On-Demand: Individual Tax Planning in a New Era | Key Provisions Regarding the SECURE Act & CARES Act in the Wake of COVID-19

And these are non-spouse beneficiaries on all distributions from inherited accounts within 10 years. And then finally, and this is the fourth and fifth indent bullet on your page, which has a fair element of controversy about it, which we will speak to, and that is making it easier for plan administrators to offer annuities, which also raises additional complications which we'll be speaking to. Now, the act is estimated to cost approximately $15.7 billion, and that's primarily funded by the change in the stretch IRAs. Now again here, this person must have withdrawn required annual distributions tax over 10 years of the original account holder's death. So right now we're about to move to the next page, but we're going to raise the concept of long-term financial planning. All participants that are involved in any of these plans, 401ks, 403(b)s, IRAs and others that we'll speak to. This presentation is also intended to speak to some critical thought areas for those of you that are here looking to as plan sponsors, but also those of you that are plan participants.

And I know we have many participants on the call that are actively working with clients around investment planning, retirement planning, and of course utilization of these plans. So we'll be covering that as well. Now, it's also interesting and thoughtful at the beginning of this presentation, talk about retirement planning generally, US demographics, life expectancy, and also the need for coordinated investment and plan distribution composition.

So we talked earlier about some of the major elements, but we should also point out that the SECURE Act not only impacts a single employer plan but also multiemployer plans. And there's no employer relationship necessary either based upon geography or industry memberships or trade associations. And the additional benefits that are provided as you see in the second bullet is a $500 tax credit for plans that enroll new hires. And you'll see that these plans must cover the part time and a long-term worker's effective 2021.

These are defined by the way at 21 years of age with 500 hours of service in each of three consecutive years. So here you see that part time employees are now being provided coverage. Plans that offer annuities are shielded from liability even if the insurance company commits fraud or collapses. This is done of course to protect the planned sponsors. This was another rather controversial area during the legislative process.

Now, many of us that advise plan participants and plan sponsors themselves, have been speaking about participant education and protection and even discouraging perhaps Roth conversions; this has been in the media, there's been a lot of commentators in industry  that have spoken on this. These are some views really from the professional community, especially discouraging Roth conversions. And also views about withdrawing funds from IRAs to invest in tax deferred and tax-free investments such as life insurance.

So these are comments that came up during the legislative process. All of them should be looked at in the context of you advising plan participants for example, or you designing a plan, that you'd want to be aware of. Some of them were common topics. The Brookings Institute has weighed in on this, SHRM, AARP, and others and they've been fairly positive in saying that it is a benefit in what could be not most, but perhaps many circumstances, especially as a remedy to retiree income needs.

And at this point I'd like to talk to, and our colleagues will mention more of this later, an example of a retirement plan and estate planning model exercise. And Scott will be speaking more of this on his estate planning section. But every one of us, whether we're advising clients or perhaps if we are providing advice to employees on plan education they provide the plan participants, typically we are using some kind of advice model that participants can make themselves aware of.

This is our formal view that we work with for many clients that participate in retirement plans. And it's really a 12 point plan. First looking at the participant’s current age and plan balances and additional financial assets, talking to our plan participants regarding their estimated forecast retirement date and understanding their cash flow modeling for an investment balance that they have presently over a life expectancy; and what will capital needs will be over a lifetime, assuming a hypothetical retirement.

Evaluating additional goals such as plan funding and total savings needed. Item five, appropriate asset allocations. As everyone knows, this is tailored to the unique plan participant. Most plans, I would say almost every plan that we work with, will have different asset compositions where being able to achieve a well-balanced asset allocation model or even balanced more toward aggressive or conservative can be attained. I think that's the hallmark of probably many plans that have done this for, by having broad choices.

And then the ability to make changes in asset allocations. Evaluating the role of life insurance needs and reviewing estate plan objectives and family needs. Considering advanced healthcare directives and long-term healthcare coverages. These are all additional matters that in our experience we're talking to our clients about and plan participants, about utilizing and coming up with appropriate not just retirement planning concepts generally, but a broad financial plan.

I would also say that our Compensation and Benefits Practice, which is by Peter Alwardt, does a lot of work also in the plan design arena, has also focused on many of these areas. I'm going to take a few more minutes on this slide just to point out some other considerations. I'm going to talk a little bit about life expectancy. Presently, the life expectancy for males is approximately 76 years old and women 81 years old. We've seen an increase in life expectancy going back approximately 20 years.

In 1960 it was 70 years of age, in 2014 it was 80 years of age. We've seen a lot of data coming out of the Organization for Economic Development, Center for Disease Control, so we're looking to, in this arena, in this part of it, trying to understand family histories. And again, it's just done, and we raised these comments to bring some additional thoughtful observation, to the overall retirement planning process and for plan sponsors maybe some additional benefits to be provided.

Many plans often offer financial planning advice as a component of their retirement plan features. We're now on slide seven. This is just some fundamental information about the SECURE Act. You can see the legislative history. Many of the provisions are going into effect this year. And so we are focused now still early in the year in working with plan sponsors and plan participants in understanding how they can take most advantage of and understand the provisions.

Now the lifetime options. You'll see that there's some additional provisions around increasing auto enrollment, long-term part time employee eligibility, we spoke about that earlier. Non-elective safe harbors, income distribution from 403(b) plans upon termination and then in service distributions. This is unique to 457 plans although there are some other plans that could allow in limited circumstances 457, or excuse me, in service distributions.

What are some of the goals for lifetime income options? Well, again, for IRAs, and we spoke about this earlier, removing the minimum age for contributions, in service distributions are harmonized now to age 59 and a half. Lifetime income options and defined benefit plan contributions can be converted into lifetime income streams. This in part goes to the annuity options which many of you have read about and are aware that we're now allowed under the SECURE Act for retirement plans. And then encourage plans to offer other lifetime income options.

There's also some provisions for plan sponsors, and this is aimed at really providing additional disclosures, education in some instances, but also adding portability of lifetime income options, pay for fiduciaries for the protection or the allowance of prudent lifetime income providers, lifetime income disclosures. And it's not required to offer lifetime income option portability, but certainly that's one of the considerations that come into the design and the operation of these plans.

Now, when we get into some of the SECURE Act definitions it's important to know that a lifetime income investment means plan investment options that allow participants certain elections. For example, you'll see options not uniformly available to other plans and as participant options or that relate to a lifetime income benefit through a contract or an arrangement under the plan. What does lifetime income feature mean?

It's going to be one of these two things generally. A guaranteed minimum level of income annually for the remaining life of the participant or joint lives. This is the single and joint election feature that we're all familiar with. Or an annuity payable on behalf of the employee, periodic payments for the life of the participant or once again, joint life. There are now disclosure requirements under the SECURE Act, this also is modified to  ERISA, amending the benefit statement requirement.

Again, this is lifetime income disclosures. And the plan must provide lifetime income stream disclosures on at least one benefit statement in each 12 month period. The Cares Act or the SECURE Act was very prominent in wanting additional disclosure education to plan participants. And this is one of those considerations. And even in the context of lifetime income streams, they must be expressed as the amount of a monthly payment or such that a participant or a beneficiary could expect to receive if the account balance is deployed to create monthly income.

There's two types of illustrations that are required. Again, we're talking about the plan sponsor or consultants of the plan sponsor that would assist with these disclosures. Qualified joint and survivor lifetime income streams option, assuming that spouses are of equal age. Second thing is the single life annuity is based on the actual age of the retirement. We're going to speak a little bit more about this, but many of you might be familiar that one of the more significant and probably the most controversial element of the SECURE Act was the allowance of broadening the use of annuities inside of plans.

The caution here though, we believe, looking at the investment environment from the other perspective, is that most of the annuities are interest rate sensitive. So if you look at where we are now in 2020 just coming out of the first quarter with interest rates and the recent Federal Reserve movements and related matters, we're in a very low interest rate environment. What does this equate to? Well, it could equate to monthly benefits being lower if a plan participant has a new annuity feature option offered by the plan sponsor.

And because of that could be potentially missing out in a diversified investment allocation and potential greater rate of returns from equity plan. Now there are certain annuities with more, or less, exposure to equities, but we're more so talking about annuities that are on an interest rate fixed bases that should be carefully considered. Especially when we would have younger plan participants that are looking at these annuities which are now allowed under the SECURE Act compared to older participants who might've seen accumulation through their plan participation duration and now might be wanting to more conservative and using an annuity in that environment to perhaps minimize long-term risk.

We're also now looking at, again, the lifetime income disclosure is continuing. The DOL is involved in this now and they're looking at some of the additional benefit statements that they might like to see. That's yet to really come to fulfillment but the DOL is required and that would be now December of '20, because the law was passed in '19, to really look at adoption of SECURE Act provisions and those following three bullets, indented or numbers one, two and three. We will need disclosures around this, the DOL will require it, and it is expected to occur sometime this year.

And also the modeling, lifetime income modeling for plan participants that are evaluating different options and different lifetime income options offered, because that's also going to be an important component of disclosure. So you see here the SECURE Act adding a lot more buttressing of planned sponsor education requirements or the availability of plan participants to gain education materials, a very important arc of the SECURE Act. There's also the portability lifetime income options, and we talked about this lightly.

Still having trustee to trustee transfers, we knew that was always the instance, but even with respect to the lifetime income products. And here we're talking about or reference to annuities. It would qualify as a qualified distribution. And you'll see portability amendments and we give the citations there. Now, if offering a lifetime income investment is no longer permitted, either to offer or to distribute, that could be a distribution or become an investment in a form of an annuity contract.

That also, as we mentioned earlier, an annuity is becoming a lot more prevalent under the SECURE Act, being allowed to be used in plans offered by employers. This would be an appropriate time to also mention that this has raised a lot of comments regarding costs and inherent costs of annuities charges and so forth. That's going to be a very high focus area we believe, with respect to plan sponsors that are offering annuities because they could, with charges, potentially erode the rate of return that plan participants could benefit from.

So that's going to be an important area to focus on, those insights on annuity charges. Now portability is not mandatory, but that still would want to be included with lifetime income option. Sometimes this happens with a rate a plan charges recordkeepers or portability protect participants. You still can have trustee to trustee transfer of lifetime income products as we point out, within or to an IRA. And again, if there's a change in recordkeepers and the discontinuance of lifetime income option, the other option is to distribute the annuity to the participant, to obtain the accumulated benefit.

And we spoke about that briefly earlier. Safe harbor problems. This was really before the SECURE Act but now it's trying to correct it. The process includes appropriately the, bullet two aside, not the indent but considering the sufficient information is available to assess the annuity provider ability to pay under an annuity contract. So that has to be something that would be considered, the cost in relation to the benefits and services. Then including at the time of selection that an annuity provider is financially able to make future payments and the costs are reasonable.

So this becomes a fiduciary responsibility, willingness, appropriateness of an annuity provider. And reassessments in hindsight to make sure that the annuity contracts are appropriate and they can still fulfill lifetime income options for plan participants. There is a safe harbor still required, and you can see fiduciaries have to engage in an objective thorough search of identifying insurers from which to purchase such contracts. These are the ones that are offered to plan participants, utilizing professionals, third parties to identify companies that meet this criteria, and also appropriate credit ratings from credit rating agencies.

It's probably a best practice in our view to be using a RFP process, looking at qualified insurers and then RFPs with or in conjunction with nationally recognized stat rating organizations and you see some of them there and that's Fitch Moody's, and others and so forth. Again, this is with respect to the rating of the quality of annuity companies that would be considered inside of a plan. You see, once again there's a lot of burden on fiduciaries regarding the selection of lifetime income providers. However, the SECURE Act in the center, bullet two, does allow a fiduciary to rely on written representations, but there's conditions.

So you see the two indents receiving written representation. If the fiduciary has no notice of any change in the insurer's conditions, this can be tested. We mentioned earlier in a prior slide you can use third party organizations to help to assess these representations. And then there's the matter of a fiduciary that has not received any information that calls into question the representation provided by the insurer. There's a significant amount of due diligence here because the information about the accuracy of insurer representations then ongoing reviews of their offerings is going to be very important with respect to plan sponsors.

And to make sure a fiduciary continues to act in a prudent way on selection, and to make sure that the annuity companies and providers are continuing to provide information on an ongoing basis. What about-

Moderator: I'm sorry, and if you could just wrap up your section, we are at the end of your allocated time for your slides.

TS: All right, I will do that. Thank you. Let's go to 23, I skipped ahead for you, and required minimum distributions. You'll see those there. Again, if you go back to the very beginning when we're trying to also provide financial planning for plan participants, this is another important consideration. We also talked about the 10 year payout. Then these are penalty provisions. They become a lot more aggressive and these are something certainly that all plan sponsors would want to be aware of. So with that, I'd like to turn it over to my colleague Brent Lipschultz who'll speak more about certain provisions for individuals specifically. Thank you.

Brent Lipschultz: Thank you very much. We're going to talk today about the SECURE Act for individuals. We just heard a commentary around the plan, benefits and so forth. One of the biggest issues with the SECURE Act, our focus is primarily around retirement plans, IRA. Well, there are other benefits. And when, for example, an IRA participant can continue making contributions. Beginning in 2020, any individual at any age may contribute to a traditional IRA as long as there's compensation that's saved.

Brent Lipschultz: So there's got to be some income, either wage income or self-employment intent. And that's pretty helpful because the government is telling us that they see a shortage in savings, they want the US population to continue saving perhaps knowing there may be a shortfall in social security down the road. Required minimum distribution, as he had mentioned, that has been raised from 70½ to 72. As you recall in the early 60s, the age 70½ really came into play. But at that time there's been that adjustment to life expectancy tables. So the government is again believing that we need to save more and accumulate more tax free, move the age to 72. So what does that mean for individuals who attained the age of 70½ before 2020? Those people must stay the course. So in other words, they have the ability to pay a minimum distribution either in '19 or by April 15th of 2020, and then Barbara will follow me will talk about what the Cares Act has done with that requirement.

But typically those that have reached age 70½ in 2020, now really until age 72, I'm sorry, 2020 to take a distribution or they can wait to 2023 to take a distribution. And then obviously they're going to take a distribution for the 2023 year in that year. So there's plenty of income. So you really have to be mindful. The whole aim of the game in this retirement planning area is looking at your effective income tax rate and making certain that you're not creating a tax problem or bouncing too much income into a certain year. The big benefit over the last few years was the charitable rollover, I'm sorry, the charitable IRA rollover. And with respect to that in the past and then it really hasn't changed much, there's $100,000 limit distributions directly to public charities from an IRA. And now that distribution, the main benefit is that it doesn't count towards income. So there's various adjusted gross income thresholds that one must meet and making certain deductions like medical for example.

By taking a distribution, rolling it directly from a trustee to the charity, that income, that $100,000 is not included as income for purpose of those calculations. Even more so state, for example, that rely on the federal adjusted gross income number as a fresh roll for a state taxation, which at Connecticut we are, that's an additional benefit because that $100,000 or less would not be included in an income. So what happens, how does the SECURE Act change on this?

Well, an individual can still do the $100,000 IRA charitable rollover strategy at age 70.5, despite receiving the required minimum distributions at age 72. But to the extent that additional contributions are being made to the IRAs after 70½, those contributions reduce the $100,000 max that can be contributed to the charity. The one question that I always get is, can we use the strategy with donor advised funds, supporting organizations or private foundations?

And the answer clearly is you can't. So with that said we're going to go over to the next slide. The SECURE Act, as he said earlier in the presentation, was the death now for stretch IRAs. And essentially a lot of professionals such as CPAs, lawyers, consultants, we all have significant qualified plan IRA balance, that's the nature of the work we're in. So this really impacts a lot of people that have significant IRA balances and they've looked at that in conjunction with their estate plan.

So before 2020, the plan participant, that IRA owner is essentially allowed to choose a designated beneficiary, such as a spouse or non-spouse, which would allow the plan or IRA owner to stretch the tax deferral nature of the plan by taking distributions over the life expectancy of the beneficiary, which may be over 10 years younger than the plan participant. So if the beneficiary was 30 years younger than the plan owner at his death, then you effectively stretch the distributions over an individual’s 30 year life expectancy.  These same rules also apply to Roth IRA. So the Roth IRA is still a beneficial strategy, but one must consider now the length of the deferral in terms of the analysis around whether the deferral will be more advantage later than the payment of tax today on a Roth conversion.

These rules come into play. So for participants are IRA owner's whose death occurs after 2019 the distribution to a non-spousal beneficiary is required to be withdrawn from the plan within 10 years following the plan owner's death. And there's certain exceptions. And you may find that because of these certain exceptions, an individual may not even need to go back to review their designated beneficiary. But with that said, the 10 year m mark is 10 years, so not only following the death of the plan participant.

So you don't necessarily have to take it out in year 10. And if it was not taken out in year 10, you would obviously have an income tax issue. You'd be punching up significant amount of income. But you could, obviously, dribble it out over a 10 year period of that. But what are the exceptions? And then the statute discusses these exceptions as eligible designated beneficiaries. So who are these exceptions? Well, first of all, providing spousal planned participant or IRA.

And that's pretty much most of us out there have named our spouses as the IRA designated beneficiaries with a contingent beneficiary thereafter. And that the contingent beneficiary thereafter, it creates some of the problems around these inherited IRAs. The second exception is a charitable plan participant or IRA owner who has not reached majority. Well, the statute doesn't discuss reaching majority of the state law majority. It basically says when you reach a certain amount of education.

The definition's a little bit controversial because in most States majority is either 21 as it is in New York or 18, but under this statute it's more geared towards education as opposed to majority under state law. Chronically ill individuals, disabled individuals, that's another exception. And then any other person who's not more than 10 years younger than the plan participants. So it's pretty clear looking at this 10 year rule that the government felt that they wanted to make certain that the plan money comes out within a shorter period of time so that the feds can get revenue as a result from these IRA balances.

After all, we're going into years of very significant wealth transfer and IRAs and 401ks have been a significant part of wealth accumulation in the United States. So I threw out some examples here, what planning could be done with each of these different exceptions. For example, the spouse, it should be EBD not EDB, I apologize for that, but it's eligible beneficiary designation. That's the key word. You could use a conduit trust because the plan designed for spots.

And the conduit process is what we call a see-through a trust, which is generally a trust where the plan benefits are paid into and then directly paid out to the one beneficiary of the trust. That's still a good plan to use. It's a trust where the spouse gets the income interest and then ultimately it could pass out to the spouse of the named beneficiary. That's good but the 10 year pay would apply after the spouse passes away. And whoever that designated beneficiary is would have to pay it over their life over a 10 year period of time.

Again, the spouse could roll it over and then delay the start of using the uniform life table and at that they can name their own beneficiary or the eligible designated beneficiary to it. So most of our clients typically have bullet point number one as their plan design, but it's good to just refresh those designated beneficiary. Second is the minor child. Under the ACT minor is defined as someone up to age 26 who is taking a course of education.

And then again, you could use the conduit trust as long as the minor is named as the sole beneficiary and upon his or her death then there's a 10 year payout. Or, actually I apologize, as soon as he or she turns, the minority, the pad is accelerated at 10 years. Again, disabled or chronically ill status is determined at the death of a plan owner, and that's a good use of the accumulation trucks, which are typically designed as special needs trust.

So people of not less than 10 years younger, typically used for siblings, an outright conduit trust would also apply in that situation as well. So those give you a sample of what types of planning could be done with each of these types of beneficiaries. So what do we want to do? We want to eliminate in our state plan, we want to consider one of the five designated beneficiaries in our state plan ultimately inheriting the retirement assets and eliminating the other discretionary beneficiaries.

Remember if you're a state plan in a state, a non-conduit or non-see-through trust, then when the plan participant dies, there's a five year payout. And that's always been in the law and it stays in a long business period. If there are multiple beneficiaries and are treated as a designated beneficiaries with at least being a eligible beneficiary, the death of the plan owner, you can split that into separate trust where each beneficiary with the payout will apply separately.

So if you've got the disabled, the chronically ill being a participant, part of that trust could be paid over his or her life expectancy. One of the planning techniques that a lot of folks is talking about, which seems to have a lot of legs to it, provided that an individual is charitably inclined, is that you could set up a charitable remainder trust. That basically, with that plan design money that's paid directly into a charitable remainder trust is not taxable because the charitable remainder trust is tax exempt.

It would provide an annual path, individuals usually over their life, and that at the end of the trust term it would go to a philanthropic endeavor, could be a foundation. So that might be one way of transferring your retirement plan assets into a trust, leaving a pay out over the life of a beneficiary to get that accumulation ability. And then as long as 10% of the present value of that initial contribution, so if that's a charity at the end you're safe. So that's one idea.

The other idea would be maybe set up a testament charitable gift annuity where an individual will name the charity as a beneficiary or sign it for a gift annuity. And it's possible. There's a ruling out there that essentially states that the income in respect to the decedent is taxable to the to the charity and not to the annuitant. So the charity essentially picks up on the income and the annuity that comes back to the beneficiary is tax free. So that's a strategy some folks are talking about.

And obviously the Roth IRA strategy still works but you've got to understand the rules around the tenure payout. So the accumulation is not going to be as great as what you thought it would be when this plan was set up. And that's what people were concerned with when the Roth IRAs were established was that the government would change the rules on this. And certainly they just did by changing the designated beneficiary term. So what do we do?

So with every task or distress in society, it happened at 9/11, and it's happening now with is pandemic, it's always important for you to look at your balance sheet and your assets as well as all of your wills and most importantly is your designated beneficiary. Because of these world changes, this may impact, maybe not as significant as other world changes, but it's important for you to reconsider your beneficiary designation or at least at a minimum refresh them.

With that said, I'm going to now turn it over. Well, one other comment is on kiddie tax. The old kiddie tax rules are now in play again. It was under the 18 Act that the kiddie tax rules were changed to apply the trust income tax bracket to determine  the highest trust rate.  A child can reach the highest rate with as much as $12,000 worth of income. That provision was taken away. So now individuals have the opportunity to go back and amend 2018 and if they even filed '19 return, to use the old kiddie tax rules.

And with that said, I will now turn it over to Barbara Taibi, my colleague, who will talk about the Cares Act provisions for individuals.

Barbara Taibi:Thank you very much, Brent. Hello everyone, this is Barbara Taibi from the Metropark New Jersey office. First thing I want to talk a little bit about are, as we know, the majority of our tax filings and payments have been postponed now to July 15th, which being that today is April 27th is good news to know that, that we're not in trouble. So we have this additional extension which is going to basically apply now to anything that was originally due on or after April the 1st and before July 15th of 2020.

So the common examples would be all of our 1040s, our 1041s. As of now the federal 2020 Q1 and Q2 estimated payments will be due together on July 15th. On May 15th we typically had all of our 990, 990PF forms. Those have been extended as well as our 5500s. Gift tax returns, generation skipping tax payments, so that would be anything on the form 709 that's filed, estate returns form 706, any of those that were due within this timeframe are also now extended to July 15th. The postponements are automatic.

There's no dollar limitations to them. And when we do get to July 16th, we're going to at that point have to do the detention form that was originally due April 15th. So for example we'll do a 4868 for individuals that'll take us to October 15th to date if we extend at that point. If we are underpaid come July 15th with our extensions, the penalties are going to start to run as of that date. You also need to note that this release, it applies to any schedules or other forms that are typically attached to the form or postcards that would have been required to have been filed on that April 15th deadline.

So that includes the 3520s, 5471s, we have the extension. Refund claims that were due for 15th, they're extended to July. Elections that needed to be considered and on a timely filed tax return are going to go to that July 15th due date. And of course if you are waiting for a refund file now, we're trying to take care of all of our clients that have refunds coming to them, we want to get those in right now. And secondly, you really also need to pay attention to the States. You've got to check the state roles.

We've got a lot of information on that. It's important because they're not all following exactly the same federal guidelines. New York's pretty good, they're following federal. New Jersey, we were sitting there waiting till the last minute to see how New Jersey was going to react to this. They finally did decide to follow federal with the extensions. But at this point it looks like in New Jersey the second quarter 2020 estimate is still due June 15th, which means New Jersey people are going to be paying their second quarter in June and their first quarter in July.

Some of the payroll forms, I'm sorry, I fast forward. Okay. So some of the payroll forms have not been excluded and I've listed those there so you've got to pay attention to those. And lastly my colleague, Richard Shapiro, has a really great article on all of the postponements. It's on our website. I've got the link there for you. So there's a lot more detail there. The next thing is rebates. I know probably a lot of people on this call may not qualify for the Cares Act rebates to individuals, but probably a lot of our children, other relatives may, so I think it's important to note.

These are the checks that have been coming. I think they say about 60% have been paid out to date. It's the $1,200 rebate check for a single individual with adjusted gross income up to 75,000 and $2400 for a married couple with at BGI of 250,000 , and an additional 500 for qualifying child. So these are rebates. They really are a credit to your 2020 tax liability. But the government didn't want you to have to wait for that so they wanted to get them to you faster and they're issuing these advanced credits.

But what that means is that let's say in 2020 when you file your return, should your circumstances change and maybe you should have gotten more than you got because of them looking at your tax return now, you'll be able to get that extra amount in 2020. But if you get too much now, you don't have to give it back. So that's good news. In order to get these rebates, you have to be a US resident. It's not available for non-resident aliens. Trust is not available for first world states or individuals claimed as a dependent on another return.

US citizens living abroad do qualify. You need a social security number. They're basing this on either your 2018 or your 2019 tax return if filed. So what do you look at there? Well, if you haven't filed '19 yet, take a look. Maybe if your circumstances get you more money because of the way you filed '18 wait, if '19 gives you a better result, you still have some time to get that in. So I would say then let's get that filed. Even people that are only falling return to get back money because of a childcare credit or earned income credit, they can do that and they'll qualify.

Also it's important to note that the government realized that probably a lot of the people that need these most are going to be people that don't typically even file tax returns. So they set up these portals on the website. One is the Get My Payment portal, which is a pretty good tool for people to use just to track where their payment might be or see if there's an issue. There's also for non-filers, a section on this portal on the website which allows you to input your information so that if you haven't filed a return in '18 or '19, maybe you're under this threshold, they'll have your information.

So that you can place it in there and you should get your rebate check. And I think it's really important that people that are eligible make sure that the IRS knows how to find them because it looks like there might be even more stimulus down the road. So we want to be sure we get this taken care of. Some retirement provisions under the Cares Act. Required minimum distributions are suspended for 2020. The amounts that you typically would have to take out of your IRA are suspended, and that includes your inherited or your traditional IRA’s.

So if you don't need it, you don't have to take it. And that would include the 2019 distributions that had to be taken by April the first of 2020. So think wisely about this because if 2020 puts you in a lower tax bracket, maybe you still take the required minimum distribution, but if you're don't need the cash and you're in the same bracket, it's a good way to keep money in a tax deferred account, maybe ride the eventual market checkup.

And also because the R&D is probably based on much higher values because they looked at the 1231(19) so it would force you to take out more, you can leave that money in there. What about those that already took the 2020 required minimum distribution? Well, if you took it in early January, as anyone else you would include it in income and pay the taxes if nothing had happened. If you fell within the window where you might've had the 60 day window that you already used, then you can put it back in without any tax consequence within 60 days of the distribution.

And now there is a new rule where that 60 day has been extended through July 15th of 2020, if the 60 days falls between April the 1st of 2020 or July 14th of 2020. You now have really longer than 60 days to put it back in with no tax consequences. Remember, this doesn't eliminate the one roll over for 12 months rule. And it also doesn't work for non-spouse beneficiaries because they typically can't roll over their inherited IRAs. Another thing some people talk about, the conversion to a Roth IRA doesn't save you really tax dollars, but sometimes it's a good time to convert when market values are down.

And also note that 2019 contribution deadlines for qualified claims that typically were 4/15 you now have until 7/15 to make those contributions. The following rules that I'm going to talk about in a second about loans and early distributions are going to apply to individuals that have been effected by COVID-19. And what does that mean? Well, these are really what the requirements are. You might have been diagnosed a spouse or dependent. Probably the thing that most of us will fall under is either quarantined or furloughed, laid off.

There's been a work reduction, an inability to work because you don't have childcare or you're the owner of a business that's been forced to reduce hours because of COVID-19. So assuming that you're unfortunate enough to meet those requirements, here's some of the changes that you can look at. The first is that the 10% penalty for early distributions, that would mean you're under age 59½ and you need to take money out of your retirement account. That 10% penalty has been waived. And this applies to distributions up to $100,000 taken any time between January 1st and 12/31 of 2020.

For most accounts, which is 401ks 403(b)s, Aesop's, IRAs and certain deferred compensation plans. Multiple distributions are allowed so you don't have to take it all in one top. And you can take some and then realize towards the end of the year that you'll need more and that would be okay. You can pay the income tax on this distribution relatively up to three years starting on the date of the distribution, and this is interest free. Or the distribution can be converted back, contributed back into the retirement plan anytime during the three year period starting at the distribution date and it will be treated as a tax free rollover.

And when you re-contribute that money back, you can either put it back into the plan you took it from or you can put it back into a different plan. And the other thing I wanted to note is that you also no longer have to have required withholding on these distributions this year. Also note that unlike loans from your plans, these repayments of these early distributions, they're not going to come due because you terminate the employment of the company where maybe the money came out of, you'll still have typically the three years to pay back even if you're no longer employed at the company where the plan is held.

A couple of changes in retirement plan loans, and this only applies to loans from the period March 27th, '20 to 12/31 '20. It increases the allowable loans that we can take to the lower of $100,000 or 100% of our vested balance. In the past that limit was 50,000 or 50% of the vested balance. And if you're an individual that already has an existing loan out with a repayment due date within the same timeframe, you can defer that payment for one year. So if the normal payback is a five year period, they're not going to include 2020.

So you really have six years to pay back that loan, but just keep in mind that interest does continue to accrue. Switching gears to some of the changes with charitable contributions, I think everybody is trying to do their part as much or as little as we can. And one of the small but meaningful changes that the Cares act made is to allow a $300 charitable deduction per person for charitable contributions regardless of whether you itemized the return or not. So for 2020 and forward, you're going to be able to take this $300 for charitable contributions that you make above the line regardless of itemizing.

The second and more notable one is that the 60% adjusted gross income limit for charitable contributions is suspended for 2020 only. So you can now give cash gifts, qualified public charities up to 100% of your adjusted gross income in 2020. And just to note here, this doesn't include donations to your donor advice funds or to charities who support other charities and certain private foundations are excluded. They're looking for cash to be on the ground and working to really help the people that need it now.

In order to go up to this 100% limits, we're going to have an election that will be made on the return partners and shareholders and individuals make this election. And if we exceed in contributions 100% of the AGI, you're going to be able to carry over the excess for the same five years you would with any other contributions that have been made. An interesting part of this is that they changed the ordering rules though when they brought this in.

So for 2020, the typical ordering of contributions has been suspended, and what they're requiring us to do now is that you're going to have to use the contributions that you made to either contributions that are a 20% limit, which would be non-cash to say a private foundation or the 30% limit, which are typically marketable securities, appreciated property that's given to public charity, those are limited to 30% of your AGI. We have to use those first. And then if there's excess, that's what we can take up to 100% of AGI.

And that's a little bit different because in the past typically you took your cash occurring up to the highest levels first and the other 20 and 30% were those items that carried over. So an example of this ... I don't see anything. Sorry, it came off my screen. I don't know if you see it or not, I'm going to quickly give an example that my colleague Marie Regal actually used about a week ago, which was if you have a person that for 2020 say has $1 million and she has already given appreciated securities to a private foundation of $300,000.

So what's the maximum deduction that she can get for her public charity donations? The answer for that is that first we have to look to that 300,000 she gave and use that first. So that would normally be limited to 20% of her adjusted gross income or 200,000. If she uses the 200 then 100,000 gets carried forward to 2021. And then she can take the rest of her AGI, the 800,000, and use it to make donations to qualified charities under this new rule all the way up to the million dollars. And we also do think that applies to carry overs in the system. So if you've got a 20 or 30% carry over, we think you have to use that first in 2020 and then you can take the excess to get you up to the 100%. And with that I'm going to turn it over to my colleague Scott Testa.

Scott Testa: 2025 if not sooner, there's a change in the White House. And the exemption is use it or lose it. So that means you have to use basically anything over,

If it falls back down to 5 million, giving 5 million now won't help you, but you have to use your exemption now. The good news is there's no clawback so you won't be adversely impacted later if the rates are cut in half for example. So the key is to leverage this exemption, use annual exclusion gifts or even use your exemption and use gifts of minority interests, just some prompts in order to get the discounts, or with assets that are expected to appreciate significantly. And you also want to consider other reasons for making gifts and whether make gifts outright or in trust.It's not just about estate and gift tax planning, you have to think about cash flow, asset and creditor protection and income taxation. And I just mentioned that trusts provide greater asset and creditor protection and could preserve wealth within the family. You can use gifts outright or in trust to shift assets to donees or beneficiaries in a lower tax bracket, for example. If you use a grantor trust you can take advantage of the tax burn by having the grantor pay tax on the income. Or if you use non-grantor trust you can make distributions to beneficiaries who might be in a lower tax bracket or in a no tax state.

Or you can even use a resident exempt trust and potentially not pay any state tax at all. I don't know those of you who were on the Heckerling update, I talked about this in more detail. Intrafamily loans. With interest rates at an all-time low, now is an ideal opportunity to make loans for cash liquidity to kids to buy a house, make an investment and at no tax cost. Look at the historically low interest rates. It's short term loan, less than three years is 0.25%, midterm three to nine years is 0.55%, long-term 1.15%. If you make a loan to your kids and they earn income above that, you're essentially shifting assets to your heirs at no tax cost.

And I urge you that you document, fully document and secure these loans and make sure you follow all protocols regarding a l

Scott Testa:Thanks Barbara. Hopefully you can hear me okay. I know this is going to be a tough act to follow up between the governors and my colleagues Tim, Brent and Barbara. We're actually towards the end of our allotted time or our time for the webinar but we have been given until 2:30 so hopefully you can stick around. And I do see that a lot of you are asking a lot of great questions and we'll try to get to them as much as possible, if not on the webinar we'll have to follow up with you.

So with everything going on today, the last thing you want to do is be unprepared. The first thing I want to do is to give you a reminder and to make sure that you review your current estate planning documents and make sure everything is up to date. That includes your wills, healthcare proxy and where you appoint an agent to make healthcare decisions, your living will, where you make your own choices for health support, make sure your beneficiary designations are up to place, make sure you have a list of total assets and access to online account.

Again, you want a will not just for tax planning but you want to name, if you have minor children, for example, you want to name a guardian or you want to name your personal representative just to not get caught up in a probate and not have to post the bond. All right, so why are we talking about estate planning now? Because right now we have basically a trifecta. We have the highest federal estate tax exemption ever, the lowest interest rates probably ever and a down-market. So of course everybody's thinking about that now is the perfect time to do some estate planning.

So just a quick look at the federal state gift tax exemptions for 2020, there's 11.58 million per person or 23.1 6 million per couple. So for the wealthy and ultra-high net worth individual who needs to do some planning, I recommend that you use your exemption now before it sunsets after 2025. And as I mentioned, yes, these exemptions put into place under TCJ will expire after oan, establish a legitimate creditor/debtor relationship. I was going to talk about a bad facts case that came out later on if there's time. But again, if you have a loan make sure it's written and signed. Make sure there's adequate security, stated interest rate. Make sure that there's a fixed payment schedule that your children pay interest annually. They should set aside funds to repay the note. And the one thing that this case looked at that came out recently is the parent’s intent on making the loan.

If you do have existing promissory notes, you can refinance those notes, use these lower rates. It won't be an additional gift, so consider that as well. The next item on the menu is a grantor retained annuity trust. I know we've talked about these before, but with rates so low, it's now time to think about these. Again, this is a transfer to an irrevocable trust, provides a stream of annuity payments back to the grantor for a term of years at a fixed dollar amount or fixed percentage. You can increase the annuity by 20% a year. When the term ends, the beneficiaries receive the assets.

If he died during the trust term it is pulled back into your estate. But the key here is that you can do a zero out GRAT, meaning the remainder can be valued at zero. Also during the trust term the grantor pays tax on the trust income. I like to use a grantor trust as the beneficiary of the grant so you can continue to use the grantor trust provisions. And again, for the GRAT to be successful, the assets must appreciate at a rate greater than the 7520 rate.

Which for May of 2020, and I had to do a double take on this, is 0.8% for May of 2020. This is an all-time low. So as long as trust assets appreciation faster than that you've made a tax-free gift your kids. Here's a quick diagram of how it works. If the parent puts stock value to 5 million into a two-year grant, takes back an annual annuity. Again, this is based on a two-year grant, 7520 rate is 0.8%. The annual annuity payment is 2.5 million. The remainder, the taxable gift is based on the 0.8% so the taxable gift is zero or a dollar. And if you look, if this asset appreciates at even a 5% rate of return, you've just gifted 326,000 to your heirs gift tax free.

Now if you had a GRAT that has failed because of the market downturn has reduced the value of the trust assets, the best solution is just continue to roll these assets into a new GRAT. And that's the theory of the short term rolling GRATs. Matter of fact, two year rolling grants have been popular in the past. They are based on the premise that the GRAT will either succeed or fail within two years. And each year as an annuity comes due you roll that asset to a new GRAT.

You might also want to consider that in today's environment the rate is low as it is now, I guarantee you it won't be the same 0.8% a year from now or two years from now when this annuity is paid out to you. But the key is to choose the right assets and duration that will in all likelihood overcome the current downturn in the market, and you want a term of years the grantor will most likely survive. The advantages of the grant is that you can make substantial gifts tax-free, you get future appreciation out of your estate.

You do get annuity payments back from the trust, which could be seen as a disadvantage as well. But depending on the need of the grantor, the grantor pays income tax during the trust term and also at the remainder if a grantor trust is used. And the key is it's authorized by statute, it's in the code. The disadvantage is that there's mortality risk, if you died during the GRAT term it's pulled back into your estate. There's no step up in basis and there's a chance that it may fail.

And also it's not good for GST planning as you cannot allocate GST exemption until the trust term ends. Another technique that I like a lot is the intentionally defective grantor trust and the sale to the intentionally defective grantor trust. This is a type of trust where all income earned by the trust is taxed to the grantor because the trust is defective for income tax. So you have to separate the legal and the gift tax consequences where you have a completed gift.

You have a separate entity that exists for legal and gift tax, but for income tax that trust is disregarded. It's ignored for purposes of income tax because there are certain powers that are within that trust document. One of those powers you typically see is the swap power. The grantor retains the right to require trust property and substitute assets of equal value. This is also a great move for swapping out low basis assets. You can do that with cash. And another benefit of the grantor trust is that you can do a sale to the trust and it's not a taxable event.

So if you sell a highly appreciating asset to the trust in exchange for installment note, you do need to seed the trust with about 10% of the asset value. So that's sufficient capital to make its payments and other that also goes to the security issue. To an extent the growth rates on the assets exceed the interest rate you've made tax free gifts to your children, there's no capital gains on the installment sales to the trust because it's disregarded.

Interest income, it has to be paid. The trust has to pay you the interest income, but it's not reportable because it's disregarded. Again, you have to separate legal from income tax. And just to illustrate how that works, the parent could seed $500,000 cash to the trust, then transfer or sell a partnership interest valued at 5 million, take back a note. In this case, a nine year note at 0.55% interest rate, interest is paid annually on the note of 27,500. Let's say that note is paid back after nine years, you could also refinance it. If the asset achieves a 5% annual rate return, you've transferred, even after repayment of the note, 3.2 million out of your estate.

I'll just look at the ... Here's a comparison of a sale to the defective grantor trust versus the grant. We talked about the pros and cons of the GRAT. The advantage of the sale to the trust is that it uses the lower interest rates, the lower benchmark and some more assets may appreciate tax free. If you died before the note is paid off only the note is included in your estate, not any appreciation. You can also benefit multiple generations; the trust could be dynasty trust for your children and grandchildren.

And another key is that you can back load the repayment. It's interest only so you're not paying a large chunk of it annually, pulling it back into your estate at that time. So you're given more time to grow. It does require the upfront gift, so there is some gift tax cost to it. And there's still some uncertainty if note is not paid off and you die whether a capital gains tax is triggered. A charitable lead trust also works well within a low interest rate environment.

This is a trust where the charitable beneficiary receives an annual annuity. The grantor, depending on the type of charitable lead trust either gets an upfront charitable deduction or if the trust is non-grantor the trust pays its own tax. It does require charitable intent because a large part of these annual annuity payments are going to charity. But again, to the extent that the trust outperforms a 7520 rate, that you may see it 0.8% for May of 2020, you're passing assets to your heirs tax free.

If the present value of the annuities payable to the charity equals the value of the contribution, that's essentially zeroed out so there is no taxable gift. I just want to move things along, running out of time here. As I mentioned there was another bad facts case that came out, Estate of Howard V. Moore v. Commissioner came out a few weeks ago. And I just want to emphasize that if you do these things, you do set up these estate planning vehicles, you want to make sure your transactions are set up and maintained properly.

As I said, don't just set it and forget it. You got to monitor these things annually, you've got to respect all formalities. You don't want to be a bad facts case. I'm running out of time to get into details of that case but this is where a decedent who was terminally ill set up a family limited partnership, did a sale to a defective grantor trust. The IRS basically struck down the family limited partnership by saying that he did not establish legitimate non-tax reasons. And I see a lot of my colleagues on the call, a lot of CPAs, estate tax savings is not a legitimate non-tax reason.

So be careful what you say in your emails. And the one thing that the court noted in this case is the reason he set this up was to save millions of dollars in taxes. It's not a good reason. You don't want to document that. Any transaction should be arm’s length. If it's the sale, it requires bargaining and negotiating, questioning, get it properly structured and funded, separate bank accounts. Don't commingle, don't pay personal expenses out of the family limited partnership or the trust or vice versa, don't pay the expenses of the trust or family limited partnership.

To my colleagues listening, if you're doing these returns and you see this happening, give your client a little slap on the wrist and say, "You can't do this. You got to reverse it. Make sure you follow formalities." That's the key point here. I do need to wrap it up, I'm probably running out of time. Any questions? Fortunately, there's a lot of number of planning opportunities from which to choose. Unfortunately, due to market conditions and economic uncertainty, many wealthy clients they're hesitant to make a gift.

I did forget to mention, if you do a grantor trust you can name your spouse as a beneficiary as a way to get additional funds in case you needed some cash to be brought back into your estate in case you're concerned about any cash flow consequences there. All right. I think I'm wrapping it up and just wanted to give a shout out. I mentioned when would a client finally decide to do some planning? I would say it might be at some point when your friends start dying. And I want to mention, I want to give a shout out.

I lost a dear friend of mine about 10 days ago, not Coronavirus related. I want to give a shout out to my friend Jon Coun who I will miss dearly. Again, it's never too late to do estate planning, it just hits you when something like that happens. So please consider urging your clients to do so as well. Thank you.

Moderator: Thank you, Scott. And it looks like we are just about up for our time, so if we did not get to your questions submitted during the webinar, we will connect with you offline. EisnerAmper has a number of COVID-19 resources for you. If you scan the QR codes on your screen with your phone, you'll be directed to our resources. Thank you for taking the time to join us today. We hope you enjoyed our presentation on individual tax planning new era.

A special thanks to our speakers today for delivering this insightful program. The recording session will be available on demand later today and can be accessed using the same link you used to join. We would appreciate if you would complete our evaluation survey, which will pop up at the conclusion of this presentation. So please keep this window open. Thank you everyone for joining our webinar today.

Transcribed by Rev.com