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Washington Status Update, March 2021

On March 25, 2021, Senator Bernie Sanders (I-VT) and Senator Sheldon Whitehouse (D-RI) introducted the For the 99.5 Percent Act (the “Act”). If the Act, or anything like it, becomes law, there is now only a small window of opportunity to implement estate planning strategies that have been utilized for years. Additionally, estate planning will become materially relevant to taxpayers whose taxable estates are less than $10 million.

We now have the shot across the bow we all knew was coming. Some shots across the bow are intended as warnings. This one is a sighting shot – zeroing in on the target. The planning window is open now but closing fast.

So, what is in the Act?

1. Effective for decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021:
a. $3,500,000 per taxpayer basic exclusion amount, with continued indexing for inflation;
b. $1,000,000 per taxpayer gift tax exclusion, with no indexing for inflation.

2. Effective for deaths, gifts, and generation-skipping transfers occurring after December 31, 2021, maximum rates of:
a. 45% for estates greater than $3,500,000 but not over $10,000,000;
b. 50% for estates greater than $10,000,000 but not over $50,000,000;
c. 55% for estates greater than $50,000,000 but not over $1,000,000,000; and
d. 65% for estates over $1,000,000,000.

3. Effective for transfers after, and trusts created on or after, the date of enactment:
a. Clarification that assets in an “Intentionally Defective Grantor Trust” (IDGT) receive no step-up in basis upon death unless the assets are includible in the gross estate of the transfer;
b. Elimination of valuation discounts for transfers of non-business assets held by family entities;
c. Effective elimination of zeroed-out and rolling GRAT transfers by requiring a minimum GRAT term of 10 years and a maximum GRAT term of the annuitant’s life expectancy plus 10 years, as well as caps on remainder interests; and
d. Unless grandfathered:
i. Assets in an IDGT would be includible in the estate of the deemed owner;
ii. Distributions from an IDGT to beneficiaries during the life of the deemed owner would be treated as a transfer by gift;
iii. The assets of an IDGT would be treated as a transfer by gift made by the deemed owner in the event the grantor status is turned off during the life of the deemed owner; and
iv. Any transfers on or after the date of enactment to IDGTs created prior enactment would be includible in the grantor’s estate.

4. Effective on the date of enactment, there will be no GST exempt status for any trust which has a date of termination greater than 50 years after the date on which it was created. Any trust created prior to enactment shall be deemed to be a qualifying trust for a period of 50 years after the date of enactment.

5. Effective for any calendar year beginning after the date of enactment, certain annual gifts by a transferor in trust would be limited to 2x the annual exclusion per donor.

In addition to the For the 99.5 Percent Act, bills imposing capital gains tax upon death and imposing a tax on any increase in value of assets from year-to-year (i.e., wealth tax) have also been introduced separately.

The bullets are flying. The aim is getting better. If you have been putting off planning, call your advisor today.

June 2020 Newsletter

The Farner & Perrin law firm is transitioning to reopening our offices. We have limited staff on site daily, with most of us working remotely. Be assured we continue to be operational and ready to serve your trusts and estates needs. However, in the interests of everyone’s health and safety we are not conducting in-person meetings at this time.  

AND THE WINNERS ARE….

TOP TEN MOST COMMON ESTATE PLANNING MISTAKES

People work a lifetime to save and accumulate wealth, and usually intend to pass it on to their children (or other heirs) at death. Unfortunately, too many people neglect how their wealth will ultimately be transferred, and their lack of planning can wreak havoc with their good intentions. Reminiscent of the David Letterman show, here are the “top 10” estate planning mistakes that we commonly see, in reverse order:

Click here for the Article

 


ADDING INSULT TO INJURY

DEATH FOLLOWING DIVORCE

Spend some time searching on the internet, and you will find no shortage of studies, statistics and facts about divorce. You will find everything from its major causes (money, infidelity) to its demographics (highest rate in Russia, lowest in India) to its incidences among occupations (highest among bartenders, lowest optometrists). As the rate of marriage trends downward in American society, the rate of divorce is not surprisingly somewhat slowing. Yet, the rate of divorce in second marriages is higher than in first marriages. And another noteworthy trend is the divorce rate among people age 50 and older has doubled in the last twenty years.

If not fascinating, these factoids at least focus us on the reality of divorce in our families, now or in the future.

Click here for the Article


IN CASE YOU MISSED IT:

2019 LAW CHANGES AFFECTING ESTATES AND TRUSTS

Texas

The Texas legislature meets only in the odd years, so it is currently out of session. While 2019 was not a banner year for probate and trust law, allow us to share select highlights:

Access to Digital Assets. An executor now has specific authority to seek a court order to access the decedent’s digital assets. Digital assets are broadly defined. A good way to think about them is as electronic substitutes for items that used to be physically maintained, e.g., records, correspondence, books, CDs, and videos. Digital assets may also include email accounts and social media accounts, such as Facebook. An executor’s authority may be limited by the terms of certain accounts.

Click here for the Article

January 2020 Newsletter
Should We Feel Insecure about the Secure Act?

Congress passed the Secure Act in the final days of 2019, effective as of January 1, 2020. This is a transformational tax law in terms of post-death income tax on inherited IRAs.

To provide context, the Investment Company Institute estimates there is almost $6 trillion in 401(k) assets and almost $10 trillion in IRA assets, as of 2019. So it is not really a surprise that Congress would seize on an opportunity to tax these assets sooner rather than later, as the aging of the population continues and the impending generational transfer of this wealth looms large.

And that is the main thrust of the Secure Act. Seniors will enjoy somewhat greater income tax deferral, but their heirs will encounter quite a compressed time frame for recognition of the income tax on what they inherit from an IRA or 401(k).

Channeling Clint Eastwood, allow us to share The Good, Bad and the Ugly.

The Good

·    Old law required the IRA owner or 401(k) participant (the “owner”) to start minimum required distributions (“MRDs”) by reference to attaining age 70 ½. The Secure Act allows the owner to delay MRDs until April 1 after attaining age 72.

·    Beginning in 2021, new tables of longer life expectancies are incorporated into the law, providing even better potential for the income tax deferral for the owner (and owner’s spouse).

               
·    The favorable spousal IRA rollover rules were left unaltered, providing the owner’s spouse with handsome deferral opportunities if named as the beneficiary of these accounts.

·    The age for taking a qualified charitable distribution (up to $100,000 annually) from an IRA remains at 70 ½.

The Bad

·    For owners dying after 2019, their designated beneficiaries will be required to liquidate the entire IRA by the end of the 10th year following death. For example, if husband passes his IRA to wife and then she dies and passes it to their children (or qualifying trusts for their children), at the second spouse’s death, the 10-year compressed taxation period starts.

·    Note that these rules do not apply for inherited IRAs where the owner died before 2020, except when a beneficiary of such an inherited IRA dies, in which case the 10-year rule then applies.

·    Also note that some beneficiaries are exempt from the compressed 10-year rule, being spouses, disabled beneficiaries, chronically ill beneficiaries and minors (with the 10-year compressed period merely postponed until adulthood).

 

The Ugly

·    Old style “see through” trusts were drafted with a view toward the prior statute, which allowed a “stretch” of the income tax over the heir’s life expectancy. These same trusts need to be reviewed and reconsidered, given the Secure Act. Some considerations follow.

·    If a single owner dies in their 70’s, their old style trusts may restrict their heirs to 10 years. Under the Secure Act, we would now prefer to use the owner’s longer (ghost) life expectancy and can do so if we update the trust planning.

·    Any “conduit” type trusts in an (old law) estate plan would allow the beneficiary to receive the IRA funds over their life. Under the Secure Act, a conduit trust requires that the beneficiary receive all the funds in 10 years. This may be too soon for that access to funds.

·    Trust income tax rates reach the highest marginal rate at roughly $13,000 in income, so this needs to be considered, given the 10-year compressed time frame for liquidation of an IRA.

 

And finally, the Farner & Perrin way forward

·    Considering the magnitude of this tax law change, there is no substitute for attentiveness to updating your estate plan. Give us a call to determine what changes you may wish to make to your particular plan.

·    Analyze the advisability of a [partial] Roth IRA rollover, depending on relative tax rates of you and your heirs (and likely timing of death).

·    Give thought to the attractive alternative (for some) of having your IRA pass to a “charitable remainder trust,” which can mimic the old style “stretch IRA” for your heirs, leaving the remainder at their deaths to charity.

Bottom line is we have immersed ourselves in this new tax law and are standing by, ready to help you react when you are ready.

 

“Go Ahead, Make My Day”

We are proud to announce that January 20, 2020 was a momentous day for Farner & Perrin, marking the Firm’s 20th anniversary.

Of note, our combined years of experience approximate that of Clint Eastwood’s storied career.