Gifts can be made to help family members pay the tax on Roth conversions or to pay for life insurance. Gifts for business succession planning are especially attractive now since many businesses, unfortunately, have seen their value drop during the pandemic. Gifts can also be made to help children or grandchildren pay down student loans. These are just some examples of gifting that might suit clients.
While gifting results in lower transfer taxes, beware: There’s a big exception to the gifting tax advantage—and that’s when you are giving property other than cash. In those cases, you must watch out for highly appreciated assets that will get a step-up in basis when the owner dies. The increase in basis would eliminate the income tax on any appreciation during the decedent’s life. Depending on the appreciation, this property would generally be better held until death and not given to others.
Gifts made now in 2020 lock in today’s gifting limits. There is no guarantee that these limits will hold up in the future.
5. Updating Estate Plans After The SECURE Act
The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries. This is effective beginning with deaths in 2020, so it is imperative for advisors to check IRA and company plan beneficiary forms for all their clients. This will reveal what may be the largest single asset in their estate plan.
Most non-spouse beneficiaries will be subject to the new 10-year payout rule, meaning that the entire inherited IRA will have to be withdrawn by the end of the 10th year after the IRA holder dies.
This includes most trusts named as IRA beneficiaries, and it could be clients need to make changes to these vehicles. For example, most conduit trusts will not work as originally planned since the entire inherited IRA will be left unprotected in trust after the 10 years. Many of these trusts will have to be upgraded to discretionary trusts to maintain the trust protection beyond the 10 years. But even then, the inherited IRA funds will still be taxed when that decade has passed, and that tax will be at high trust tax rates for any funds remaining in the trust and not distributed to the trust beneficiaries.
One solution here is to convert these IRAs to Roths to eliminate the post-death trust tax exposure or withdraw IRA funds now and purchase life insurance, which is a better and more flexible asset to leave to a trust.
It’s time to re-evaluate clients’ IRA estate plans, and, again, that begins with a beneficiary form review. Check to make sure that contingent beneficiaries are named and up to date. Make sure that the estate plans will still accomplish the clients’ goals after the changes brought about by the SECURE Act.
These are your five best 2020 year-end retirement, tax and estate planning moves. They will enhance your value to clients whose retirement savings will soon be exposed to potential tax increases after 2020. It’s only a question of when. It’s time to act now.
Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group, please visit www.IRAhelp.com.