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Estate and Trust Planning in 2022: News You Can Use

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The Tax Cuts and Jobs Act of 2017 (TCJA) made some significant changes to federal estate and gift tax lifetime exclusion amounts. However, the TCJA fell short of repealing federal death taxes, and leaves the door open for Congress to decrease (or increase) the exclusions, or increase (or decrease) estate and gift tax rates, at any time. Unfortunately, the 3.8%  Net Investment Income Tax, which affects married couples with incomes exceeding $250,000 and trusts or estates with retained income exceeding $13,050 (for tax year 2021), is likely to remain until the Affordable Care Act is repealed or amended.

Substantial lifetime exclusion amount for estate and gift taxes

Our current federal Internal Revenue Code unifies the estate tax and the gift tax, providing for a combined tax credit that allows people both to make taxable gifts during their lifetimes and to transfer estate property to heirs at their deaths free of federal taxes up to a certain total amount. That amount increases each year to adjust for inflation, and for persons dying in 2022, the exclusion amount will be $12.06 million.

You might think this amount is high enough to prevent you from having to think about federal estate taxes. However, keep in mind that Congress could lower the exclusion amount at any time. (Indeed, if Congress does nothing, it will automatically revert to $5.49 million on January 1, 2026.) Furthermore, the federal death tax exclusion amount includes not just the value of financial assets and real estate that you own yourself (personally, or in your Living Trust), but also the payout values of your retirement plans and any life insurance that you own at your death. When calculating how close you are to taxability, be sure to include the value of any death benefits and group life insurance that your employer might provide.

Increase in the annual exclusion amount for gifts

The Code’s gift tax provisions are written to apply to even small gifts. However, Congress in its beneficence has provide for an annual exclusion that exempts from gift taxation and reporting gifts up to a specified amount. That amount is also adjusted for inflation, but only when thousand-dollar increments are exceeded. For 2022, due to 2021’s rampaging inflation, the annual exclusion will increase to $16,000.

A few reminders about the annual gift tax exclusion. First, you can still give up to $15,000 ($16,000 for 2022) to as many different people as you want. So if your estate is at, above, or near the lifetime exclusion amount mentioned above, making annual gifts to your children, grandchildren, nieces and nephews might be a good way to make sure they come to visit you often (as well as keeping your family’s money out of Uncle Sam’s wallet).

Also, there are several categories of gifts that can exceed this amount without incurring gift taxes or using up your lifetime exemption. Most people can make unlimited tax-free gifts to their spouses (except for noncitizen spouses – tax-free gifts to them are limited to $164,000 for 2022). Moreover, money you spend on medical care or education for someone else isn’t treated as a taxable gift so long as you pay the school, college, or medical care provider directly. (Directly means you write the check or incur the credit charge. Reimbursements of other people’s payments don’t qualify.)

As always, contact me if you have any questions about maximizing or using your lifetime or annual exclusions from estate and gift taxes.

[Revised: December 16, 2021]

It’s Back! The Tax-Free IRA Charitable Rollover

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Thanks to the Protecting Americans From Tax Hikes Act of 2015 (“PATH”), signed into law on December 18, 2015, Section 408(d)(8) of the Internal Revenue Code once again provides a $100,000 annual exclusion from gross income each year for qualified charitable distributions (QCDs) made directly from a traditional IRA by donors aged 72 or older.

Donate HereFurthermore, this IRA “charitable rollover” provision was made permanent (meaning it would take a vote of both Houses plus a presidential signature to change it), retroactive to January 1, 2015. This makes it much easier to plan for charitable rollover donations and make them without the year-end uncertainty that has plagued senior donors for the past several years.

IRAs Only

As in past years, distributions from 401Ks, 403Bs, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, you usually can roll assets from those plans into IRAs and then donate them if you begin the process early enough in the year.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds (such as those offered by Fidelity Charitable and Vanguard Charitable) and supporting organizations are not eligible recipients.

And, as in the past, distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Under a special and favorable IRS rule under the charitable rollover provisions, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA account, and then from any non-taxable portion. This is a distinct benefit to taxpayers who made non-deductible IRA contributions during their working years.

You May Not Receive Anything Of Value In Return

This rule can be harsh, so be careful. Any quid pro quo benefit or thing of value received by the donor in return for the charitable rollover distribution – even the value of a dinner, a sports ticket, or other seemingly trivial benefit, may disqualify the entire distribution, not just a portion equal to the benefit received, from QCD treatment.

Therefore, a careful donor will first advise the charity well in advance that: (1) a distribution will be made from an IRA account to the charity and that it is intended to constitute a qualified charitable distribution under IRC § 408(d); and (2) that no goods, services, or benefits of any kind are to be provided by the charity to the donor or any other person in consideration for the distribution. (Charities usually know this well, but it never hurts to remind them.) In addition, a wise donor will request in advance that the charity provide a letter to the donor acknowledging the amount of the distribution that it received and confirming that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in exchange for the distribution. If you don’t receive such a letter within days of making a QCD, you should remind the charity that you need one.

[Updated: December 16, 2021]

Your New Estate Planning Checklist

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Fortunately (or unfortunately, if you’re not all that happy with our current estate and gift tax laws), the start of 2022 brings no significant changes to the federal or Virginia tax laws or to Virginia laws affecting estate and trust planning and administration.

So instead of an update on new laws and tax rates, here’s a practical checklist you can use to evaluate your estate plan and, perhaps, make some financial and planning resolutions for the upcoming year. Because an out-of-date estate plan might be missing useful features that I’ve added in recent years in response to those years’ changes in tax and nontax estate planning laws and court decisions.

Action This DayDo you have an estate plan in place? (That question is for you, non-clients.) Whether you do or not, please go through the rest of this checklist. If you answer “no” or “I don’t know” to any of the following questions, please contact me so that we can get things set right.

Do you have a revocable living trust and pour-over Will in place? If so, have you and I sat down and reviewed them within the last five years?

Does your Health Care Power of Attorney permit a person (such as your spouse or a family member) or committee of your choosing (such as a family member in concert with your doctor) to make emergency health care decisions for you in the event you are ever unable to do so?

Are you pretty sure that your estate plan will minimize death taxes and income taxes for your beneficiaries (including taxes on your real estate, investments, life insurance proceeds, and IRA or TSP assets)?

Do you need to take any steps to avoid to avoid possible will contests or similar disputes among the beneficiaries (and non-beneficiaries) of your estate?

Are the people you have named in your Wills as Guardians of your minor children’s persons, and named in your trusts as Trustees of the assets you might leave them, still the best people (or financial institutions) for the job? I often counsel my clients to pick co-Trustees – banks or trust companies to do the heavy lifting, and trusted individuals (who might be the beneficiaries themselves) to keep an eye on them.

Does your estate plan provide protection from creditors and lawsuits for assets you leave to your surviving spouse, children, and grandchildren? (If your plan is more than ten years old, it almost certainly doesn’t protect them to the maximum extent now possible. If it doesn’t include a revocable living trust, it absolutely doesn’t protect them.)

If you have a revocable living trust in place as part of your estate plan (and you should), have you transferred all of your assets to yourself as Trustee so that your family can avoid the expenses, annoyances, and stress of probate? If not, we should get started this day.

Does your estate plan protect your children’s inheritances in the event your surviving spouse chooses to remarry? (And your surviving spouse’s inheritance, in case he or she chooses unwisely?)

Does your estate plan include provisions to allow the assets you leave to your surviving spouse and your children to get a step-up in basis at their deaths, to minimize future capital-gains taxes?

If this checklist leads you to believe there might be ways your current estate plan could be improved, I invite you to contact me so that we can make it better.

Your Estate Plan, Your Trusts, and Your Retirement Accounts

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You should read this excellent short column by financial writer Arden Dale of The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” on integrating IRAs, 401(k) plans, federal employee Thrift Savings Plan (TSP) accounts, and similar retirement savings accounts into estate and trust plans. The article deals primarily with choosing primary beneficiaries in a way that will minimize estate and income taxes. For most married retirement plan beneficiaries, that will mean choosing their spouses to receive the plan proceeds outright and free of trust, via a rollover after the first spouse’s death.Safeguard Your Retirement Plan For Children

However, trusts continue to be important contingent, or secondary, beneficiaries, especially for larger plans. The ability of your children or grandchildren (and in some cases, your spouse) to compound retirement plan investments over a long period of time makes IRAs and similar plans one of the most valuable tools for wealth succession planning for your family. Well-drafted retirement plan trusts help ensure that such plan “stretch-outs” will be administered property. I will normally recommend a separate IRA Inheritance Trust if you wish to

  • preserve and guard retirement plan assets from your beneficiaries’ “predators and creditors” – including remarriage spouses, your children’s and grandchildren’s creditors, and their improvidently-chosen spouses;
  • control distributions after your death (discourage or prevent a beneficiary from withdrawing all of the assets he inherits from you at once, absent a very good reason);
  • direct otherwise-reluctant retirement plan administrators to divide an account into separate accounts for your children;
  • limit payouts to any special-needs beneficiaries (including those who become disabled after your death) to protect ongoing government benefits; and
  • ensure that your retirement plan money stays in your family.

Generally speaking, if you and your spouse’s combined retirement plan assets exceed $250,000, it will be cost-effective for us to create stand-alone IRA Inheritance Trusts for each spouse in addition to your Revocable Living Trust. If you’d like to arrange an appointment or a phone call, or receive more information via email, please call or email me, or use the contact tool in the sidebar.

(Updated: December 2020)

The 3.8% Net Investment Income Tax is Still Here

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One little-mentioned provision of the Patient Protection and Affordable Care Act is the 3.8% net investment income tax (NIIT) that went into effect during Barack Obama’s administration. Various commentators refer to it as the “Obamacare surtax,” the “health care surtax,” or the “Medicare tax”; but whatever one chooses to call it, it is still going to be with us unless and until the ACA is repealed or modified.

Last-Minute Estate Planning In 2012This surtax is assessed on Form 1040 (for individuals) and Form 1041 (for trusts and estates) upon the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over a threshold amount. For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; and all other individual taxpayers, $200,000. For trusts and estates, the threshold amount is the amount where the top income tax bracket for trusts and estates begins ($13,050 in 2021).

Does the Health Care Surtax affect me?

Stated another way: 1) If your modified adjusted gross income (MAGI) for 2021 is less than or equal to the threshold amount that applies to you, you will not pay the health care surtax. 2) If your MAGI is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.

What’s all this about MAGI? Basically, it means that your healthcare surtax liability is determined on your income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital-gains income tax rate for high-income taxpayers stands at 20% in 2021, so the total federal tax on capital gains (with the surtax) could be 23.8% in 2021 and beyond. (Don’t forget to add state capital-gains taxes to get your true marginal tax rate on investment income.)

How Can I Avoid (Or Minimize) Investment Income Surtaxes?

The good news is that there are some steps Northern Virginia families can take right now to help you avoid or reduce the amount of your Obamacare surtax. Even though past Republican Presidents and Congressional majorities have stated a goal of eventually eliminating Obamacare and the NIIT entirely, there are many slips ‘twixt cup and lip. Unless and until repeal is passed and signed into law, there are no guarantees.

Now, more than ever, you need the assistance of experienced professionals to advise you and help you implement the best plan for you and your family. I stand ready to assist Virginia residents with the estate planning part of your project, and to work with your investment advisor and your CPA.

[Updated: December 2021]

How Old is Your Durable Power of Attorney?

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When you created and signed your General Durable Power of Attorney, you did it to make sure that a person chosen by you could take care of financial and personal matters for you if you were to become incapacitated.

However, as this 2016 New York Times article explains, when an Agent takes a power of attorney document to a financial institution, the institution might not accept the document. Instead of honoring the power of attorney, some banks and investment houses have been known to insist that the account owner or owners sign the institution’s own power of attorney form, despite Virginia law apparently to the contrary.

Durable Power of AttorneyIt’s usually easiest in such a situation just to go ahead and fill out the bank’s form. However, that’s not always possible if you or your relative has developed dementia, or there’s another emergency and time is of the essence.

Unfortunately, these are not rare occurrences. Estate planning and elder law attorneys often encounter financial institutions unwilling to honor valid powers of attorney. Even though Virginia law requires institutions to accept a durable power of attorney, and insulates them from liability when they do accept one, attorneys have seen some institutions resist. The usual reasons are because Agents’ IDs don’t exactly match the names on the powers of attorney (think marriage, divorce, or other name change – or use of a nickname instead of a “driver’s license name”), or because a power of attorney is deemed “stale” — signed too many years ago to be accepted without additional assurances under the bank’s or investment company’s internal rules.

And in many cases, the brokerages or banks have valid concerns. They are concerned about potential financial exploitation of their customers, particularly seniors, and are on their guard when Agents whom they have never met walk in with powers of attorney that enable them to control substantial sums of money. When they insist on using in-house forms, or obtaining updated powers of attorney or recently-dated doctor’s letters, it’s usually because they’re concerned about their potential liability to the account owner.

Fixing the Problem Before It Happens

What can you do? First of all, if your (or your loved one’s) General Durable Power of Attorney is more than five years old, come in and see me to have it updated. The fresher the power of attorney, the less likely it is to be challenged. Equally important, transfer your individual, non-retirement accounts to your Living Trust, if you have one. Banks are much more willing to deal with Successor Trustees than they are with Agents under powers of attorney, because the rules for trusts are much more manageable, and the bank’s exposure to liability therefore is lower.

(The Durable Powers of Attorney that I am currently drafting specifically authorize Agents to complete financial institutions’ in-house power of attorney forms on behalf of the principal.)

As a backup, you can ask your brokerage or bank if it requires its own durable power of attorney document. If it does, take home a copy, or have the institution email me the form or a link to it online. I’ll look it over for you, warn about any problems it could raise (and indeed there might be none — but the print is likely to be small) and advise you on what to do next.

Finally, if your Durable Power of Attorney requires a doctor’s letter for it to “spring” into action, consider whether you would prefer to have it immediately effective. A middle ground is to make your power immediately effective, but also to hang onto it yourself (in a safe place known to your Agent) until it is actually needed.

It may seem like extra work, but by preparing ahead, and reviewing and updating your powers of attorney now, you will be ready if and when you need to represent a loved one as Agent, or a loved one needs to represent you. To get started, you can call or email me right now.