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Estate Planning in 2020

Changes in 2020 from New Legislation

The Setting Every Community Up for Retirement (SECURE) Act made some of the most significant changes to retirement plans since 2006. It was originally passed in the House in the spring of 2019 and failed to pass the Senate then. But it was included in the year-end spending bill that was passed on December 20, 2019 and became effective January 1, 2020.

These changes can affect your estate planning:

  • Stretch IRAs eliminated. Previously, a beneficiary who inherited an IRA could extend distributions over his or her lifetime. Young beneficiaries, especially grandchildren, could extend the payout from an inherited IRA over decades, spreading out the payment of income taxes and keeping tax-deferred growth of the balance continuing for many years. Now, funds from inherited IRAs must be fully withdrawn by most beneficiaries within ten years of the account owner’s death. There are exemptions for certain beneficiaries, including surviving spouses, minor children, the chronically ill and disabled, and beneficiaries who are not more than ten years younger than the account owner.
  • Elimination of age limit for making contributions to traditional IRAs. Previously, once you reached age 70 ½, you had to stop making contributions to traditional IRAs. The SECURE Act removes this age limit. If you continue to work beyond age 70 1/2, which many people now do, you can continue to make IRA contributions and add to your retirement savings.
  • Age for Required Minimum Distributions (RMD) Raised from 70 ½ to 72. This will allow you to keep money in your IRAs and other tax-deferred plans longer and put off paying income taxes on withdrawals if you don’t yet need funds for retirement. This new rule does not apply to those already older than 70 ½ or who turned 70 ½ in 2019. Also, if you are not a 5% owner in the company and continue to work, you can still delay your RMDs for that employer’s retirement plan until the year after you retire.

Changes in 2020 from Previous Legislation

The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, had some significant impacts on estate planning beginning in 2018. Here’s what you need to know about those changes and how your estate planning may be affected by them.

Federal Estate Tax

This law did not eliminate the Federal estate tax, as many expected. But it did double the exemption, from $5.49 million for individuals and $10.98 million for married couples in 2017 to $11.2 million for individuals and $22.4 million for married couples in 2018. The exemption continues to be tied to inflation, so it will be adjusted each year…until the end of 2025. If Congress does nothing before then, the estate tax exemption will return to the 2017 rates, adjusted for inflation. The tax rate for assets over the exempt amount remains at 40%.

Here are the Federal estate tax exemptions by year:

Year Individual Exemption Married Couples Exemption Tax Rate on Excess

2017

$5.49 million

$10.98 million

40%

2018

$11.2 million

$22.4 million

40%

2019

$11.4 million

$22.8 million

40%

2020

11.58 million

$23.16 million

40%

 

Generation Skipping Transfer (GST) Tax

The GST tax applies to assets you leave that “skip” a generation. For example, if you leave assets directly to your grandchildren, bypassing their parents, you may have to pay a GST tax. It also applies to assets you leave to other individuals more than 37 1/2 years younger than you. The reason it exists is that Uncle Sam wants his share of taxes, just as if each generation had received its inheritance and paid the taxes on it. The GST tax is in addition to the Federal estate tax and is equal to the highest estate tax rate in effect at that time (currently 40%).

The good news is that everyone has an exemption from the GST tax. This law kept it the same as the Federal estate tax exemption and it, too, is adjusted annually for inflation. Also, if Congress does not act by the end of 2025, the GST exemption will return to the 2017 rates, adjusted for inflation.

Here are the Federal GST tax exemptions by year:

Year Individual Exemption Married Couples Exemption Tax Rate on Excess

2017

$5.49 million

$10.98 million

40%

2018

$11.2 million

$22.4 million

40%

2019

$11.4 million

$22.8 million

40%

2020

11.58 million

$23.16 million

40%

 

Annual Tax-Free Gifts

Unrelated to this law, the amount of annual tax-free gifts increased in 2018 from $14,000 to $15,000 and remains at $15,000 in 2020. Each year you can make as many tax-free gifts to as many recipients as you wish, as long as the amount does not exceed the limit set by Congress. If you are married, your spouse can join you. For example, in 2020 you and your spouse together could give $30,000 to each of your three children and five grandchildren—a total of $240,000 in tax-free gifts. You can also still give an unlimited amount for tuition and medical expenses if you make the gift directly to the educational organization or health care provider.

Other Developments That Can Affect Your Estate Plan

This tax law also lowered personal income taxes and business corporate taxes. The capital gains tax stays the same (20% on assets held for more than 12 months.)

Many reliable, time-tested estate planning options, often rumored to be on the chopping block, are still available and untouched by the new legislation. These include stepped-up basis for transfers made at death, family limited partnerships, charitable trusts, grantor trusts, qualified personal residence trusts, dynasty trusts, discounted values and other methods frequently used in estate, business succession and asset protection planning.

What This Can Mean to You and Your Estate Planning

Your estate will not have to pay Federal estate taxes if its net value (assets minus debts) is less than the exempt amount in effect at the time you die. Estimates are that this dramatic increase in the Federal estate tax exemption rescues all but about 2,000 families from the dreaded Federal estate tax. So, for most families, this means you are free to plan your estate without having to jump through hoops to avoid estate taxes. But keep in mind that this increase is currently temporary; the exemption is set to revert to 2017 rates (adjusted for inflation) in 2026 if Congress does not act.

Here are several reasons you will want to review your existing estate plan with your attorney—or finally make this the year to get your estate planning done.

  • With stretch IRAs eliminated for most beneficiaries, you will probably want to review your beneficiary designations with your attorney.
  • Your estate plan may have been set up so that an amount equal to the federal estate tax exemption goes to your children or grandchildren and the balance to your surviving spouse. With the increased exemption, this could cause a larger than intended amount to go to your children/grandchildren and a smaller than intended amount (or even zero) to your spouse.
  • Some states have their own estate/ inheritance tax, often at a lower threshold, so your estate could be exempt from the Federal estate tax, but still have to pay a state tax. Your attorney can help you reduce or eliminate these taxes.
  • Your attorney may also want to plan for a possible reduced exemption in 2026.
  • Instead of estate tax planning, your attorney may want to concentrate on income tax planning for your assets.
  • If your estate is larger, you will want to take advantage of the increased exemptions while we have them. If you have previously used your exemptions for transferring assets during your lifetime, you now have increased exemptions and can make additional tax-free transfers and gifts. 
  • If you are a business owner, make sure you have a business succession plan in place for your retirement, potential incapacity and eventual death.
  • Increased appreciation on assets provide an excellent opportunity for charitable giving, if you are so inclined.