Year-End Tax Planning and SECURE Act Changes

Dear Client:

We are sending you this letter to share some of our thoughts on the recent federal election uncertainty and potential divided Congress and its impact on your estate plan and income tax planning.  While there are a few weeks before Inauguration day and legal challenges over the election are still pending, year-end planning this year should still be considered amidst that uncertainty.  Further, additional IRS guidance has been made available after the SECURE Act of 2019, which changed certain rules for retirement benefits and naming trusts as beneficiaries, and changes to your estate plan may be advisable.

Income Taxes.  Joe Biden has proposed raising taxes on families with incomes more than $400,000.  The top tax rate would increase from 37% to 39.6%.  However, it is not clear whether this $400,000 threshold means earned income (e.g., wages, self-employment) or all income (earned income and investment income).  Under the new Biden administration’s tax plan, special long-term capital gains rates (15% for lower incomes and 20% for higher incomes) for the sale of capital assets would be impacted too, and higher income earners could face a 39.6% federal income tax rate on these types of capital gains.  In addition, it is not clear how a family’s filing status relates to his proposal (married, single, head of household?).  One proposal also includes a cap on itemized deductions at 28% of income.  We are encouraging clients to consider whether it is appropriate to accelerate taxable income into 2020 and/or maximize potential itemized deductions (e.g., charitable contributions) in 2020 before there is a new cap.

Estate Taxes.  Joe Biden proposed that the lifetime gift and estate tax exemption would be cut in half, from $23.4 million for a married couple to $11.7 million. He has also proposed eliminating the step-up in basis rules (allowing an heir that receives highly appreciated assets to claim income tax basis equal to fair market value at the decedent’s death).  For clients with a taxable estate today, you should review the current income tax basis of your assets and consider using your lifetime exemption to make gifts in trust for your family. A divided Congress may result in more time to plan, but today’s exemption amount is already scheduled to be decreased by one half in 2026. Using your lifetime exemption sooner rather than later is generally beneficial.  The IRS has stated that it will grandfather certain gift and estate planning when higher lifetime gift tax exemption amounts existed. If you do not have a taxable estate today, but would if the exemption were reduced, the appropriate plan is less clear. You may not have to take aggressive action prior to year-end if the Republicans are able to keep a Senate majority.

Retirement Benefits.  A summary of retirement plan changes after the SECURE Act is included in a separate memo which can be viewed here: SECURE Act and Impact on Estate Planning.  Some clients have implemented stretch IRA planning into their estates and trusts, which allows retirement benefits to be paid and income tax deferred over a time to beneficiaries when certain requirements are met.  If you have trusts designed to pay only the required minimum distribution to your beneficiary at your death, or the trust is designated to provide retirement benefits to disabled or chronically ill persons, then some changes to the trust instrument may be necessary to minimize income taxes and maximize income tax deferral opportunities.

If you should have any questions or wish to schedule a review of your estate plan, please feel free to contact Attorneys Sean Clancy or Thomas Duda at our office.  We would be more than happy to assist you.  Thanks.

Sincerely Yours,