Upcoming Events at the BBA – November 2020

By: Jennifer D. Taddeo, Conn Kavanaugh and Rebecca Tunney, Goulston & Storrs, Communications Committee, Trusts and Estates

Upcoming Programs at the BBA: 

Introduction to Revocable Trusts   11/4/2020 – 12:30PM to 1:30PM   This program will provide an introduction to revocable trusts in estate planning and review the key components of revocable trusts, including funding formulas, marital provisions, possible trust structures for children and other beneficiaries, and trustee provisions.  The program will also provide drafting suggestions and advice on avoiding certain pitfalls when advising clients about establishing revocable trusts.

Trust Situs: Planning and Administration Considerations   11/5/2020 – 2:00PM – 4:00PM  Trust situs can refer to taxation of a trust, jurisdictional matters, location of assets, and/or principal place of administration. What do trustees and estate planners need to know about this broad, sometimes confusing, topic? Please join us as our panel of experts discusses estate planning, trust administration, and fiduciary income tax considerations relating to trust situs.

Gifts and Sales to Intentionally Defective Grantor Trusts & Use of High Exemption Levels in 2020 – 2021  11/16/2020  – 12:30PM – 1:30PM   This seminar will provide an overview of the structure, tax treatment and proper administration of gifts and sales to intentionally defective grantor trusts (“IDGTs”). Some of the structuring topics we will discuss include:

  • proper trust drafting to ensure estate tax exclusion and grantor trust status for income tax purposes,
  • how to choose the right assets to transfer to an IDGT,
  • “entitizing” assets,
  • the proper documentation needed for a “gift” and/or “sale” of assets, including the use of “defined value” (Wandry) and “price adjustment” (King) language,
    timing issues,
  • debt v. equity issues,
  • ensuring sufficient cash flows,
  • the proper administration of the IDGT after the transfers, and
  • the presenters’ recent audit experience and the IRS’ hostility to the strategy.
  •  

We will also focus on the tax benefits including: (i) leveraging assets through use of value-freezing techniques and discounts, (ii) maximizing use of GST exemption, and (iii) optimal benefits of grantor trust status as a means to further deplete the grantor’s estate without consuming exemption and avoid income taxes upon the sale of assets and payments under any promissory note.

This seminar will further discuss why it may be critical to advise clients about using the enhanced wealth transfer tax exemptions now in light of possible post-election reforms. 

Estate Planning with Seniors during COVID-19: Undue Influence, Incapacity & best Practices  11/17/2020 – 12:30PM-1:30PM  In this second part of a two-part series focusing on the unique vulnerabilities of seniors during COVID-19, Attorneys Laura Goodman and Christina Vidoli will discuss best practices with respect to estate planning for seniors during the pandemic and, specifically, how to navigate new challenges such as virtual and socially distanced meetings without putting yourself at risk for later questions of undue influence or incapacity.

Evidence of Transferor’s Intent is Key in Distinguishing Loans and Gifts for Purposes of Calculating Estate Tax. Estate of Mary P. Bolles v. Commissioner, Tax Court Memo. 2020-71

By: Katelyn Allen, Nutter.

Facts:

Throughout her life, the decedent made numerous transfers among her five children and kept a personal record of advancements and repayments to each child.  On the advice of tax counsel the decedent treated the advancements as loans and accounted for loan “forgiveness” each year for each child on the basis of the annual gift tax exemption.

From the year 1985 through 2007, the decedent transferred $1,063,333 to or for the benefit of her son Peter. Peter did not make any repayments to the decedent after 1988.  In 1989, the decedent executed a revocable trust, where she specifically excluded Peter from any distribution of her estate upon her death.

In 1996, the decedent executed an amendment to her revocable trust that included provisions for Peter and explicitly instructed the trustees to account for “loans” made to Peter during the decedent’s lifetime when calculating the share of assets Peter would receive upon the decedent’s death.  The decedent executed a contemporaneous document entitled “Acknowledgement and Agreement Regarding Loans”, in which Peter acknowledged that he received loans from the decedent and that the amount of the loans, including any accrued interest, would be taken into account for purposes of calculating his share of trust assets.

The decedent’s estate filed an estate tax return reporting the value of a Promissory Note and receivable due from Peter Bolles as zero and reporting no prior taxable gifts.

Analysis:

Upon audit of the decedent’s estate tax return, the Commissioner determined that the fair market value of the Promissory Note and receivable due from Peter was $1,063,333, and this amount was includable in the decedent’s estate under IRC Section 2033.  Alternatively, the Commissioner determined that if the fair market value of the Promissory Note and receivable was zero, as it had been reported on the estate tax return, the decedent had made $1,063,333 of taxable gifts to Peter during her lifetime, and that figure should be used in computing the estate tax liability under IRC Section 2001(b).

The Tax Court examined the traditional factors set forth in Miller v. Commissioner (Tax Court Memo. 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997)) in determining whether the transfers from the decedent during her lifetime were loans or gifts.  The factors to be considered in making this determination are as follows:

  1. The existence of a promissory note or other evidence of indebtedness.
  2. If interest was charged.
  3. The existence of security or collateral.
  4. A fixed maturity date.
  5. Whether or not actual repayment or a demand for repayment was made.
  6. The transferee’s ability to repay.
  7. Records maintained by the transferor and/or transferee.
  8. The manner in which the transaction was reported for federal tax purposes.

The Court noted that the decedent recorded the advances to Peter as loans and accounted for interest, but there were no loan agreements, security on the loans, or attempts to demand repayment on the loans. The Court noted that the shift in 1989, when the decedent executed a trust agreement that blocked Peter’s receipt of assets at the time of her death, characterized a shift from “loans” to gifts.

Result:

The Court concluded the transfers to Peter from 1985 through 1989 were loans, but the transfers made from 1990 through 2007 were gifts.  The decedent shifted from extending and accounting for the transfers as loans to accounting for the transfers as advances against Peter’s share of the estate, as evidenced by her excluding Peter from his share of the inheritance in her 1989 trust.  As a result, the transfers from 1990 through 2007 were accounted as prior taxable gifts for purposes of calculating the estate tax due.

Advice for Planners:

When advising clients who wish to make transfers to family members, it is important to have the client clearly articulate his or her intentions – whether he or she wishes to make the transfer as a gift or whether he or she intends the transfer to be a loan with an expectation for repayment.  Once the client has articulated his or her intentions, it is important for the planner to craft proper evidence of the transfer as a loan or a gift and ensure that the client’s estate plan does not contradict his or her intentions. The planner should review the factors of Miller v. Commissioner to ensure the evidence of a loan or gift would be accepted or supported by the Commissioner and the Tax Court.

Tax Deadlines Extended Due to COVID-19

By: Justin M. Hannan and Gene Schlack, Day Pitney LLP.

To provide relief to taxpayers impacted by the COVID-19 pandemic, the IRS and the Massachusetts Department of Revenue have issued guidance in recent weeks extending the deadlines for filing and paying certain taxes.

Pursuant to IRS Notice 2020-18, Notice 2020-20, and Notice 2020-23, the filing deadlines for all federal income tax returns, gift tax returns and estate tax returns that would have been due between April 1 and July 15 have been automatically extended to July 15.  Additionally, any income tax payments and gift, estate and GST tax payments, including estimated quarterly payments, that were due between April 1 and July 15 are now due on July 15, and such payments made by the July 15 deadline will not incur interest or penalties.  There is no limit on the amount of tax payments that may be deferred. 

It is important to note that while these extensions apply to all taxpayers, including trusts and estates, they do not apply to tax returns and tax payments originally due prior to April 1.  For example, a trust that failed to file Form 1041 by March 15 is not saved by this guidance, and any taxes due with said Form 1041 would remain subject to penalties and interest.

Notably, IRS Notice 2020-23 clarifies that the extension to file tax returns also extends the deadline to file certain information returns, such as Form 3520, that are filed as attachments to such tax returns. This key point was previously unclear, creating substantial uncertainty among tax professionals.

In addition to the federal extensions, the Massachusetts Department of Revenue also extended various Massachusetts filing and payment deadlines. Per Technical Information Release (TIR) 20-4, state filings and payments for personal income tax, estate and trust income tax, and income tax due with a partnership composite return with an April 15, 2020 due date have been automatically extended to July 15.  Similarly, installments for estimated income tax payments that would otherwise be due on April 15 and June 15 are now due on July 15.  The filing and payment deadlines for Massachusetts estate tax returns have not been extended.

Though TIR 20-4 does not extend corporate excise tax filings and payments, it does waive late-file and late-pay penalties (but not interest) for corporate excise returns and payments with original due dates of April 15 that are filed and paid by July 15. 

Massachusetts (Temporarily!) Allows Remote Notarization

Massachusetts (Temporarily!) Allows Remote Notarization

The BBA endorsed temporary legislation authorizing notarization and witnessing of documents to be conducted remotely, by videoconference.  The Legislature passed, and the Governor enacted, such a law, which addresses an urgent need that was brought to our attention by practitioners from a number of our sections, including Trusts & Estates and Real Estate.  Read an exclusive Boston Bar Journal article on the requirements and restrictions for this new law.  Thank you to the authors Sara Goldman Curley, Kerry Spindler, and Rebecca Tunney.

New Standing Orders Extend Court Closures and Toll Probate Court Deadlines During COVID-19

By: Ann Hetherwick Cahill of Burns & Levinson LLP and Darian M. Butcher of Day Pitney LLP, Co-Chairs of the BBA Trusts & Estates Probate Litigation Committee

The Supreme Judicial Court and the Probate and Family Court each issued new Standing Orders that went into effect May 4, which supersede the prior Standing Orders.  It is important to read both new Standing Orders together: the SJC Standing Order is available here and the Probate and Family Court Standing Order is available here

Pursuant to the SJC Standing Order, until at least June 1, the courthouses will remain closed to the general public, except to address emergency matters that cannot be resolved through remote methods, such as telephone, video conference, e-mail, and comparable means.  The Probate and Family Court Standing Order enumerates 10 categories of emergency matters, which include, among other things, petitions and motions concerning medical treatments, petitions for appointment of a temporary guardian or conservator, and petitions and motions for appointment of special personal representatives. 

Regarding non-emergency matters, the SJC Standing Order directs the Trial Court departments to identify the categories of non-emergency matters that each will attempt to address virtually.  In its Standing Order, the Probate and Family Court has identified a goal of hearing as many case types and events as possible.  Accordingly, beginning on May 11, 2020, the Probate and Family Court will attempt to hear virtually all case types and events, except for trials and evidentiary hearings, where it is practicable to do so.  Determinations concerning the volume of cases to be heard and the case types will be made by the Register and First Justice and will differ across divisions of the Probate and Family Court. 

The Standing Orders also affect deadlines in the Probate and Family Court that fall between March 16 and June 1 in the following ways:

1. Most Deadlines are Tolled until a Date after June 1:  The deadline extensions of Paragraph 12 of the SJC Order control with the exception of five enumerated types of deadlines listed below.  Thus, in most instances, Paragraph 12 of the SJC Standing Order extends all deadlines (based on “statutes, court rules, standing orders, tracking orders, or guidelines”) that expire between March 16 and June 1. 

The new deadline is calculated by determining the number of days remaining after March 16 until the original deadline, and add that number of days after June 1.  For example, if the original deadline was March 20, then 4 days remained as of March 16, so the new deadline would be June 5 (June 1 plus 4 days). 

The new deadline calculations also apply to deadlines that would have originated during the pandemic. For example, if you served discovery while working from home during this pandemic, Paragraph 12 of the SJC Order directs that your new deadline only begins to run as of June 1.       

2. The Five Exceptions – These Deadlines Are Not Tolled:  Under Paragraph H of the Probate and Family Court Standing Order, the above tolling does not apply to the following five types of deadlines:

i. Findings required by G. L. c. 208, § 1A;
ii. Objection period in G. L. c. 208, § 21, so that judgments absolute may enter in divorce cases; 
iii. Time period to file an answer or any other responsive pleading to a contempt summons; 
iv. Time period to file an appearance or affidavit of objections pursuant to G. L. c. 190B, § 1-401; and 
v. Time period to request a motion for a new trial or to amend findings and/or judgments in Rule 59. 

Thus, for cases involving these five types of deadlines with expiration dates falling between March 16 and June 1, the deadlines are not extended.  This is a trap for the unwary as failure to take heed of these exceptions could result in a defendant being defaulted if they failed to file an answer or responsive pleading to a contempt summons, or a respondent could lose the opportunity to appear and file an affidavit of objections. 

The new Standing Orders also address the operations of the Clerks’, Registers’, and Recorder’s Offices, all of which continue to conduct court business for emergency matters and non-emergency matters as designated by their respective court department.  Specifically, the Probate and Family Courts are accepting new matters for filing by mail, e-mail, or e-filing were available, unless filings in emergency matters cannot be accomplished electronically.

For other details about trials and extensions of Probate and Family Court orders, including for treatment plans and temporary orders of appointment in guardianship and conservatorship cases, please review the SJC Standing Order (here) and the Probate and Family Court Standing Order (here).

Document Executions and COVID-19

By: Jennifer Taddeo of Conn Kavanaugh Rosenthal Peisch & Ford ,Co-Chair of the BBA Trusts & Estates Communications Committee, and Abigail V. Poole of Samuel, Sayward & Baler.

The Novel Coronavirus is having a huge impact on the lives of all Massachusetts residents, and the elderly and disabled populations of the Commonwealth are especially vulnerable to delay in execution of their estate planning documents causing serious harm to their health and finances.

Under current Massachusetts law, all acknowledgments and signatures must be obtained in the physical presence of a notary public. However, protective measures being put in place to address COVID-19 will increasingly mean that individuals are unable to access a notary who is physically present. As a result, these vulnerable populations may be deprived of the ability to obtain services and complete essential legal documents necessary to protect themselves and their loved ones, especially as policies in place at skilled nursing facilities, assisted living facilities and other residential facilities are also now preventing notaries public from meeting in person with residents of these facilities.

A number of Trust and Estates attorneys in Massachusetts are working on ways to resolve these issues, including by potentially asking the Governor of the Commonwealth to sign an executive order, effective immediately, to permit notaries public who are licensed attorneys to obtain virtual acknowledgement and signatures from individuals for legal documents for a limited period of time due COVID 19. Seventeen other states already permit virtual notarization and five more have enacted virtual notarization laws that will soon take effect.

To share your thoughts on this issue, this potential solution, or any other possible approach, contact Michael Avitzur at mavitzur@bostonbar.org by March 19, 2020.

Editors’ note: The BBA will continue to watch this space and offer updates to its members. If you have information about relevant trust and estates matters or initiatives related to COVID-19, please send those to Alexa Daniel, at adaniel@bostonbar.org.

First Circuit to Hear Arguments in Question of Whether a Self-Settled Spendthrift Irrevocable Trust is Entitled To Creditor Protection After the Settlor’s Death

By: Caitlyn Glynn of Nutter

On Thursday March 5, 2020, the Massachusetts Supreme Judicial Court will hear oral argument on the following question, certified to it by the U.S. First Circuit Court of Appeals: whether a self-settled spendthrift irrevocable trust that is governed by Massachusetts law and allowed unlimited distributions to the settlor during his lifetime protects assets in such trust from a reach and apply action by the settlor’s creditors after the settlor’s death (docket and briefs available here).  The Massachusetts Uniform Trust Code addresses what the result would be in the case of a revocable trust and in the case of an irrevocable trust before a settlor’s death; however, there appears to be no statutory authority as to the result with the facts here: an irrevocable trust after a settlor’s death.

The facts begin in Arizona with the age-old tale of neighbors suing each other, here, over shared water rights.  They then quickly turn darker and end with suicide and double homicide.

Donald and Ellen Belanger were one set of neighbors in the lawsuit who had moved to Arizona from Massachusetts.  Armand and Simonne De Prins were the other set of neighbors, who eventually prevailed on the water rights suit and obtained a monetary judgment against the Belangers. Mrs. Belanger, distressed at least in part about the loss of the lawsuit, committed suicide. 

Four weeks after his wife’s suicide, Mr. Belanger contacted his attorney and created an irrevocable trust (the “Trust”).  The Trust was a self-settled trust that named his attorney as sole trustee, named himself as sole beneficiary during life, and his daughter as sole beneficiary after his death.  The Trust also contained a spendthrift clause and stated that Mr. Belanger could not “alter, amend, revoke, or terminate” the Trust.  After signing the Trust, Mr. Belanger transferred substantially all of his assets to the Trust.  Four months after signing the Trust, Mr. Belanger shot and killed the De Prinses.  Mr. Belanger then killed himself. 

The De Prinses’ son filed a wrongful death action in Arizona against Mr. Belanger’s estate and settled the wrongful death action with the personal representative of Mr. Belanger’s estate (who was also the trustee of the Trust).  Such settlement stipulated that collection of the judgment against the estate would be exclusively against the Trust and that a reach and apply action against the Trust would be transferred to the U.S. District Court of Massachusetts, where the trustee resides.  At issue was a single claim to reach and apply the Trust’s assets to satisfy the $750,000 wrongful death judgment against Mr. Belanger’s estate. 

After cross-motions for summary judgment, the District Court entered judgment for the De Prinses’ son holding that, under Massachusetts law, a self-settled trust cannot be used to shield one’s assets from creditors, even where the trust has a spendthrift provision and the trustee had made no distributions to the settlor prior to his death.  This is the question that the Court of Appeals then looked at. 

The Court of Appeals looked to Massachusetts case law and statutory law.  MUTC § 505(a)(3) provides that “[a]fter the death of a settlor, . . . the property of a trust that was revocable at the settlor’s death shall be subject to claims of the settlor’s creditors,” even despite a spendthrift clause.  This statute and Massachusetts case law make clear that the assets of a trust that was revocable during a decedent’s life would be reachable by his creditors at death. 

MUTC § 505(a)(2) states that, “[w]ith respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.”  Thus, during Mr. Belanger’s life, a creditor could have reached all of the Trust assets, as such trust assets could have been distributed to Mr. Belanger.  The statute leaves open whether an irrevocable trust is reachable by creditors after a settlor’s death.

It will be interesting to see what the Supreme Judicial Court rules.  In either event, it will be good to have certainty on this issue.  Stay tuned to this blog for the result.

MORE THAN YOU BARGAINED FOR: POTENTIAL ETHICAL VIOLATIONS FOR SOLICITING GIFTS OR ADDITIONAL BUSINESS FROM CLIENTS

Authors: Erin K. Higgins and Conor Slattery of Conn Kavanaugh

Estate planning attorneys strive to provide their clients with excellent service, and hope their good work will be rewarded with additional business from the client and the client’s network.  However, an estate planning attorney should ensure that the client is freely requesting those additional services, and they are not a result of any unethical solicitation by the attorney.  Additionally, an estate planning attorney should never solicit a gift from an estate planning client who is not a close family relative.

An estate planning attorney must not encourage a client to take actions that will result in additional business and the generation of substantial legal fees for the attorney, such as designating the estate planning attorney as the personal representative, trustee, or other fiduciary.  Such actions may amount to unethical solicitation.  An attorney should only agree to serve as a fiduciary at the direct request of the client.  If an attorney is designated as a fiduciary at the client’s request, the attorney may not charge his or her legal rates for purely administrative work or other non-legal work performed.  Rather, the attorney must charge a rate in line with the fair market rate for non-lawyers performing the same tasks, or face disciplinary action as happened in Matter of Chignola, 25 Mass. Att’y Disc. R. 112 (2009).  Similarly, an attorney should only safeguard a client’s will at the client’s direct request, not at the attorney’s suggestion, as the retention of a client’s will may lead to additional work for the drafting attorney if the client decides to revise his or her estate plan.  Where a client is unfamiliar with the options for safekeeping of estate planning documents, however, an attorney can provide the client with a list of options that may include the attorney’s firm holding the original documents. 

Additionally, pursuant to Rule of Professional Conduct 1.8(c) a lawyer shall not solicit any substantial gift, including a testamentary gift, from a client, or prepare an instrument for a client giving the lawyer a gift, unless the lawyer is closely related to the client.  For the purposes of Rule 1.8(c), a person is “closely related” to another person if related to such other person as sibling, spouse, child, grandchild, parent, or grandparent, or as the spouse of any such person.  To avoid violating Rule 1.8(c), an estate planning attorney should not draft any estate planning document naming the attorney as a beneficiary absent such a close relation to the client.  The Massachusetts Bar Association in Ethics Opinion No. 82-8 made it clear that the acceptance of any gift from the client will leave the attorney exposed to a possible charge of undue influence.  An estate planning attorney should insist that another practitioner draft any document naming the attorney as a beneficiary. 

Knowing when to step back from estate planning work out of a concern for unethical solicitation ultimately will save an attorney from much heartache down the road.  A lawyer who has questions about when he or she must step aside should seek advice from ethics counsel on the appropriate course of action. 

SECURE ACT CHANGES CERTAIN RETIREMENT ACCOUNT RULES

Author: Megan (Neal) Knox of McDonald & Kanyuk, PLLC

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) into law, which contains the “Setting Every Community Up for Retirement Enhancement” (“SECURE”) Act of 2019.  The SECURE Act makes several changes to the rules pertaining to retirement savings and employee benefit accounts, which generally became effective January 1, 2020.  The SECURE Act increases opportunities for individuals to increase their retirement savings but also eliminates the ability to spread distributions of inherited retirement benefits over the life expectancy of most (but not all) beneficiaries.  Highlighted below are the provisions of the SECURE Act that may be of most interest to estate planners. 

A.     Changes to Lifetime Rules.

  1. Elimination on Age Limit for Contributions to Traditional IRAs. Prior to the SECURE Act, individuals could not contribute to a traditional IRA in, or after, the year in which such individual reached age 70 ½.  With the enactment of the SECURE Act, there is no longer an age cap on contributions to a traditional IRA.  Therefore, beginning in 2020, working individuals can continue to contribute to a traditional IRA without any age limit. 

  2. Starting Age for Required Minimum Distributions (“RMDs”) Extended. The SECURE Act raised the required beginning date (“RBD”) for RMDs from age 70 ½ to 72.  These rules apply to 401(a), 401(k), 403(b) and governmental 457(b) plans and traditional IRAs.  Individuals who reached their RBD prior to January 1, 2020 are currently in pay status and must continue to take RMDs.  The SECURE Act will not affect these individuals during their lifetimes.  For individuals who reach age 70 ½ after December 31, 2019, their RBD is April 1 of the year after the year in which they reach age 72.  With respect to certain plans, the RBD is April 1 of the year after the year in which the individual retires, if later. 

 

B.     Changes to Required Minimum Distribution (“RMD”) Rules After the Participant’s Death.

  1. Participants[1] Who Die After December 31, 2019. Generally, the following changes[2] apply to the post-death distribution rules for participants who die after December 31, 2019:

    a.     General Rule: 10-Year Payout Period. For more than 30 years, a so-called “Designated Beneficiary”[3] has been able to stretch RMDs from an inherited retirement account over such Beneficiary’s life expectancy, thereby maximizing the ability to defer income taxes.  The SECURE Act generally reduces this payout period rule to a maximum of 10 years after the year of the participant’s death.  Unlike the prior rule, distributions do not need to be made annually.  The retirement plan simply must be completely distributed out by the end of the 10-year period.

    b.     Exception for “Eligible Designated Beneficiaries.” A limited exception to the general 10-year rule is carved out for only five categories of Designated Beneficiaries: (1) the participant’s surviving spouse, (2) the participant’s minor child (but only until he or she reaches the age of majority), (3) a disabled person, (4) a chronically ill person, and (5) an individual who is not more than 10 years younger than the participant (collectively, the “Eligible Designated Beneficiaries”).   Eligible Designated Beneficiaries qualify for a modified version of the former life expectancy payout method, the modification being that after the Eligible Designated Beneficiary’s death, the remainder must be distributed within 10 years after the death of the Eligible Designated Beneficiary.  Additional noteworthy details regarding categories (2)–(4):

          i) Participant’s Minor Child. When a participant’s minor child reaches the age of majority,[4] the 10-year rule applies unless the child: (a) has not completed “a specified course of education” and is under the age of 26, or (b) is disabled when the child reaches the age of majority, so long as the child continues to be disabled.  Eligible Designated Beneficiary status does not apply to minor grandchildren or any other minor individuals.  If the participant’s child dies before reaching the age of majority, upon his or her death the 10-year rule applies.

         ii) Disabled and Chronically Ill Persons. An individual is considered “disabled” or “chronically ill” only if he or she meets the specific requirements defined under the Internal Revenue Code relating to these new rules.  The Designated Beneficiary’s status as disabled or chronically ill is determined as of the date of the participant’s death. 

    c.     Effect on Trusts for the Benefit of Eligible Designated Beneficiaries. If the participant designates a trust for the benefit of an Eligible Designated Beneficiary, that trust may or may not qualify for the life expectancy payout method.

         i) Conduit Trusts. A conduit trust is a trust under which all distributions from the retirement plan are required to be distributed immediately to the trust’s primary beneficiary.  Leaving benefits to a conduit trust for a single individual beneficiary are treated the same as if left outright to such beneficiary.  If the sole beneficiary is a Designated Beneficiary, the 10-year payout rule will apply.  If the sole beneficiary is an Eligible Designated Beneficiary, the life expectancy payout rule will apply. 

         ii) Accumulation Trusts. An accumulation trust is a trust under which the trustee may accumulate retirement plan distributions from the trust during the beneficiary or beneficiaries’ lifetime(s), with the remainder payable to another beneficiary upon a specified beneficiary’s death.  Unless new Treasury Regulations are issued, it is uncertain whether an accumulation trust with an Eligible Designated Beneficiary as a trust beneficiary will qualify for the lifetime expectancy payout rule because the exception to the 10-year rule does not apply if the Eligible Designated Beneficiary is not the sole  Even if the Eligible Designated Beneficiary is the sole lifetime beneficiary, he or she may not be considered the sole beneficiary of the trust since the trust assets will be distributed to the remainder beneficiary after his or her death.  It is also unknown whether an accumulation trust for the benefit of a participant’s children will qualify for the life expectancy payout if some are minors and some are adults at the time of the participant’s death.  However, the payout period for an accumulation trust for the benefit of a disabled or chronically ill beneficiary is certain.  It will qualify for the life expectancy payout even if the remainder will pass to another beneficiary upon the disabled beneficiary’s death, but only if the disabled beneficiary is the sole beneficiary during his or her life. 

  2. Participants Who Died Before 2020. The SECURE Act provides only a partial exemption for retirement accounts where the participant died prior to January 1, 2020.  If the participant died before January 1, 2020 and the original Designated Beneficiary dies after January 1, 2020, it is uncertain under the new rules whether the 10-year rule applies to the subsequent beneficiary or whether the payout period depends on whether the subsequent beneficiary is just a Designated Beneficiary (subject to the 10-year rule) or an Eligible Designated Beneficiary (eligible for the life expectancy payout).  If the original beneficiary is an accumulation trust, it is unclear whether a new distribution period begins when all the trust beneficiaries die or when any of the trust beneficiaries dies.  If both the participant and the original designated beneficiary died before January 1, 2020, the SECURE Act does not apply to the subsequent beneficiary.  The old rules will continue to apply, and the subsequent beneficiary would withdraw the remaining assets over what would have been left of the original beneficiary’s life expectancy had he or she continued to live. 

[1] The term “participant” used throughout this post means the individual who owned and contributed to a retirement account prior to his or her death.

[2] These changes apply only to certain defined contribution plans but not defined benefit plans, including certain annuity payouts in an IRA or other defined contribution plan that were locked in prior to the SECURE Act. 

[3] “Designated Beneficiary” is defined as: (a) an individual named as beneficiary by the participant or retirement plan, or (b) a trust that meets the IRS’ specific requirements.

[4] The age of majority differs among states but generally is either 18 years (as in Massachusetts) or 21 years.

 

IRS Releases Final Anti-Clawback Regulations

Author: Eric R. Cunnane of Goulston & Storrs

On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018 (83 Fed. Reg. 59343 (Nov. 23, 2018)), effectively ensuring that if a decedent uses the increased basic exclusion amount for gifts made while the Tax Cuts and Jobs Act (TCJA) is in effect and dies after the sunset of the TCJA (currently scheduled for Jan. 1, 2026), the decedent won’t be treated on his or her estate tax return as having made adjusted taxable gifts in excess of his or her basic lifetime exclusion amount (Treasury Decision 9884).

Specifically, the final regulations confirm that in calculating a decedent’s federal estate tax due, the basic exclusion amount used in the computation will be the greater of the federal exclusion amount in effect at the decedent’s date of death or the total amount of gifts previously excluded from tax due to the use of the exclusion amount in place at the time of the transfer (Regs. Sec. 20.2010-1(c)).

For example, if an unmarried individual made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million (indexed) in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025 when the basic exclusion has reverted back to $5 million (indexed), the applicable credit amount against estate tax will be based on a basic exclusion amount of $9 million.

The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses exemption is deemed to utilize the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025.  For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available.

In addition, the final regulations address portability and provide guidance with respect to how the deceased spousal unused exclusion (DSUE) amount is calculated under the new clawback rules.  The final regulations confirm that the reference to “basic exclusion amount” in Sec. 2010(c)(4), defining DSUE as the lesser of the basic exclusion amount or the unused portion of the deceased spouse’s applicable exclusion amount, is a reference to the basic exclusion amount in effect at the time of the deceased spouse’s death, rather than the basic exclusion in effect when the surviving spouse dies. As a result, the DSUE amount elected during the increased basic exclusion period will not be reduced when the sunset provisions become effective after 2025.

For example, an individual’s spouse died prior to 2026 at a time when the basic exclusion amount was $11.4 million.  The deceased spouse made no taxable gifts and did not have a federally taxable estate, and the spouse’s personal representative makes a portability election to allow the surviving spouse to take into account the deceased spouse’s $11.4 million DSUE amount.  At the time of the surviving spouse’s death, the surviving spouse had made no taxable gifts, had not remarried and the basic exclusion amount was $6.8 million.   The credit to be applied for purposes of computing the surviving spouse’s estate tax is based on the surviving spouse’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on the surviving spouse’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

The final regulations do not directly address generation skipping transfer tax (GST) issues, as the IRS noted that the effect of the increased basic exclusion on the GST tax is beyond the scope of the regulatory project.  The IRS does state, however, in the preamble to the final regulations that “There is nothing in the statute that would indicate that the sunset of the increased [basic exclusion amount] would have any impact on allocations of the GST exemption available during the increased [basic exclusion amount] period.”