uncommon to name them as designated beneficiaries. Of course, a minor child would not be able to control the plan benefits as that role would be fulfilled by a trustee until the child reaches majority. One of the advantages of naming a child as beneficiary is that under the new law, the stretch for distributions over the beneficiary’s life expectancy continues throughout the child’s minority. It is only when the child reaches their majority that the ten year rule for distribution kicks in.

State law typically governs as to when a child reaches majority and varies somewhat from state to state. However, it is important to note that where a child may be considered as not having attained their majority where the child is under the age of 26 and has not yet completed a specified course of education. This would delay the expiration of the stretch and defer the ten year rule until the child was 26 (and theoretically better able to manage the funds). A child who is disabled is also considered as not having attained majority and would be able to benefit from the stretch indefinitely.

This approach is not for everyone and would not fit the plan participant’s desires in some cases. However, this does have the advantage of not requiring the creation and administration of a trust for the child as would be necessary with other types of assets. Consult with your tax and planning professionals to see how this could benefit you and your children.

In the context of financial planning, much attention is properly given to life insurance as well as to health, disability and long term care coverages for the clients we serve. The recent – and ongoing – pandemic and related issues have highlighted the need to understand and perhaps update coverage for business property damage or loss, premises liability, business interruption and event cancellations, as well as residential real and personal property coverages including loss of use.  This applies not only to ourselves and our businesses but to the wide variety of clients we advise.

An unexpected event, such as the destruction of premises or the loss of inventory, equipment and records, can completely upset an otherwise solid financial plan. Businesses and individuals often have some form of insurance concerning potential loss events but most will not have insurance including coverage of losses occasioned by a pandemic or a government mandated lockdown of a business operation. If one is fortunate enough not to have experienced a significant loss thus far this year, then updating and adding such coverage (if available) would seem to be a logical next step. After all, we do not have any clear idea of whether there will be a resurgence of the pandemic, further lockdowns and potential for other disturbances and damage over the course of the year.

When negotiating for expanded coverage, including specific types of events, evaluate the amount and type of coverage you would anticipate needing in various circumstances and be sure you understand the costs of different coverage levels as well as the conditions and requirements for that coverage to apply. You probably won’t want to insure against all possible losses in the worst case analysis since costs likely will be prohibitive and the odds should be somewhat lower for that worst case scenario occurring.  

A common technique for taxpayers with large IRAs and relatively lower income is to engage in conversion of traditional IRA funds to Roth IRAs. A conversion requires the taxpayer to declare as income the amount converted in the year the funds are removed from the taxable IRA and transferred to a Roth IRA. The obvious benefit to this technique is that under current law future appreciation in the Roth IRA is not subject to income taxation while distribution of principal from the Roth IRA is likewise not taxed.

This year – 2020 – presents a special opportunity for many taxpayers to consider whether to engage in Roth conversions. Tax rates currently are fairly low for many taxpayers and the burden of RMDs has been removed for the calendar year. Even younger taxpayers may benefit since the CARES Act removes the 10% penalty on early withdrawals of up to $100,000 from an IRA. In addition, for many taxpayers income will be lower this year due to interruption, reduction or loss of employment connected to the pandemic and the related lockdowns.

Things to consider when evaluating a Roth conversion include current income and tax brackets, anticipated future income levels, the anticipated uses for future RMDs and other distributions from the existing IRA, how the tax on a conversion will be paid (from the IRA or from other sources), and more. Of course, we can’t really know what the future hold in terms of the markets and their performance, the government and their constantly changing tax laws, and even our personal situations. Your financial adviser or tax professional will be able to help you work through the advantages and disadvantages of a conversion and to understand the immediate impacts of such a decision. The unusual situation this year may be an incentive to take another look at the Roth.  

It is always important to periodically review one’s estate planning to ensure that it stays up to date with client goals, changing circumstances, current tax law and more. This spring, with the enormous impact of the pandemic on most of us, is certainly a time to consider our planning and how we are protecting our loved ones. The task may seem daunting, but it is worthwhile to make sure a plan is in place no matter where you are or the state of your health.

Of course, if you are in one of the riskier categories for the pandemic, it is imperative to take a look at your situation and to be sure that things will be taken care of appropriately if you become ill, or worse. The process is more than simply reviewing your beneficiary designations or the dispositive provisions of your will or revocable trust. Understanding how your assets will flow, the estate and income tax consequences of the plan, any friction or complication in valuation or transfer of assets and more should all be understood.

Further, identifying and naming trusted persons to act in a fiduciary capacity – personal representative, executor, trustee, holder of your power of attorney – may be critical to the success of your planning. The same consideration should apply to naming a health care surrogate or the holder of your health care power and to completing items such as your living will and any health care directives. In naming anyone for these tasks, make sure they understand your intent and are (at least presently) willing and able to undertake those tasks if necessary.

For all of these aspects of your planning, professional advice and drafting of the required documents is necessary. This may also involve taking special steps to ensure proper execution, notarization and witnessing in a time when social distancing and restrictions on movement may impact the process. 

A central goal of much estate planning is ensuring that assets pass to and are available for a person’s loved ones. One such method is the spousal lifetime access trust (SLAT), an irrevocable trust created by a lifetime gift to the trust which provides for the grantor’s spouse and children as beneficiaries. Using a portion of the lifetime exemption of the grantor for the transfer to the SLAT allows this trust to avoid gift tax when created and estate taxation in both the grantor’s and spouse’s estates at death. The trust also avoids the potential costs and complexity of probate. 
This trust allows the beneficiaries access to funds during the grantor’s lifetime and after his or her death. The distributions may be made on a preset schedule, under specified circumstances or at the sole discretion of the trustee. The trust provides a level of protection against creditors since assets in the trust are not reachable by most creditors. It is important to understand the typical SLAT is designed as a grantor trust meaning that the income tax obligations of the trust are borne directly by the grantor during his or her lifetime. Planning for this income tax burden will be necessary.
Many states do not have a state estate or inheritance tax and in such case other techniques may be equally or more favorable for transfer tax planning purposes. An alternative to this approach is the typical revocable trust which funds irrevocable trusts for surviving spouse and children at the grantor’s death instead of currently as a SLAT would provide. Consulting with your tax professional should help you determine if the SLAT will work in your estate plan. 

One of the biggest changes under the Secure Act was the elimination of the stretch IRA approach utilized by many high net worth clients. The new law allows a surviving spouse as well as minors and some disabled persons to take benefits over their lifetimes while all other individuals must withdraw the balance of the IRA within ten years. Many clients have expressed concern with this change and a desire for alternative approaches for their qualified plan assets.
The charitable remainder trust presents a useful way to allow a person to take distributions over their lifetime instead of the new ten year limit. The trust will need to meet the requirement that the charity will receive at least ten percent of the total trust value and, of course, the distributions to the beneficiary will be taxable income. For clients with charitable intent and beneficiaries no longer able to benefit from the stretch, the trust can make a big difference in the timing and rate of taxes while keeping the estate plan effective. Since the charitable trust rules are more complicated than we can cover here, it is important to consult with a tax and estate planning professional to make sure the trust will accomplish your goals.
A conduit trust – which must pass to its beneficiary all distributions received from an IRA – is another approach. When the beneficiary is an eligible designated beneficiary such as a surviving spouse, the distributions may be made over the beneficiary’s lifetime and won’t have to be fully distributed in ten years. However, if the only permitted distributions from the trust are RMDs from an IRA, a problem arises since the only RMD under the new law is the one occurring at the end of the ten year period. This means the trust language must not be limited to distribution of RMDs but instead should permit any distributions from that IRA.
Careful planning is essential under the SECURE Act and you should consult with a tax professional before finalizing any trust or other planning.