Posts Categorized: Tax Update

Last Month at the BBA – Trust & Estate Section events in January and February 2021

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

Missed it?   You can still benefit from prior Trust & Estates Section programming at the BBA: 

Modifying Irrevocable Trusts: Decanting, Non-Judicial Settlement Agreements and other Trust Amendment Alternatives   Wednesday, January 6, 2021  This program will provide an introduction to various methods for modifying an irrevocable trust, including how and when to consider: (1) Modifications under the Massachusetts Uniform Trust Code, (2) reformations, (3) non-judicial settlement agreements, and (4) decanting.

Breach of Fiduciary Duty Litigation: Superior Court versus Probate & Family Court   Wednesday, January 13, 2021  A panel of probate litigators will share insights for bringing fiduciary duty claims and defending those claims, whether brought in Superior Court or the Probate & Family Court. The panelists will also explore litigation tactics applicable to each court as well as alternate dispute resolution and settlement opportunities.

Ethical Dilemmas and Considerations in Representing Impaired Clients   Wednesday, January 13, 2021   According to a leading mental health organization, 1 in 5 adults in the United States suffers from some form of mental health condition or disorder. It is likely that at some point in your legal career, you will represent an individual client, or a representative of a corporate client, who suffers from some degree of mental incapacity. Knowing how to assess capacity and deciding how to proceed if you have doubts about your client’s mental health is easier said than done. This first part in a 3-part series of programs will focus on an attorney’s legal and ethical duties when facing the prospect of representing a mentally impaired client.

Trusts & Estates Mid-Year Review    Tuesday, January 19, 2021   An annual event not to be missed, the Trusts & Estates Mid-Year Review covers recent federal and state case law, legislation and tax law matters. This year’s program will touch on:

  • New Developments Committee:  The committee will review recent estate planning and administration cases.
  • Public Policy Committee:  The presentation will include an overview of recent and pending legislation.
  • Tax Law Updates Committee:  The committee will report on important updates regarding the Internal Revenue Code, federal tax law, recent cases, private letter rulings, charitable planning updates, retirement cases and other interesting developments.

Charitable Giving Basics for Estate Planners Wednesday, February 3, 2021  This program will provide an introduction to charitable planning. We will discuss the reasons for charitable giving, the types of property that can be used to make a charitable gift, and the techniques that can be used to achieve clients’ charitable goals.

Special Drafting Considerations for Elderly Clients Thursday, February 11, 2021  Attorneys Patricia Keane Martin and Kristin Dzialo will discuss special drafting considerations for practitioners to be mindful of when advising elderly clients.  Specifically, they will discuss language concerning end of life decision-making and care, and the importance of counseling clients on the implications of including or excluding certain powers from their documents with an eye towards protecting the client and achieving his or her planning goals. The discussion will be beneficial both for practitioners new to estate planning and for seasoned estate planners.

Transferee and Fiduciary Liability for Estate Tax Applied to Second Level Transferee and Fiduciary. United States v. Estate of Kelley, et al., No. 3:17-CV-965-BRM-DEA (D.N.J. Oct. 22, 2020)

By: Ryan Tompkins, Sullivan & Worcester

Background:

Lorraine M. Kelley (“Kelley”) died on December 30, 2003.  Kelley’s brother, Richard Saloom (“Saloom”) and Richard J. Lecky were appointed as co-executors of Kelley’s estate.  The executors filed a federal estate tax return for Kelley’s estate reporting a gross estate of approximately $1.7 million, which was adjusted to roughly $2.6 million upon examination by the IRS resulting in an additional tax liability.  Saloom consented to the assessment in June of 2006.  In late 2007, Saloom began making payments toward the tax liability.

Saloom was the sole beneficiary of Kelley’s estate.  By January of 2008, Saloom had distributed the entire estate to himself, although more than $450,000 remained outstanding in federal estate tax due.  Saloom died on March 21, 2008.  The gross value of Saloom’s estate totaled approximately $1.1 million.

Saloom’s daughter, Rose Saloom (“Rose”), was the sole beneficiary and executor of Saloom’s estate.  After Saloom’s death, Rose filed a New Jersey inheritance tax return for Saloom’s estate listing a $456,406 debt for “federal tax” and she made several payments toward the outstanding estate tax liability for Kelley’s estate.  Rose did not, however, retire the entire balance.  Rose instead distributed the remaining assets of Saloom’s estate to herself leaving the estate insolvent.  As of September 2, 2019, the unpaid balance of Kelley’s estate tax liability with accrued penalties and interest was $688,644.

Analysis:

Attorneys from the Tax Division of the United States Department of Justice filed a complaint in federal district court asserting transferee liability and fiduciary liability for the estate tax against Rose, as executor of Saloom’s estate and individually, among other claims and requests for relief.

Section 6324(a)(2) of the Internal Revenue Code imposes personal liability on certain transferees of the decedent’s gross taxable estate when the estate itself fails to pay any estate tax.  The transferee’s liability is limited to the value of property received from the estate.

The federal insolvency statute, 31 U.S.C. § 3713, places personal liability on the executor of an estate who pays the debts of the estate or distributes assets of the estate, before paying a claim of the United States.  This rule is intended to preserve the priority of debts due to the United States.  Personal liability can attach, to the extent of the distribution, if the government establishes that (1) the fiduciary distributed the assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.  See United States v. Tyler, No. 10-1239, 2012 U.S. Dist. LEXIS 34093, at *10 (E.D. Pa. Mar. 13, 2012), aff’d 528 F. App’x 193 (3d Cir. 2013).  Fiduciaries can be deemed to have had constructive knowledge if they had “notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.”  528 F. App’x at 201 (quoting United States v. Coppola, 85 F.3d 1015, 1020 (2d Cir. 1996)).

Liability of Saloom’s Estate

The court concluded that there was no material dispute of fact as to whether Saloom had knowledge of the tax liability for Kelley’s estate when he intentionally distributed assets from the estate to himself rendering the estate insolvent.  Saloom was therefore personally liable for the estate tax liability of Kelley’s estate.  Thus, the Kelley estate tax liability was a debt due to the United States from Saloom’s estate

Liability of Rose Individually

The court then found that Rose was personally liable as the fiduciary of Saloom’s estate based upon her failure to pay the Kelley estate tax liability out of the assets of Saloom’s estate prior to distributing the estate assets to herself.  In arriving at this conclusion, the court noted that Rose clearly had actual knowledge of the federal estate tax owed by her father, which she listed as “indebtedness” for “federal tax” on the New Jersey inheritance tax return she filed for Saloom’s estate.  Rose also made several payments toward the debt after Saloom’s death.

Takeaway:

While the result of this case is not entirely surprising on the facts, it serves as a reminder to practitioners that transferee and fiduciary liability can operate in tandem to extend the reach of the federal insolvency statute beyond the fiduciaries and first order transferees of the estate that generates the tax.  After all, Rose was neither a fiduciary nor a direct transferee of Kelley’s estate and yet the court found her to be personally liable for the entire estate tax due.

Upcoming Trust & Estates Events at the BBA – February 2021

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

Upcoming Trust & Estates Section Programs at the BBA this month: 

Charitable Giving Basics for Estate Planners Wednesday, February 3, 2021  This program will provide an introduction to charitable planning. We will discuss the reasons for charitable giving, the types of property that can be used to make a charitable gift, and the techniques that can be used to achieve clients’ charitable goals.

Special Drafting Considerations for Elderly Clients Thursday, February 11, 2021  Attorneys Patricia Keane Martin and Kristin Dzialo will discuss special drafting considerations for practitioners to be mindful of when advising elderly clients.  Specifically, they will discuss language concerning end of life decision-making and care, and the importance of counseling clients on the implications of including or excluding certain powers from their documents with an eye towards protecting the client and achieving his or her planning goals. The discussion will be beneficial both for practitioners new to estate planning and for seasoned estate planners.

Speed Networking with Trusts & Estates Attorneys Tuesday, February 16, 2021   This event gives law students and new lawyers a unique opportunity to meet with several Boston-area trusts & estates attorneys in just one evening. Those who attend this event will have the chance to meet all of our guest attorneys in small groups to learn about lawyering in a pandemic, career paths, and legal opportunities available in Boston.

Remote Execution of Estate Plan Documents: Practicalities, Pitfalls and Best Practices  Monday, February 22, 2021 This program will cover the Remote Notarization Act, which was signed into law by MA Governor Charlie Baker on April 27, 2020.  The speaker will review the requirements of remote notarization in MA for estate planning documents and will also host a “mock remote signing” during the program.

Upcoming Events at the BBA – January 2021

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

Upcoming Trust & Estates Section Programs at the BBA this month: 

Modifying Irrevocable Trusts: Decanting, Non-Judicial Settlement Agreements and other Trust Amendment Alternatives   Wednesday, January 6, 2021  This program will provide an introduction to various methods for modifying an irrevocable trust, including how and when to consider: (1) Modifications under the Massachusetts Uniform Trust Code, (2) reformations, (3) non-judicial settlement agreements, and (4) decanting.

Breach of Fiduciary Duty Litigation: Superior Court versus Probate & Family Court   Wednesday, January 13, 2021  A panel of probate litigators will share insights for bringing fiduciary duty claims and defending those claims, whether brought in Superior Court or the Probate & Family Court. The panelists will also explore litigation tactics applicable to each court as well as alternate dispute resolution and settlement opportunities.

Trusts & Estates Mid-Year Review    Tuesday, January 19, 2021   An annual event not to be missed, the Trusts & Estates Mid-Year Review covers recent federal and state case law, legislation and tax law matters. This year’s program will touch on:

  • New Developments Committee:  The committee will review recent estate planning and administration cases.
  • Public Policy Committee:  The presentation will include an overview of recent and pending legislation.
  • Tax Law Updates Committee:  The committee will report on important updates regarding the Internal Revenue Code, federal tax law, recent cases, private letter rulings, charitable planning updates, retirement cases and other interesting developments.

2020-2021 Income Tax Charitable Deduction Changes

By: Keirsa K. JohnsonHemenway & Barnes LLP

Until a few days ago, Massachusetts taxpayers were scheduled to be able to take state income tax deductions for charitable contributions, for the first time since 2001, starting in January 2021.  As a result of the recent budgeting process, however, allowance of those deductions has been postponed until 2022.

History

In 2000, voters approved a ballot initiative to reduce the state’s income tax rate from 5.95% to 5.00% by 2003.  One year after implementation, citing budget shortfalls that forced cuts to essential services, the legislature repealed that change and instead enacted legislation that reduced the income tax rate by .05% each year in which certain economic triggers were met, until the income tax rate hit 5.00%.  As part of that legislation, charitable deductions from income were also suspended until the 5.00% tax rate was reached.  (Notably, that legislation also decoupled the Massachusetts estate tax from the federal estate tax regime.  See TIR 02-18, Tax Changes Contained in “An Act Enhancing State Revenues” and Related Acts.)

Taxpayers with excess charitable contribution amounts in 2001 were permitted to carry those amounts forward five years but, since a 5.00% tax rate was not reached and the charitable deduction was not reinstated by 2006, those deductions were lost.

In December of 2019, the Baker/Polito administration announced that the final rate reduction requirements had been met, that the income tax rate for 2020 would be 5.00%, and that starting in 2021 taxpayers would be able to claim a deduction for charitable contributions.  The deduction was expected to cost the Commonwealth an estimated $64 million in Fiscal Year 2021, and up to $300 million in full fiscal years after that. 

Given the significant budget deficit caused by the COVID-19 response, however, some proposed delaying the reintroduction of the charitable deduction until 2022.  On December 11, 2020, Governor Baker signed budget legislation doing just that.

Looking Forward

When the charitable deduction becomes available (assuming no change to current law), it will be available only to individuals—including “non-itemizers” who take the standard deduction on their federal income tax returns—and will be taken against Part B adjusted gross income.  No deduction will be allowed for the contribution of household goods or used clothing.  G.L. c. 62, § 3.B(a)(13).

Federal Context

The charitable deduction for federal income taxes was also changed for 2020 under the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”).  Under the Tax Cuts and Jobs Act (“TCJA”) of 2017, individuals were allowed to deduct up to 60% of their adjusted gross income for charitable donations of money to public charities.  However, the TCJA also doubled the standard deduction for federal income taxes, all but eliminating the incentive to itemize deductions and capitalize on the charitable deduction for many taxpayers.  The CARES Act, passed in the spring of 2020, includes a $300 above the line deduction for charitable contributions, and also increases the charitable deduction limit for donations of money to public charities (not including donor advised funds) to 100% of a taxpayer’s adjusted gross income for those who itemize.  These changes are only temporary and are scheduled to expire at the end of 2020.  It is yet to be seen whether a similar charitable deduction will be included in any future federal coronavirus relief packages.  If not, the postponement of the state income tax deduction for charitable contributions until 2022 means that Massachusetts taxpayers who postpone 2020 contributions until 2021 may lose a federal benefit with no offsetting state benefit. 

Upcoming Events at the BBA

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

Upcoming Programs at the BBA: 

Modifying Irrevocable Trusts: Decanting, Non-Judicial Settlement Agreements and other Trust Amendment Alternatives   Wednesday, January 6, 2021  This program will provide an introduction to various methods for modifying an irrevocable trust, including how and when to consider: (1) Modifications under the Massachusetts Uniform Trust Code, (2) reformations, (3) non-judicial settlement agreements, and (4) decanting.

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.

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.”