Although 2020 has proven to be an abnormal year, our tax experts want to remind individuals about some important tax and estate planning topics. Adelle Starr interviews Terri Lawson and LeighAnn Costley, both Tax Partners at Frazier & Deeter. In this podcast, they cover important tax and estate planning topics to consider every year as a well as some that are unique to 2020.
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Untangling the Technical: Summer of 2020 Tax Topics
This transcript was assembled by hand and may contain some errors.
It has been edited for readability.
Adelle Starr Hello, everyone, and welcome to Untangling the Technical, Frazier and Deeter’s podcast in which we look at complex topics to break them down for people who are navigating today’s ever-changing tax environment.
This is Adelle Starr, and today we’re excited to have two of our Tax partners here to take a look at some of the big picture items that people should be thinking about this year.
Both of our guests provide tax advice for closely held businesses, corporate executives and other high net worth individuals, as well as multiple generation, family entities and trusts. So, these are some of our true tax gurus that we have on the line here today. They help with estate and gift tax planning, charitable contribution planning as well as business succession planning. First, let me welcome LeighAnn Costley to the podcast.
LeighAnn has degrees from the University of Michigan and Walsh College, and she was named one of Atlanta’s “Women Who Mean Business” in 2019.Welcome to the podcast.
LeighAnn Costley Thank you, Adelle. I’m glad to be here.
Adelle We also have Terri Lawson. Terri is a graduate of the University of Georgia and she’s a frequent speaker about tax and estate planning. She is a member of the board of the Center for the Visually Impaired. Terri, welcome to the podcast.
Terri Lawson Thank you, Adelle.
Adelle Today, we want to talk about some of the big tax and estate planning topics that people may really want to think about right now as we’re recording this in August of 2020. Some of these topics are sort of evergreen areas that people should really think about every year as they go through different stages of their lives, but a few of them are planning opportunities that may be very unique to this year that we’re having.
So, I wanted to start off by talking about one of the situations that’s on the plate this year. The changes that were included in COVID-19 relief legislation, and one of those big topics is retirement distributions. So, for those of you who are not completely up to speed on retirement planning, and the required minimum distribution aspect of that, I wanted to ask LeighAnn to explain what the required minimum distribution actually is.
LeighAnn Thanks, Adelle. The required minimum distribution is a provision in the tax law for all retirement accounts. And, it’s age based.
So, if during your work-life, you contribute to a 401k or an IRA, and as you reach retirement, you can begin taking distributions at the age of 59.5, without incurring a tax penalty.
However, you can choose to defer taking any distributions if you have other sources of income until a required minimum age. Until December of 2019, that required minimum age was 70.5. So, you needed to begin taking distributions from your retirement accounts in the year that you turn 70.5, the amount that you would have to withdraw at that point in time is an actuarial calculated amount based on the balance and the value of your retirement accounts and your age.
The Secure Act, which was passed in December of 2019, pushed that required minimum age if you had not already begun taking distributions at that time to 72.
So, if you were 70, and were anticipating in 2020, beginning to have to take distributions from your retirement account, because you’re going to reach 70.5, the Secure Act pushed that requirement back for two more years, allowing you to defer, for another couple of years, the required minimum distribution out of your accounts.
Adelle Okay, so that’s the baseline of needing to take that money out, which, of course, might have implications as far as your general planning.
Terri, could you talk to us about what changed this year with the CARES Act?
Terri Sure, under the Cares Act, like LeighAnn said, when you’re taking a required minimum distribution, it is based on a table that’s published by the IRS and it’s actuarially based and it’s taxable income to you. Under the CARES Act, part of that act was to allow you if you had taken your required minimum distribution for 2020, you could either put it back into your IRA, rr you didn’t have to take it, if you had not taken it when this Act was passed in April of 2020. So, for example, if you’re a minimum distribution was $50,000 for 2020, instead of having to take that money and pay tax on it, You can either choose not to take it, or if you’d already taken it, you have until August 31st, to put that back into your IRA and pay no tax on that whatsoever, and defer it for another year.
It ends up being a permanent savings because you are not going to pay tax on that money this year whatsoever, you don’t have to catch it up next year, it’s just by year.
Adelle Okay, so that’s a pretty interesting situation that’s really on the table right now, for people to react to,
Terri Correct. They’ve got another 25 days to put that money back if they’ve taken it this year.
Adelle Okay, so that’s great. That’s good knowledge to have. One of the other things that we wanted to talk about was the fact that there were a lot of changes if you kind of go back a little bit, there were a lot of changes from the Tax Cuts and Jobs Act that were planned for individuals that were set up as temporary that were designed to sunset in 2025. So, we wanted to talk and have LeighAnn set the stage for us a little bit about some of the big changes that were included in that sweeping tax legislation.
LeighAnn Thanks, Adelle. I want to focus just on the estate and gift tax changes from that tax act in terms of the Sunset provisions. There were a few other things related to individual tax, like the state and local tax deduction limitation, and the elimination of miscellaneous itemized deductions that are also subject to this. But, the big one that we should focus on from a planning standpoint is what happened with estate and gift taxes.
For those of you who are not familiar, or maybe need a refresher, you are allowed something called the lifetime exemption, and that allows you to give away during your lifetime an amount of money that is not subject to gift tax. That exemption amount has changed over the course of time and when you die, any lifetime exemption that you have utilized goes against your estate tax exemption.
They’re one and the same thing, the exemption amount applies either to lifetime gifts or to your estate. When you die, you can utilize it in both factors as one total amount.
The Tax Cut and Jobs Act increased the exemption, basically doubled it from $5.5 million to $11 million, and also allowed it to be indexed for inflation. So, for 2020, the current estate and gift tax exemption amount is $11.58 million.
And what that means is, that if you die tomorrow and you have not used any of your lifetime exemption, the first $11.58 million of your estate would be tax free. You would not pay any estate tax to the federal government upon your death.
When this provision expires in 2025, the lifetime exemption for estate and gift purposes will go back to its pre-Tax Cut and Jobs Act amount, which was originally $5 million indexed for inflation. So, what that amount will be is yet to be determined, but it will certainly be substantially less than it currently is at $11.6 million dollars.
Terri LeighAnn, one of the good things that the IRS has already announced is that if you make gifts up to that $11 million, they are not going to claw that back and make you pay gift tax when that drops back down in 2025.
Adelle Could you guys talk a little bit about, I mean, you are our tax gurus about these topics, is there any likelihood that the 2025 sunset could go away? Is there any chance these could become permanent?
Terri Well, as we’ve seen, everything is fair in, love and politics. So, we never know.
From time to time back, in 2012, we thought it was going to drop back down to one million after the one-year, no hiatus of the state tax. When we had in 2010 no estate tax, we thought it was going to go back to a million. After that passed in 2012, and it ended up staying at 5.3 million under President Obama.
So, we never know if there’s a change in administration or just a change in the economy on how Congress is going to view the estate tax. It’s always been a hot topic. You will hear every presidential candidate ever since this has been in place, talk about the estate tax and the changes that they can make to it. So, we never know.
LeighAnn Well, in touching on that just a little bit, we know it’s going to sunset, we know that it’s coming to an end, we know that there’s going to have to be something done to either extend it or change it. Either making it permanent or reducing it and making it permanent. Terri mentioned 2010, all practitioners’ knew that the then, in effect, law, in 2010, was scheduled to expire and we thought for certain that Congress would act nearly immediately after the expiration at the end of 2010, in order to put something in place permanently. What happened was, and Terri mentioned this, as well, we had no estate tax in 2011 because they didn’t jump on it, they didn’t plan for it, they didn’t make any moves, and it got so far into the year that, by the time they decided what they wanted to do, they did not make it retroactive to January 1st.
So, knowing that this provision sunsets, and other provisions sunset at the end of 2025 does not mean we will have any vision into what is going to change before it expires or even shortly thereafter.
Adelle That’s fascinating. So, there’s a lot of stuff to pay attention to it sounds like as we go forward.
But we know, at least for right now, it’s an opportunity that people should be addressing as best they can. Let’s change gears a little bit, is there something that we should think about as far as charitable giving?
Terri Adelle, you’re correct. This is a really big opportunity for people to take advantage of this 11 million-11.5 million exemption by maybe thinking about doing some gifting over the next couple of years to use that exemption because like I said, the IRS is not going to claw that back. So, if it drops down to $5 million or less, they still have had that chance to get $11 million out of their estate. So, that’s a really big opportunity. Another feature that is currently in place is what we call Portability. Portability means, if you are a married couple and one spouse passes away, you have the chance to pass that unused exemption to the surviving spouse for their use in their estate.
So, years ago, we wanted to make sure that we had equalized estate so we can take advantage of both of the spouses’ exemptions. So, we talk to clients about making sure that their estates were roughly equal. Now, we don’t have to do that because the Portability allows us to make that election to equalize the estates and use that unused exemption on the second spouse to die which can be a really powerful thing.
There are some rules if the surviving spouse remarries, but it’s an opportunity as well and it’s important, even if your estate is less than the exemption amount, you have to follow return to elect that Portability. So, we’ve done a lot of estate returns that’s below the exemption, there’s no tax due just to make that election of portability so that surviving spouse has that expanded exemption available to them.
Adelle Interesting, so that’s really key, because if you don’t do that filing well, what happens?
Terri it has to be elected on a timely filed return. If you don’t follow the return, the elections not made in that part of that unused exemption is not available to you. It’s important to know that that surviving spouse can use that unused exemption, that we made the Portability election for in their lifetime or at their death. So, if we have a spouse that passes away and the surviving spouse is making gifts, they can use that unused exemption to expand their lifetime giving. They don’t have to wait until they have passed as well.
LeighAnn So, Adelle, if you think about it from just a very simple example, if you’ve got a husband and wife, and the assets are under the husband’s name are only worth $2 million, and the assets that are in the spouse’s name are worth $10 million. Let’s say she owns some private family business stock. So, the husband dies. First, his estate is less than the exemption, so you have to file a return. As Terri was saying, the current exemption is 11.6. It would use up $2 million of the exemption, because those are the assets in his name, but there’s $9.6 million remaining. You file a return, you elect that Portability so that the spouse then has her 11.6. Plus, his 9.6, giving her effectively almost $22 million of exemption.
She only has $10 million of assets now. But, what if that family business that she owns and has owned for years goes public and that $10 million in assets is then worth $50 million? She’s got his Portability number that when she dies 2 or 3 years later, has given her a much larger exemption amount against her then value of assets on her date of death.
Terri And, with the estate tax being 40% currently, it’s huge savings.
Adelle That’s excellent. I think that’s a really great explanation of why portability is a very important thing. I wanted to ask LeighAnn to talk to us about charitable contributions, which I know has been a really hot topic this year. Could you talk to us a little bit about why?
LeighAnn Certainly. One of the things that the Tax Cut and Jobs Act did was eliminate most of the deductions available to high income taxpayers. There’s now a limit on the state and local tax deduction that you can take on Schedule A. You can still claim Mortgage Interest Expense, but charitable contributions are one of the only remaining deductions to reduce your taxable income. Prior to this year, there are different buckets of charitable contributions.
There are cash contributions, obviously, there are what we call, appreciated property contributions, which is generally stock. People often take a deduction for items that they donate to a charitable organization when they clean up their house, clothing, household goods, etc. But there are limitations on how much you can deduct against your income. Up through 2019, you can deduct up to 50% of your gross income using a stock contribution to a qualified charity, or 60% of your gross income if you donated cash to a qualified charity.
I’m not going to get into the nuances of if you donate to a private foundation/related entity etc. because that’s beyond the scope of this podcast, but one of the things that has happened in 2020 as a result of the CARES Act, is that the government has increased the cash contributions allowable to qualified charities. If you are so inclined, you can make cash contributions equal to 100% of your income to qualified charities.
And that may seem like a huge change in policy, but it is not unusual in the wake of a national disaster for the government to do this, they enacted the same provision back in 2005 after Hurricane Katrina hit the Gulf Coast. It encourages high income taxpayers who are charitably inclined to take advantage of the tax benefits of increased charitable giving in response to a national tragedy.
Adelle That’s excellent. Very interesting information.
Terri One of my favorite planning points for my older clients who are retired and are taking those required minimum distributions we talked about earlier, is called a qualified charitable deduction. As LeighAnn said, with the limitations on itemized deductions, we’re seeing more and more taxpayers take the standard deduction, so a qualified charitable distribution is a charitable contribution may directly from someone’s IRA to the charity, and you have to be taking required minimum distributions. You have to be at that age. you can’t, if you’re a 59.5, you can take advantage of this, but if you are of the age, taking required minimum distributions, you can elect to deduct or to contribute to a qualified charity up to $100,000 per year from your IRA.
And if you are married filing jointly, you and your spouse can both donate up to $100,000 to a qualified charity from your IRAs. So, that comes off your adjusted gross income. You don’t have to itemize to take advantage of this. If you took $150,000 from your IRA, you donate $100,000 and you keep $50,000, then only $50,000 of that is taxable to you.
So, that’s just a really straightforward, great planning point that we use with our retired clients. It’s just one of those things that if they’re charitably inclined, but they don’t have any other itemized deductions, it’s a really good way for them to reduce their income they’re paying tax on.
Adelle Well, and an excellent way to support some really important charities, that’s really excellent.
Well, this has been really great to have both of you on. Before we wrap up, I just wanted to find out, are there any closing thoughts that you wanted to share with our listeners today? How about Terri?
Terri Well, Adelle, you’ve heard me talk about this before, but this is a really great opportunity for people to refresh their estate planning. If you don’t have anything done on your estate planning, then it’s a really good opportunity for you to take advantage of making those plans. I tell clients, “By the time you own any kind of property, or if you have children, you need to have a will in place”. If you haven’t refreshed your will in about five years or longer, it’s a great time to update that, and if you’ve never done a will, it’s a perfect time to do so. So, that’s my never-ending, soapbox.
Adelle Great advice, very good advice. LeighAnn, do you have some closing thoughts you’d like to share?
LeighAnn Of course. I think you can tell by some of the comments Terri and I have made throughout this podcast that there have been a lot of tax law changes over the course of our careers. That is never more true than when you are faced with an election year.
I think we can be certain, especially since we know a lot of the provisions that are currently in place are scheduled to sunset in 2025 that, regardless of which administration prevails in the November election, there’s definitely going to be some tax law changes in our future. We’ll need to stay on top of that and advise our clients accordingly.
Adelle Great point, change is going to happen. It’s just going to be a question of what. So, I wanted to thank you both, Terri and LeighAnn, for taking the time to be on our podcast today. It’s always an interesting thing to keep up with what’s going on in personal tax.
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