On-Demand: Year-End Tax Strategies for Individuals and Families

We're going to talk a little bit about Qualified Charitable Distributions because the Secure Act did not eliminate this transaction and technique that we can use. So what is a Qualified Charitable Distribution? Well, this would be an otherwise taxable distribution from an IRA owned or inherited by an individual age 70 1/2 and over and paid directly from the IRA to a qualified charity. So there is a limit on qualified distributions. It's a maximum of $100,000 per year that each person, each spouse can give from their owned or inherited IRA that would go directly to benefit the charity. Okay and you have to understand that this needs to go directly from the IRA out to the charity directly. It can't, you can't be the go-between in this.

So what's kind of the benefit of using a Qualified Charitable Distribution? Well, the distribution is excluded from your income. Again, we're saying that this has to go directly from the IRA to charity. 2020 is an odd year as we're going to be talking about more and while we have different rules for required minimum distributions, the CARES Act doesn't require it this year. We'll talk about that, the age has risen but in a typical year, to take a Qualified Charitable Distribution when you do have an RMD, it's one way to basically get it out but not have the income. And that's what's really important. Probably the biggest benefit is that a Qualified Charitable Distribution, it reduces your AGI. It is not included in taxable income as would be a normal IRA distribution. Right? 401(k) distribution.

So what does that do? What's the benefit there for you? Well, basically if you have a lower Adjusted Gross Income level, then maybe now you would get more of the QBI deduction, the 20% deduction for qualified business income because your income's lower. Maybe now you're under the threshold. Maybe you get more medical deductions because you have exceeded the 7 1/2% of income. You could be in an overall lower tax rate altogether just because of the lower Adjusted Gross Income. And for those that are concerned with Medicare premiums, a lower AGI typically would mean a lower America Medicare premium that you're forced to pay.

So, we know it's not an income, but is it a charitable contribution? Is it a deduction? No. Right. If it's not going to be in your income if the Qualified Charitable Distribution is not an income, there's no further deduction allowed. So it is basically not going to be allowed as a charitable contribution on your schedule, an itemized deductions. And just to keep in mind that you cannot use this strategy to make contributions into donor advised funds, supporting organizations or private foundations.

Another part of Secure Act is basically the partial elimination of stretch IRAs. And what we're going to talk about now pretty much applies to non-spousal beneficiaries. So before 2020, if you had the death of a plan participant or an IRA owner, you were allowed to give a designated beneficiary and that person would stretch the tax deferral advantages of the plan that they're inheriting of the IRA over the life of the beneficiary. Now for participants in IRA owners whose death is after 2019, the distribution to a non-spousal beneficiary is required to be withdrawn from the plan within 10 years of the plan owner's death. So you can see how this really makes a big difference, right? If you were 30 years old and you inherited an IRA, you would have been required to take 150/3 of that plan balance out based on your age. Now you only have 10 years to take out the full balance that's in this plan that you are inheriting. So that certainly gives you a lot less time to let something grow, tax, deferred to when maybe you as the beneficiary would need it.

Just to know though that there aren't readable distribution requirements here, so you have to get it all out in 10 years, but you don't have to take one 10th every year. So you might know that come down the road, your income situation's going to be very different in three years. Maybe it's going to be much, much lower. You think about maybe taking a larger piece out of it at that time, you may be even wait all the way to the 10th year. It just has to come out then but doesn't have to be in equal pieces every year.

There's some exceptions to this 10 year rule. And this is a new class of beneficiaries. The Secure Act created they're called Eligible Designated Beneficiaries EDBs. And this is basically the group of beneficiaries that can still take distributions over their life expectancy. It's kind of like they're still going to follow the old rule. These would be a surviving spouse of a plan participant. If you have a minor child as a beneficiary, that could get the longer timeframe, chronically ill beneficiaries and a beneficiary who is not more than 10 years younger than the plan participant that may be a partner, a friend, a sibling, these would be eligible beneficiaries.

So we have some planning opportunities, just quickly because of time constraints. Just know that you should probably be looking at your state plans to determine, do you have eligible designated beneficiaries? Maybe you want more of those take out some of the other beneficiaries you have, when you're leaving IRAs to minors, look at certain conduit trusts or possibilities. Perhaps now leaving an IRA to charity is a better idea. A charitable remainder trust, charitable gift trust. You could think more about that based on the 10 year rule as a better benefit.

Also note the Roth strategy still could work here to start to convert to a Roth IRA as an owner. Especially if you as an owner are most likely in a lower tax bracket than the people you are leaving the money to. Because you can start to take pieces out of the traditional converted to a Roth. And even though you do still have the 10 year rule, but right they're going to be able to get that out tax free. So you're paying tax now at a lower rate than the beneficiaries would had to.

Again, just keep in mind, let's start, you know review retirement plans, because these are some big changes and you might think there's nothing that really pertains to you in the stretch IRA rules. But you're saying, "Oh, I'm leaving it all to my spouse anyway." Well perhaps if you are similar in age, this is a problem your spouse might have just a few years down the road too, if something were to happen to them and then they would have a non-spousal IRA, that's going to be left to beneficiary. So the 10 year rule could apply to maybe deal with it now and have it done with forever.

Quickly, the Kiddie Tax, the TCJA tax cuts and Jobs Act did change the rules there and that's when Kiddie Tax we were basically paying at the trust rates. Well, that's all been eliminated. So now we're kind of going back to the old rules and for 2020, we're going to be taxing at the parent's rate again. So any unearned income of a minor child over $2,200 is now going back to being taxed at the parent's rate. So we have to remember and review the rules as we knew them prior to 2018.

Barbara Taibi:Thanks, Marie. All right, let's move on now to the CARES Act. The CARES Acts was really created due to the COVID pandemic that we're experiencing. I guess it came about sometime in March of 2020, right. And probably the biggest highlight of this is that the required minimum distributions have been suspended for 2020. And that includes inherited and traditional IRAs. Typically what's your RMD, right? You have to look to the balance in your retirement account at year end, prior to the year you're in and based you take that fair market value divided by the charts for your life expectancy and that's the piece that would have to come out. So that has been suspended for 2020.

I think it's important that those of us working with clients, make sure if they are not taking that out, that we know that because it certainly changes our projections for 2020. And also if we're thinking we've got certain withholdings that we were counting on that come out of their RMD, we have to make sure we're having them pay estimates or having payments made from some other source. It's a Think Wisely though, about this. You know if you are in a much lower tax bracket in 2020, maybe you still should take your RMD because you're going to get this cash back that you may need at a much lower tax bracket this year because of your circumstances. But if you really don't need the cash and you think your rates are going to kind of be the same year after year, why not maybe keep it in this tax deferred plan to hopefully right eventual market checkups that you can get the advantage of. So you might want to think about just leaving it there, but there could be some people that already took the required minimum distribution earlier on in 2020.

So what happens if you did that and did nothing really? You could just report the income and pay the tax like you normally would. But although this has passed, you did have the ability to put the RMD back into your retirement plan without any tax consequences, by following the 60 day rule, which they had extended through August 31st of 2020. But that date has passed already. And just some note on some of the rules for these plans but maybe even if you miss that 60 day rule, for August but if you take it out after that and put it back in within 60 days, you're still okay or maybe you could be treated as a COVID related distribution which we'll talk about later. It could still be some planning that we can use.

The next rules we're going to talk about when it comes to early distributions and loans only pertaining to people that have had something, an experience that's COVID related. This would be an individual that's diagnosed with COVID or spouse or dependent has COVID. You know there's, you've experienced adverse financial consequences because of the items listed there, quarantine, furloughed, laid-off, inability to work the normal hours that you would and it's interesting that they're saying how as an plan administrator, how do you know that person qualifies? And there, the IRS has said that, an administrator can rely on an individual's certification that they satisfy one or more of these above conditions unless you as an administrator has actual knowledge to the contrary.

So if you meet the conditions of being COVID effected, the 10% penalty on early distributions from a retirement plan. So if you were under the age of 59 and a half, and you would take a distribution that would typically have a penalty that has been waived for 2020. And this applies to distributions up to $100,000 for all of 2020 and includes 401(k)s, IRA plans and certain deferred retirement plans. You could take multiple distributions out, meaning that let's say maybe earlier on you thought you needed 30,000 and now you do need another 70,000 that's okay. It's not limited to just the one in 12 months rule that you typically would have. So you're good to take the other 70 before your end if needed.

And how do you pay this money back or whatever decisions you're making? Let's say that you're going to take this distribution. You have to repay it ratably in this case, it is ratably up to three years from the date of distribution. So in my example, one, you decided to take $9,000 as the coronavirus-related distribution in 2020. You'd report $3,000 on your federal income tax return for each of 2020, 21 and 22. Now, how about you take a distribution and it's going to be contributed back into the retirement plan because you also have three years to put it back in and it would be considered a tax-free rollover. Same facts, you took $9,000 out and you choose to repay that $9,000 the third year 2022. You're going to need to file an amended 1040X to claim the refund for 2020 and for 2021 on the $3,000 you included in income, get that back, and then nothing would happen in 2022. You wouldn't report anything in that year.

Also changes to loans that you can make any retirement plans. You can now take a loan up to the lower of a hundred thousand dollars or a hundred percent of your vested balance. And that's up from $50,000 and 50% of your invested balance. I'm sorry, your vested balance.

We're going to be working with a new form this year. It's an 8915-E, that's going to be part of our 2020 tax returns. And that's where the, we are going to report all of our coronavirus distribution and repayment information that the IRS is requiring us to disclose.

Sticking with the CARES ACT, we're going to talk a little bit about itemized deductions, mostly charity, because there's been some changes here. So let's just summarize some of the basic rules when it comes to charitable contributions. If you remember that prior to the TCJA percentage limitation for cash donations to public charities was 50% of Adjusted Gross Income. And then for tax years beginning after December 31, '17, TCJA increased that percentage limitation for cash gifts to public charities to 60%. And that did include private operating foundation, donor advised funds and supporting organizations. Donations of appreciated long-term capital gain property to public charities is still at 30% of Adjusted Gross Income. Limitation for cash contributions to grant-making private foundations is 30% of Adjusted Gross Income, but where are you to give long-term capital gain property to those same foundations it would be limited to 20% of Adjusted Gross Income. And for contributions in excess of these limits, they're carried forward for the next five years.

The CARES Act has a new incentive for 2020 only. The CARES Act now limits qualified contributions to 100% of the individuals AGI which is pretty much suspending any limitation for 2020. And this is for cash gifts to a public charity and certain private foundation, but a public charity. It is not intended for donor advised funds, supporting organization or grant-making private foundations. And that's because the intent of this is really to have us donate to charity and have them get the money. Now, some of these other plans, right, it kind of allows you to spread out when the actual contribution is going to be made.

This act also suspends the normal ordering rules when it comes to taking these contributions. So now instead, an individual can take their charitable deduction for amounts that are not considered qualified. So not part of this new 100% rule, take those limits first and then you'd get a corresponding reduction in the allowable deduction for the qualified contribution. And I'm going to show you an example of that in my next slide. Just for 2020, Jackie expects for AGI to be 1 million, she's made a donation of appreciated long-term securities to her family private foundation of $300,000. What is the maximum amount of cash contributions she can make to public charities to get the maximum deduction? So the 300,000 of securities to a private grant-making foundation is limited to 20% of her AGI, which is 200,000. The remaining 100,000 carries over into 2021, and that will allow her to still make an $800,000 cash contribution to a qualified charity. That would give her A full $1 million, which is up to 100% of what we said her AGI was. I'm going to take it to a little slide that talks a little bit more about one of the techniques we use was just for bunching charitable contributions. Let's say we have a married couple who incur $10,000 of real estate taxes, and they typically make charitable contributions of about $30,000 a year. You can see that on the top of the screen. Over a five-year period, the charitable contributions would total 150,000 and deductible real estate taxes would be 50,000, which would give us a total of 200,000 in itemized deductions.

How about if we bunch all of the charitable contributions that they want to make in five years into year one? We're going to take the full 150,000 in year one of their charitable contribution. So in year one column one on the bottom, you'll see that they're going to get $160,000 as their deduction in year one. I'm using 24,000 as the standard deduction. Over the five-year period using this bunching mechanism gets you 256,000 in itemized deductions versus the 200 if we just spread that charity over the five years. Reason being is that you can see in the bunching of the 150,000 in year one, in years two through five, you're going to be getting 24,000 which is the standard deduction, even though you only have real estate taxes of 10,000. So you're actually getting up to whatever the standard deduction happens to be at that time. In a scenario like this, a $56,000 savings, assume you're at 37% rate, that's about a 21,000 tax savings.

There are a lot of mechanisms with retirement plans. In the interest of time, I just am going to talk a little bit about using backdoor Roth IRA contributions. So we know that there are income limit restrictions that apply to Roth IRA contributions, as well as deductible contributions to your traditional IRAs. How about if you have a non-deductible contribution into a traditional IRA that is status permitted no matter the income levels as long as the person does have enough earned income, be that wages or self-employment income? For 2020, that maximum contribution is $6,000, or 7,000 if you're over 50, and that's also applies to a spouse even if the spouse has no earned income. So this plan is just that shortly after you make the non-deductible contribution to the traditional IRA, it then can be converted into a Roth IRA with no related tax cost. And then over time, you're going to be able to continue to do this and have these backdoor Roth IRAs grow and could significantly increase the value of your Roth IRA when, under normal circumstances, you might not qualify to contribute into a Roth IRA.

For those of you in New Jersey like, you've probably read a lot about the new New Jersey millionaires tax. It's new for 2020, and it's in effect for 2020. This tax applies mostly to people that now have to worry about that 1 to $5 million income range, because New Jerseyians have been paying the new increase rate, which is 10.75%. They have been paying that in income of 5 million and up, but now they're going to be paying the 10.75% on any income from 1 million and up. So that's a 1.78% increase on that range of 1 to 5 million. That's an additional $4 million, which is now taxed at an additional 1.78% because it's the 10.75. So that is about a 71,200 tax increase for a person making $5 million in 2020 versus what they would have paid in 2019.

Next will be the election results and thinking of some of the proposals that we might see down the road. What do we know, right? We have a Democratic president. We have a Democratic House. Smaller percentage, but still Democratic. And the Senate's still up in the air, right? We have the situation where either we still have two run offs, so we might have a Republican, we might have a Democratic Senate. We might have a tie, and then the vice-president is going to be the tiebreaker there, right? So, maybe there's going to be negotiation. Remember that word? Negotiating for things that might help us all out based on different areas in the country. But some of the things Biden has talked about, we'll see what happens, his big changes would be that, the thought is that the top tax rate, which is now 37%, would be increased up to 39.6% for taxpayers with income exceeding 400,000. It's just that top rate that's been talked about, the 37 going to 39.6. So if you're a taxpayer earning about $1 million, that would cost you an additional $15,600 in tax.

Right now, our qualified dividends and our long-term capital gains are taxed at a lower rate, right? They've got the 20% and the 3.8% net investment income tax. Well, for taxpayers with income over 1 million, and I think that gets lost, it is over a million that this would apply, the preferential rates of the 20 and the 3.8 would go up to your ordinary income tax bracket, which could be 43.4% if you are now taxed at 39.6% and the additional 3.8. So a taxpayer who would have $2 million of income, 1 million of that being long-term gain, would see an additional 196,000 in tax on that long-term gain, right? A 19.6% increase in the rates we talked about. Another change could be that the earned income above 400,000 would be subject to social security tax.

The way it works now is that we all pay social security tax up to about 137,000. So that continues, but that was the end of it. So, now the proposal is that that stays. The range between 137 up to 400 would pay zero additional social security tax. But then those making over 400K would go back to paying the social security tax again. The thought there being that low-income people do, pretty much, all of their income is being taxed. Social security is being paid on that. Whereas very high earning people are paying on a very small percentage of their income.

The limitation on the rate for itemized deductions. Another proposal is that there may be a limit on the benefit rate you're going to get for your itemized deduction. That could be capped out at 28%. Again, if you're making more than 400,000, you would be in, say, the 39.6% rate for your income. But even though your income is taxed at that rate, you're only going to be able to get the benefit at 28% for your itemized deduction. So if you are a person that's at the 39.6 bracket, and let's say you have $100,000 in itemized deductions, that's about an $8,600 increase in tax, that differential between the 39.6 and the 20% on your deductions. There's also talk of, perhaps, the section 199 a deduction getting phased out for people with income exceeding 400,000. There could be an NOL change. Sorry, net operating loss change. Some of the carryback rules that we now, very favorable carryback and NOL rules that we have, they might be changed, also.

There's also talk of the Pease limitation. Do you remember that in 2017 and back, where we did have limitations on the amount of itemized deductions we could take for our high-income taxpayers? We had to give it a haircut. That could be back. And what about the $10,000 cap that we now have on state and local taxes? While it's not in the Biden proposal, certainly we would think it would be pushed in New York and other very high income tax states. We'll see what happens there. What's going to happen with some of this money other than paying off some of the deficit we'll need to? President-elect Biden has got some ideas with tax credits, bringing in some very important new tax credits. We know credits are good. They're better than deductions because there's dollar for dollar, but he talks about a dependent care credit going up from three to 8,000, childcare credits being raised and being either refundable or partially refundable, to basically use some of this revenue.

All right, so let's talk about some year end planning. If you are of the mindset that you're going to just think about 2020 as it is now, and maybe things are going to stay the same, our typical year in planning, still looking to harvest capital losses. If you've got capital gains, you might want to see if you can take some losses before year end so you're not paying tax. Also, you're probably going to get some capital gains distributed to you if you own mutual funds, so think about those. Maybe you need to take some losses to offset that. Keep in mind the wash sale rules. They're very important. If you sell something at a loss, remember you can't rebuy that same security 30 days before or 30 days after, or you won't be able to recognize that loss. Charity. Charity, very big. Take advantage of the 2020 increased cash deduction. It allows you to take up to 100% of adjusted gross income. This is 2020 only.

I didn't mention this, but there's also a $300 deduction that all of us would get, even if we don't itemize for cash contributions to charity, so we're all going to get that extra $300. Think about maximizing your 401k and IRA contributions. That's very important. In a typical year, we always say, we look to defer income and accelerate deductions if you think that your 2021 position is going to mirror your 2020 rates and things will look the same. How about 2020 year end planning if we think change is coming in 2021? Well, then we reverse some things. We say, "Well, maybe we need to then accelerate income and defer deductions because we think we're going to be paying a lower tax rate in 2020 then in 2021."

I've listed out some ways that you can accelerate income. Exercising options is a big one. Electing out of the installment method. That's, we pour all the capital gain in 2020, as opposed to spreading it out over a few years. Taking larger retirement distributions, if that makes sense. Maybe you want to accelerate your capital gains into 2020 because you are convinced that the 20% rate is going away after this year. Paying the fourth quarter of your real estate taxes or the fourth quarter of your state income taxes, defer that until January, just in case something should happen. Maybe we get a reprieve on the $10,000 cap. Opportunity zone investments is a class onto itself, but certainly still very important. And the conversion of traditional to Roth IRAs could make sense, again, because you're going to have to pay the tax, but you're paying it what we think is going to be a lower rate now.

Okay. Front-loading charity, again, to get the higher, not only the additional amounts that we can get, but also you'd be able to get the deduction at your highest income tax rate assuming that does go to just a 28% benefit in years going forward.

Karen Goldberg:Thank you, Barbara. That was a great presentation. I'm going to shift gears now, and I'm going to speak about estate planning in the current environment. With very high exclusions and exemptions, and that's historically high exclusions and exemptions, and historically low interest rates. I'm going to start off by running through some of these exclusions and exemptions. The annual gift tax exclusion is $15,000 per person in 2020, and it won't be changing in 2021. It's going to stay at 15,000. As we know ,it's gradually increasing for adjustment every year as the consumer index increases, it increases slightly. In the case of married couple, they can give away $30,000 tax-free. The annual exclusion gift from an individual to a non-U.S. citizen spouse in 2020 was 157,000. In 2021, it's 159,000. Only a slight increase.

The gift and estate basic exclusion amount is 11.58 million in 2020 and is scheduled to increase to 11.7 million in 2021. For a married couple, that means in 2020 they have a $23.16 million exclusion, and in 2020, a 23.14 exclusion. The generation-skipping transfer exemption, which is at 11.58 million in 2020, more the gift and estate basic exclusion amount, and it'll increase to 11.7 million in 2021. Right now we have that very large basic exclusion amount, but in 2026, it's scheduled to revert back to a $5 million number plus some indexed amount. This could happen sooner because as Barbara mentioned, we have a new administration coming in with a Democratic president. We have a Democratic Congress. We don't know what the set-up's going to look like. Potentially if there's a Democratic majority, there could be some change in this sooner than 2026.

I know in part of Biden's plan, he does want to reduce this basic exclusion amount. So now a lot of our clients are eager to use this basic exclusion amount. How do they do that? Well, in order to use that bonus exclusion, the amount above some 5 million plus amount, our clients must use the entire 10 plus million basic exclusion amount, that 11.58 million or 11.7 million. This is because that bonus exclusion is deemed to be used last. So the original exclusion, the 5 million plus, is used first. So if a client, let's say, says, "Oh, I'm only willing to give away $6 million this year," and used $6 million of their exclusion, if the exclusion amount reverts to, let's say, five and a half million in 2026 or sooner, that's it. That's 6 million. They used it. They won't have any exclusion remaining once the exclusion reverts to that five plus million. Good news, though. Well, good news and bad news. If your spouse dies in 2020 or 2021 with an exclusion amount of 11.58 or 11.7 million, that sticks.

So if the second spouse dies in 2026, and the basic exclusion amount has gone down to, let's see, 5.8 million, that basic exclusion amount that they inherited from the predeceased spouse that wasn't used and the election was made, the deceased spousal exclusion amount that they inherited from their pre-deceased spouse of 11 million plus sticks. It isn't reduced to the lesser amount when the basic exclusion amount, if and when, is reduced. So, what can we do? What can our clients do with the new basic exclusion amount of GST exemption that is dramatically higher than it's been in the past? Well, now is a great time to use it to forgive family loans. You know those loans. Loans that parents have made to their children, and maybe the children are making spotty payments on it. Sometimes interest. Maybe a little principle. But parents, they don't push to get paid back, and maybe it really wasn't intended to be a loan.

Well, now's a good time to forgive it because last thing parents want is for this loan to be outstanding at their desk, because the IRS might look at it and say, "Well, you really never enforced it. Payments were made on a spotty basis." Maybe it was a really a loan when it was originally made, and when the exclusion was a lot less. So maybe you owe some gift packs in that back year. Or how about another way to use the exclusion is a lot of our clients have these loans between them and they're defective grantor trust because they engaged in sale with an intentionally defective grantor trust. They could forgive those loans. Get rid of it. It's over, rather than waiting until the end. Great way to do it. They probably sold the asset to the trust rather than gifting it to the trust because the parent didn't have enough exclusion to make the gift. So, now they do. Good time to make the gift.

Our clients may be thinking about using the exclusion about, and they're saying, "Oh, I have to go to my attorney and set up a new trust." Well, you know what? Maybe these same clients set up trusts in 2012 when there was the threat of the 5 million plus exclusion being reduced to $1 million. Well, they have existing trusts. These trusts may be appropriate to make additional gifts to, so they should consider topping off those trusts. Maybe some of your clients have life insurance trust, and the premiums are increasing on the life insurance every year. At some point they're going to create taxable gifts to the trust. The gifts to the trust are treated as annual exclusion gifts, but now the premiums are pretty high. Now that there's additional exclusion amount, now might be the time to pre-fund those insurance trusts.

Also, it's a good time to reconsider insurance needs. Clients might've taken out large policies, perhaps second to die policies, because they wanted to use it as a way to fund the estate tax. But now they're saying, "The exclusions are pretty high. Maybe there won't be any estate tax. But then again, there's a new administration coming in. It could go low, but maybe not that low, and maybe I purchased this life insurance when the estate tax exclusion was a million dollars. Maybe my estate tax burden may be less." Something to think about. A lot of our clients have used their basic exclusion amount to make lifetime gifts. And a lot of times have used more basic exclusion amount, the 11.58 million, then their GST exemption amount that's in the same amount. So if the GST exemption reverts back to some five million plus number it'll be lost. Our clients don't want to make additional gifts so they can use the GST exempt amount, but what they could do is take the GST exempt amount, the additional amount above the basic exclusion amount, and use it to make a late allocation to currently existing trust of which likely will go to grandchildren, but previously they had not allocated GST exemption to them.

So now is a good time to use that GST exemption to make a late allocation to those pre-existing trust, if the trust property could eventually go to grandchildren. Spousal Lifetime Access Trust, next topic I wanted to discuss. This is what everyone's recommending to their clients, you hear a lot about it from other advisors, so what is it? SLATS. Well, this is when one spouse sets up a trust for the other spouse, and includes their children and grandchildren as beneficiaries as well. By doing this, the spouse who makes the gift retains indirect access to the trust property. Assuming their spouse is living and married to them, if funds are needed, distributions can be made to the beneficiary spouse, and those funds can be used for the couples living expenses if needed, but this is the last place that a couple should dip into for their living expenses, because the property in this trust is really intended to pass down to children and grandchildren.

A lot of times a couple will set up a Spousal Lifetime Access Trust for each spouse. So husband will set up a trust for his wife, and wife will set up a trust for husband. In this way, regardless of who dies first, the other spouse has indirect access to a trust, but you know what? Those trusts have to be a little bit different, they can't be exactly alike. If the trusts are exactly alike or too much alike, the reciprocal trust doctrine will apply. And what this says is, if the spouse trusts are too much alike, the IRS can unwind them and treated as if the husband set up a trust for himself and the wife set up a trust for herself.

And if this happens, those trusts will be included in each spouse's estate, and the spouses won't have accomplished what they wanted to accomplish. So what if both spouses don't have enough assets to set up a trust for each other and they want to set up a trust for each other. Well, the wealthier spouse can give property to the less wealthy spouse. The most wealthy spouse should immediately turn around and set a trust up for the wealthier spouse. There should be some cooling off period, otherwise the IRS could say that that was a step transaction, that the wealthier spouse actually set up a trust for him or herself.

When they transferred the funds to less wealthy spouse and the wealthiest spouse, less wealthy spouse just turned around and set it up for that wealthier spouse, step transaction. Cooling off period, how long should that cooling off period be? I don't know, not a good answer, but you don't want one spouse for it all to happen on the same day, essentially, whether it's 30 days, I'd like to see it in two different tax years, but there's a question of how long that should be, but it shouldn't be an immediate event, a gift for one spouse to the other in the setting up of a trust. I cannot emphasize that enough.

And it's the end of the year and clients are eager to do this, so there's a less of flexibility with this. I should mention that SLATs are grantor trust, which means that the donor-spouse pays the income tax on the trust income, rather than the trust paying its own income tax. This allows the trust to grow undepleted by income tax, and the payment of income tax is an additional tax-free gift to the trust. So SLAT is a really great planning strategies. So what if a couple says, you know what? We know that the exclusion in 2020 is 23.16 million, and we know that it's going to be 23.4 million, in 2020 and 21 maybe, but we're really only willing to take advantage of maybe half of that bonus exclusion, maybe we're okay with 15, but we're not okay with 23.

So I find this is the case when I talked to a couple that maybe have $50 million or less, they don't want to give away that much of their wealth, 23 million to take advantage of the bonus exclusion. So what I suggest to them is that one spouse use the $11.58 million exclusion to create a SLAT, and the other spouse doesn't use any of their basic exclusion amount. This way, if the basic exclusion amount reverts to some five million plus number, yes, the donor-spouse don't have anything, they will have used the 11.58 million, but at least the other spouse will still have five million, plus million in exclusion remaining. So we will have used little bit of the increased basic exclusion amount.

I mentioned that interest rates are historically low. November 2020, rates for short-term mid-term and long-term notes, it's 0.12%, 0.39%, and 1.17%. Wow, really low. The 7520 rate in November has never been lower less than half a percent, 0.4%. In December, the 7520 rate is increasing to 0.6%. These low interest rates are great for GRATs, sales to intentionally defective grantor trust, and intra-family loans. It's a very low hurdle rate, parent loans, money to child with a note bearing an interest rate at 0.39%. Child takes up those funds and invest them in something that grows at greater than 0.39% a year, that appreciation ends up in the hands of the children, and they just have to return to the parents, the principal on the note and that low interest rate. So all of that appreciation gets to the child. It has the same impact with a seal to intentionally defective grantor trust interest rates is so low.

The hurdle rate is so low that future appreciation will get to the trust. And you know what? For those clients who have outstanding notes, now is a good time to refinance those notes at these lower interest rates. And that 7520 rate, less than half a half of a percent, great time for GRAT, but this is very bad for qualified personal residence trust because of the way the interest rates works with respect to qualified personal residence trust, there'll be less of a discount with the low interest rates. The qualified personal residence trusts are not attractive strategies in this current low rate environment. I wanted to show you to illustrate how effective this can be in the low interest rate environment using the GRAT.

So you have a client, he transfers $10 million worth of stock to a two year zeroed out GRAT. The client takes back an annuity equal to $5 million, plus some small amount of 29,928. The amount about the $5 million represents that 0.4%. The value of the gift to the trust is zero, but if the property appreciates at 8%, 10%, and 12%, look how much gets to the children without using any basic exclusion amount or paying any gift tax. 1.2 million at 8%, one and a half million at 10%, and 1.8 million at 12%. How great is that? The low interest rate is very, very powerful because the children are getting appreciation above that 0.4%. Well, sometimes our clients like to procrastinate, it's better to plan now rather than later, because the basic exclusion amount is scheduled to be reduced in 2026, and it could very much happen sooner.

It's always a good idea to transfer an asset before it appreciates to transfer it earlier, rather than later. And making a gift of an asset can be much more beneficial because the asset may be entitled to valuation discounts for gift tax purposes that wouldn't otherwise be allowed for estate tax purposes. For instance, a client owns a hundred percent of a business. If he dies with it, 100% of the businesses is subjected to estate tax, no discounts. But this during the light, he should give a minority interest in the company to his child or trusted that child, but minority interests will be subject to minority interest discount, lack of marketability discount. It'll be something less than, maybe that 40% interest the client gets to the child, it won't be the full, that 40% interest may be able to be discounted maybe 30%, 35%, because of the potential valuation discount because he's only giving away a minority interest.

Karen Goldberg:Well, 66% of you are cracked in 2020, it's 11.58 million double gap for married couple 23.16 million. In 2021, it's 11.7 million and for married couple, 23.4 million. I think incorrectly at the beginning of this, I might've said 23.14 million, but it's 23.4 million. Apparently I don't know my math, but let's go on to the next slide. Well, the New York estate tax exclusion is scheduled. Well right now it's 5,850,000 in 2020, and it's scheduled to increase in 2021. I don't know what that number is yet.

Once the in estate exceeds that 5,850,000 number by 5%, a couple or an individual is not entitled to any exclusion, and the entire state is subject to New York estate tax. Connecticut, this is big news. The $3.6 million exemption rose to 5.1 million in 2020 for gift in estate tax purposes, and remember Connecticut is the only state that has a gift tax. In 2021, it's scheduled to increase to 7.1 million, but with all the state deficits, who knows if this will continue?

MA:So we're going to move on to philanthropic planning opportunities. Thank you, Karen, for great presentation on estate planning.

So philanthropic planning should be incorporated to your income tax planning and charitable deductions are obviously more valuable in here with the higher marginal income tax rate, and profit planning includes doing a two year income tax projection in order to timeout the charitable deduction for the optimal benefit. Now, this has always been a little complicated, but it's particularly complicated in this period of time because we have such uncertainty with the impact of the three acts, the TCJA, the SECURE Act, and the CARES Act, as well as the change in administration, which as we've all been talking about may very well mean a change in the tax law, and in what year that's going to come to be, we really don't know.

So consider bunching charitable deductions in one year, is a methodology that does work. And Barbara had an example earlier on presentation that demonstrates that, and there are other charitable vehicles that are available to effectuate philanthropic planning. So this is just a summary of the adjusted gross income limitations on charitable giving Barbara covered much of this earlier in her presentation, but I just wanted to make this a summary to show that public charities and private operating foundations typically follow the same percentages. And by the way, did limitations really based on three factors, the individual's adjusted gross income, the type of property that's given, and the status of the exempt organization.

So for public charities and private operating foundations, if it's cash, it was 50%, it would be 60%, sorry, for cash contributions, but 100% in 2020 only, if it's ordinary income property is 50%, and appreciate capital gain properties at 30%, non-operating grant making foundations at 30% and 20%. So any excess amount that's contributed, that's over and above what you're able to deduct in a particular year is carried forward. So I have a little example where we say Grace makes a cash donation to a private foundation of $2 million, her AGI is four million. She is able to deduct up to 30% of her cash, because it's cash 30% of her AGI, and the excess amount of 800,000 carries forward for the next five years. And whether you are able to take a charitable contribution is going to depend on whatever the situation is in your future year.

And of course, planning is more difficult because if in a subsequent year you may qualify and have a charitable deduction based on the AGI limitations, but if it's low enough that it doesn't arise above the standard deduction, you end up not really getting a benefit. Remember you itemized standard deduction, but you can elect to itemize if your itemized deductions are above the standard deduction amount. You can make a front end contributions into a prior foundation or donor-advised fund and get that deduction all at once, so you may consider wanting to give a bigger amount, and then those entities condole out the grants to the actual public charities over a period of years, so that is another strategy that can be considered.

And remember, the AGI limitation for a donor-advised fund is 60% for cash contributions and 30% for appreciated gain property. So every year I talk about this strategy if tried and true, it works. It's sort of like, the simple things sometimes work the easiest and that's using long-term appreciated property to fund your charitable contributions. And so if let's say, and my example, Grace has stock she owned for five years, that's clearly long-term, her fair market value is 100,000, and her cost basis is 60,000. That's a $40,000 capital gain. If she decides to donate the stock directly to the charity, she is going to get a 100% of that $100,000 deduction, and add a 37% tax rate, which has the highest income tax rate for 2020. She's going to get deduction $37,000.

But if she decides, "Oh, I'm going to sell the stocks first and then donate the proceeds." Not a good move, because what ends up happening is that she's going to pay capital gains tax on that $40,000 capital gain, and it's going to be at the 23.8% amount, which is the inclusive amount on the 3.8% for net investment interest income. So I always say at this point, the devil's in the details. So you want to make sure that you actually transfer stock, if that's what you're doing, you want to transfer stock to a charity, you need to do that well in advance of your year end. You never want to use securities where the fair market value is lower than the stock. That's when you sell, get your capital lower, because that's valuable, you could use it against other capital gains or $3,000 of your ordinary income, and then donate the proceeds.

Remember some of these basic rules, that if the stock is held for 12 months or less, the deduction is limited to the lesser of the fair market value or the basis. If the property that's donated is inventory subject to depreciation, recapture, same rules. Deduction is limited to the lesser of the fair market value or the basis of the property.

MA:Okay. Let's see. Okay. Let's continue on and talk about contributions and with a focus now of donation of artwork. If the item is donated, is used by the charity for its exempt purposes, the charitable deduction will be the fair market value of the artwork. If Grace donates a painting to a museum, the museum is going to exhibit the painting. That's great. The deduction is the fair market value of the painting. If she donates the same painting to let's say, the American Red Cross and they actually put it up in their lobby of their building, the reception area in their building of their office, the deduction is going to be limited to the lesser of the fair market value or basis because they're not really using it for the exact purpose of the organization.

If the property is disposed within three years, its owner will be required to include in ordinary income in the year it's dispositioned, the difference between the charitable deduction originally taken and the donor's basis. You may say, "Well, how is the IRS going to know?" Well, it gets reported to the IRS by the charity when they sell the property. It's an 8282 Form and then also when you claim your deduction, file an 8283 Form indicating the amount of the property and the amount of the deduction and that it was supposed to be used for exempt purpose. That's how it is tracked.

Now, fractional interest could be an interesting way of giving artwork specifically. What that is, is a fractional interest contribution of an undivided portion used by the charity for its exempt purposes, such as artwork in a museum. Let's say as an example, you have a painting valued at 400,000 and the individual wants to make a contribution for three months of the year to the museum who's going to then exhibit it. Then, you're looking at a 25% usage, three months over 12 months, times 400,000. You have a deduction of $100,000. If in a subsequent year, the amount is limited to the lesser of the fair market value at the time of the initial donation, or the time of the subsequent donation, you actually have to pick to lower the two.

If let's say in year two, Grace wants to do another 25%, but now the fair market value has increased to 500,000, she would still have to use 400,000 in the calculation. There'll be another $100,000 contribution. The thing is, is that the entire amount of the artwork has to be contributed over to the charity within a 10-year period, otherwise they're a recapture provision. You do need to be careful about that.

Let's talk about some other options. There's a charitable remainder trust, and that provides an income tax stream to non-charitable beneficiaries during the term of the trust. The remainder is then distributed to the specified charity. There are two types of CRTs. The annuity trust pays a fixed percentage on initial trust value, resulting in a fixed dollar annuity and a unitrust, which pays a fixed percentage of the trust's annual fair market value at the end of the year. At the annuity trust, you're making one contribution initially and that's it. One funding, but unitrust allows for additional funding over the years. Trust is irrevocable. It can't exceed 20 years. The annuity payout has to be between at least five, but not more than 50% of the initial amount transferred or the annual value for the CRUT at the end of the year.

If the annuity is paid to beneficiaries instead of a grantor, then there are gift tax consequences. Why would you do this? Well, very attractive if you have a concentrated position in low basis stock. If you sell, you would have a very large capital gain. This allows you to diversify the portfolio and you defer the capital gain and create an annuity stream. Your assets grow tax deferred since the income tax is only paid as the annuity payments are made, and you would receive a charitable deduction for the present value of the remainder interest that goes to charity.

Oops, I went too far. I'm going back. Hold on. Okay. Another option is a charitable lead trust, which is the mirror image of the charitable remainder trust. Here, your annuity is paid to the charity and the non-charitable beneficiaries receive the remainder interest. You have to have a charitable intent and this is a particularly efficient way of transferring future appreciation to heirs. The present value of the remainder interest is subject to gift tax. Future appreciation will escape the gift tax, so you want to fund this with property that you anticipate will increase in value over the years. This is really particularly helpful because of the low interest rates that Karen had alluded to earlier. You will get more assets passed on to the heirs because if in fact your trust assets outperform that IRS rate, that's an IRS 7520 rate, then more assets will be passing on to the heirs' tax rate.

There are two types of CLTs. It could be set up as a grantor trust. The grantor can take the charitable deduction at the time that the trust is established. Again, because that 7520 rate is low, that's going to result in a higher charitable deduction. The grantor is taxed on annual income. If it's set up as a non-grantor trust, then there's no charitable deduction for the grantor and the trust pays the tax on the income. Conditions are such that this is particularly helpful for and actually can really be a good planning option for individuals that have a philanthropic intent and also want to do some planning on United States. This is just an example of how the CLAT works. It's just a little chart that explains it.

Other regulatory considerations is you must distribute at least 5% of your average non-charitable assets each year, or be subject to penalties. That means you need to make your grants out to public charities. If you do make grants to private foundations or foreign entities, you must practice expenditure responsibility to avoid the taxable expenditure provisions. Then, you must also deal with potential self-dealing issues. That's when a disqualified person, such as an insider, such as the founder or a board director, executive director, or substantial contributor receives the benefit in excess of services provided. Typically, we see that in cases where there is, for instance, an individual makes a pledge to a public charity, and then proceeds to have it funded by its prior foundation. There could be an issue with that.

Other transactions that you cannot enter into with a private foundation includes sales or exchanges between the disqualified person and the private foundation, as well as certain loans between the two would not be allowed. Now, TCJA enacted Section 4960, which provides that there's an excise tax equal to the corporate income tax rate on compensation in excess of one million dollars by a tax exempt organization to any of its five highest compensated employees. That corporate tax rate is at 21% and is an excess parachute payment. Any excess charity parachute payments made by the tax exempt organization would also be included. Covered employees include, as I mentioned before, one of the five highest compensated employees of the organization. It would also include former employees beginning at the 12/31/2016.

The tax is imposed on employers and not on employees. It relates back to, again, certain executive compensation paid to covered employees of the ATEO, which is a not-for-profit, the applicable tax exempt organization. The thing of concern was that this provision before applied not only to compensation by the ATEO directly, but also to compensation paid by related organizations or as such, not-for-profit entity.

That would also include the for-profits. This was actually a big concern. There was a notice, an interim notice that came out after the TCJA was enacted and the concern was that you can have an individual who is a founder or president of a closely held business that they own and they decide that they're going to set up a private foundation. Because of the control factors, they look for common control, so this person could be in more than 50% control of his business, and more than 50% control of his foundation that all of a sudden, any compensation over a million dollars would be taxed at 21%. The business would have to pay that tax because the business was the one that perhaps paid the salary to the employee. This was in the category of no good deed goes unpunished.

Where we are with this is that this proposed regulations that came out earlier in the year, and they provided relief from this provision. Again, it's still proposed regulations. It came out in June. There was some comments in August, and we're waiting to see when it goes final. But there is a couple of provisions that really provide exceptions for those who really are not being paid by the exempt organization for their services and they are really working a lesser amount of time on the not-for-profits. The limited hours exception really just looks at total. If it's less than 10% of your total work hours and not more than 100 hours annually, then you don't have an issue with this provision.

If you're non-exempt funds exception, then you are looking at basically, a limitation of your employees are spending not more than 10%, but less than 50% of the time in services to a not-for-profit. Albeit, getting no compensation from the not-for-profit. Keep in mind though that you have to watch out for any indirect payments, because there is something in the proposed regs that talks about the situation with a not-for-profit is reimbursing the for-profit the services of the individual that is doing work for the not-for-profit, like let's say accounting services or legal services, things of that sorts. You do have to really take a look at this and we'll keep you posted once the final regs come out. Just quickly, because we're really running out of time here. One last thing I want to mention is the donor advice fund.

After explaining all of the crazy rules with prior foundations, donor advice fund, truthfully is much easier. You have similar thresholds to public charities. Not 100% the same as public charities, but similar. The donor recommends charitable preferences to the fund. The fund is not required to follow the recommendations, but they usually do if it's reasonable within public policy. You don't have to file any of the tax returns and be concerned of all these other rules that could really impact things. It is subject to IRS' scrutiny and so therefore, your DAF should be making some grants out to public charities. There's no real requirement of a DAF to pay out a certain percentage each year, but it's a good practice to do some granting. With that, I think we've run out of time here, so I'm going to turn the program over back to Lexi.

^{Transcribed by Rev.com}