Top Six Estate and Tax Planning Steps to Consider Before the End of 2019

Morgan and DiSalvo, P.C. | Attorneys at Law

This installment of our The Passionate Estate Planner newsletter will review what we at Morgan & DiSalvo consider to be the top six Estate and Tax Planning steps you should consider taking before the end of 2019. This list is not comprehensive, and we still recommend that you seek guidance from your CPA or other tax preparer for an individualized review of your situation. It is our goal to not only help educate you, but to also allow you to realize some significant benefits before year end.

I. Consider Bunching Charitable Gifts to Achieve More Effective Income Tax Deductions.

A. Background. The 2017 Tax Act made significant changes to our income tax laws. In particular, the standard deduction was doubled, state and local tax deductions were capped at $10,000, miscellaneous itemized deductions were eliminated, and the Alternative Minimum Tax was practically eliminated for almost all taxpayers. As a result, most taxpayers will be using the standard deduction instead of itemizing deductions, at least until the personal income tax changes made by the 2017 Tax Act sunset at the end of 2025. This means that most taxpayers will not receive any income tax benefits for their charitable contributions.

B. What Should You Do Before Year End? If you don’t already have one, you should set up a Donor Advised Fund and contribute cash (or better yet, appreciated securities that you have owned for more than one year) to the Donor Advised Fund before the end of 2019. The amount you contribute to the new Donor Advised Fund should be large enough to cover multiple years of future charitable giving. Bunching your future charitable gifts into a single year in this manner may allow you itemize your income tax deductions for 2019, because the larger charitable contribution, when added to other potentially deductible items, may cause your itemized deductions to exceed the otherwise-applicable standard deduction. This, in turn, can produce a significant income tax benefit. You can find excellent Donor Advised Fund options at either a local community foundation (such as the Community Foundation for Greater Atlanta or the Jewish Federation of Greater Atlanta) or at the charitable arm of a large brokerage house (such as Fidelity Investments or Charles Schwab). Most of these options come at a fairly low cost and use a fairly simple process that allows you to request that contributions from the Donor Advised Fund be made to your other desired ultimate charitable beneficiaries and causes in future years. You can, of course, also make a bunched contribution to a single organization that you prefer to support directly, or a group of larger contributions to a number of organizations, instead of using the Donor Advised Fund approach, but the Donor Advised Fund approach gives you the option to decide on the ultimate charitable beneficiaries at a later date. While a cash contribution is the simplest option, contributing appreciated publicly-traded securities that you have owned for more than one year instead of cash can provide even more significant tax benefits because you will receive a deduction based on the full fair market value of the stock, but you will not have to recognize or pay income tax on the built-in capital gains as you would have had to do if you sold the securities and contributed the cash.

II. Make a Qualified Charitable Distribution From Your IRA Account to Satisfy Your Minimum Required Distribution for 2019.

A. Background. If you are at least 70 1/2 years old, you are required to withdraw at least a certain minimum amount each calendar year from your traditional IRAs. This is known as your Minimum Required Distribution amount (also often referred to as a “required minimum distribution” or “RMD”). These amounts, once actually withdrawn from your accounts, are normally treated as ordinary income on which you must pay income tax. However, those that do not need their RMDs to live on and are charitably inclined should consider making a qualified charitable distribution from their IRA. Under this option, the IRA owner directs the IRA custodian to have an amount (up to $100,000) distributed from the IRA directly to a public charity in a Trustee to Trustee transfer. (Please note: this option is not available for contributions to a Donor Advised Fund, private foundation, or certain other charities.) This is called a “qualified charitable distribution.” If the IRA owner has not previously taken his or her full RMD for that calendar year, the amount transferred to the charity will be counted towards the owner’s RMD for that year, but none of that amount will have to be reported as income by the IRA owner. This means that the distribution will allow the IRA owner to satisfy his or her RMD and avoid penalties, but that it will generally have no other direct tax effects, because the amount distributed in a qualified charitable distribution neither causes the recognition of taxable income nor generates any charitable income tax deduction.

If the IRA owner instead decides to take the full RMD for a year himself or herself and then makes charitable contributions (whether using the distributed funds or other funds), the income tax effects will not be as beneficial, and could even be negative. In particular, the IRA owner will recognize taxable income on the IRA distribution but may not be able to fully benefit from the charitable income tax deduction, as discussed above. The taxable income will also increase the IRA owner’s Adjusted Gross Income (“AGI”) for that year, which can cause other tax and non-tax effects. For example, some itemized deductions, like medical expenses, are only deductible to the extent that they exceed a percentage of your AGI. In addition, the higher AGI can increase the income taxes paid on the IRA owner’s Social Security benefits and may cause an increase his or her Medicare insurance premiums.

B. What Should You Do Before Year End? If you would like to directly benefit one or more public charities and you are still due to receive an RMD from your IRA that you do not need for your current or future support, contact your IRA custodian and direct them to transfer your RMD amount from your IRA in a Trustee to Trustee transfer to your desired public charitable organization(s).

III. Other Steps to Take With Regard to IRA Accounts: Make Sure You Comply With Your RMD for the Year and Consider Making a Roth Conversion for Part of Your Traditional IRAs.

A. Background. IRA accounts (and to some extent, other qualified retirement plan accounts) are exceptional investment savings vehicles, but they take some care to ensure you get the most out of them and that you do not get penalized. One of the most significant potential penalties applies if you fail to withdraw and pay tax on your full RMD amount for a given calendar year (RMDs apply to your own traditional IRAs once you turn 70 1/2 years old as well as to inherited traditional IRAs that you received from parents or other family members.)

Those who are not in the higher income tax brackets should consider converting part of their existing IRAs to Roth IRAs on an annual basis. Amounts converted to a Roth IRA from a traditional IRA are subject to tax as ordinary income received by the IRA owner in the year of the conversion, but no RMDs will ever apply to the Roth IRA during its original owner’s lifetime and no income taxes will be paid on any future Roth IRA distributions. If your overall income tax bracket is fairly low now and you are eligible to make the Roth conversion, converting part of existing traditional IRAs to Roth IRAs now can provide you with great future tax benefits, especially if you use funds other than funds held in the converted IRA to pay the income taxes.

B. What Should You Do Before Year End?

1. Make sure that you withdraw your full RMD amount each calendar year if you are at least 70 ½ years old or you are the beneficiary of an inherited IRA. If you are at least 70 1/2 years old, you should also consider using the qualified charitable IRA distribution strategy discussed above.

2. Consider converting part of your traditional IRA into a Roth IRA. Make sure that (A) you will have the ability to do so without causing the converted funds to be taxed at higher income tax brackets and (B) that you have funds outside of your IRA and Roth IRA that you can use to pay any resulting income tax on the conversion.

IV. Give to Your Family Members.

A. Background. People often like to make gifts to their loved ones if they are financially able to do so. Gifts can have gift tax, estate tax, and income tax effects, both positive and negative, and can trigger return filing requirements. Planning gifts carefully can help minimize any potentially negative tax consequences and maximize potential tax benefits.

Those who are unlikely to have a significant exposure to future estate taxes, will generally make gifts for purely emotional reasons, intending only to help their loved ones. However, if not done carefully, these gifts can still have tax consequences and can trigger the need for the giver to file gift tax returns using IRS Forms 709. And, if done with forethought, gifts motivated primarily for non-tax reasons may still provide some income tax benefits for the giver.

For those who have both the desire and the financial ability to make larger gifts, planning becomes even more important. In addition to helping ensure that gift tax return filing requirements can be avoided or complied with as needed, planning gifts carefully can help ensure that potential estate tax benefits and income tax benefits are maximized and potentially negative income tax consequences are minimized. Many of the people who can and want to make larger gifts are wealthy enough to still face potential gift and estate tax liability issues. For 2019 and 2020, such persons include individuals and married couples that have current or expected future estate values (generally, net worth plus the death benefits for any life insurance policies) in the range of $10,000,000 or more for an individual and $20,000,000 or more for a married couple1.

B. What Should You Do Before Year End?

1. Take advantage of the gift tax annual exclusion. The “annual exclusion” from gift taxes currently allows any individual U.S. person to make gifts of up to $15,000 in total value to each and every one of an unlimited number of recipients per calendar year. This is a use-it-or-lose-it exclusion: you cannot apply one year’s gift tax annual exclusion to gifts made in a prior or subsequent year. Gifts that qualify for the gift tax annual exclusion in a given year are basically ignored for gift tax purposes unless you are required to file a federal gift tax return for that year for some other reason. Married couples have the ability to effectively use both spouses’ gift tax annual exclusions: either by having each spouse actually make up to $15,000 in gifts to each intended recipient or by having one spouse make up to $30,000 in gifts to each intended recipient. Please note, however, that if either spouse actually makes more than $15,000 to any single recipient, then the spouses will need to make the election to gift-split for that year, and making the election to gift split requires that at least one spouse actually file a gift tax return for that calendar year.

2. What type of gifts should you consider making before year end?

(A) Contribute to 529 Plan accounts for children or grandchildren. Of all the giving you will ever do, assisting with a loved one’s education may be one of the most important and impactful. You can contribute significant amounts to 529 Plan accounts. However, if you contribute an amount to a 529 Plan account that exceeds the gift tax annual exclusion amount for that year (whether alone or when combined with other gifts you have made to or for the benefit of the 529 Plan account beneficiary in the same year), then you will need to file a gift tax return and report the gift. You may be able, when filing that gift tax return, to make a special election that causes your total gift to the 529 Plan for that year to be treated for gift tax purposes as if you made it in equal installments over a 5 year period that begins with that year- this allows you to effectively use up to 5 years of gift tax annual exclusion for that beneficiary in a single year (which is an exception to the otherwise rule of use-it-or-lose-it). If you live in Georgia and contribute to a Georgia 529 Plan account, you can also receive a Georgia income tax deduction of up to $2,000 per year (or $4,000 per year for those filing married filing jointly) as a result of your 529 Plan account contribution.

(B) Make outright gifts to recipients who are responsible adults. Such gifts can be made in the form of cash or tangible personal property items such as jewelry, cars, electronics, or furniture. However, in some cases, it may be more beneficial, at least from the giver’s perspective, to give appreciated assets such as marketable securities or real estate to the recipient, especially if the recipient is in a significantly lower income tax bracket than the giver. This is because the recipient will likely pay lower taxes if and when the assets are eventually sold. However, an exception exists for younger recipients who are subject to the “kiddie tax.” If the giver wants to offset the income tax cost that the recipient will pay, he or she could consider making additional cash gifts in either the same year or in a later year.

(C) Contribute to an IRA or Roth IRA for a child or grandchild. This kind of gift is a wonderful opportunity for your child or grandchild to save funds for their future in a tax advantaged and asset protected manner. The maximum contribution that can be made to an IRA or Roth IRA by a child or grandchild or someone else contributing on their behalf is $6,000 for 2019. Please note, however, that before this kind of gift can be made, the child or grandchild needs to have earned compensation income at least equal to the amount contributed to the IRA or Roth IRA and must otherwise be eligible to make a contribution to an IRA or Roth IRA. If the giver or someone else in the family owns a family business, there may be opportunities for the business to employ the child or grandchild to ensure that they earn sufficient compensation income.

(D) Caution: Do not give outright gifts to beneficiaries who have special needs. You generally should not make outright gifts to loved ones who have special needs (those who have disabling or potentially disabling conditions and who are receiving or may one day need to receive means-tested government benefits such as Supplemental Security Income and Medicaid). Instead, any such gifts should be made in a manner that does not affect that loved one’s ability to qualify for government benefits. Options may include giving to an ABLE Account, to a Community Pooled Trust account, or to a separate Supplemental Needs Trust.

(E) Those who are wealthy enough to face significant potential estate tax liabilities and who intend to make larger or ongoing gifts should also consider using irrevocable family gifting trusts and other strategies that can allow even more benefits.

V. Consider Trust Distributions For Those With Existing Non-Grantor Trust(s).

A. Background. Those who have an existing non-grantor trust may discover that they can reduce the overall impact of income taxes on the trust and its beneficiaries by having the trust make strategic distributions to the beneficiaries so that the trust’s income is taxed at the lower individual rates of the beneficiaries instead of at the typically higher trust income tax rates.

B. What Should You Do Before Year End? Those with existing non-grantor trusts should consider having the trust make distributions to trust beneficiaries if doing so will allow the trust’s income to be taxed at lower rates. Under federal income tax law, these distributions can be made up to 65 days after the end of a calendar year and still be treated as if made during that calendar year. However, it can take time to weigh all the factors and determine what distributions should be made, so it’s best to start considering these issues before the actual end of the year.

VI. Review and Possibly Update your Estate Plan.

A. Background. We recommend reviewing existing estate plans every 3 years or so, to ensure they are kept up-to-date and that they reflect your current estate planning intent as to (1) who is to benefit and how, (2) who will be in charge to carry out your intent, and (3) what legal structure is used to carry out your intended plan. In many cases, you may only need to actually update your financial Power of Attorney and Advance Directive for Health Care documents, unless you want to make substantive changes to your plan or to change any fiduciary selections. Updating your Power of Attorney and Advance Directive documents about every three years may help keep them fresh and thereby make it easier to get them accepted by third parties when they are actually needed. However, if you have not seriously considered a full estate planning update since 2013, you should do so sooner rather than later. There have been many changes to both state and federal laws since then, and as a result of these changes, there are planning options available that may not have been available in the past. Many clients are pleasantly surprised during a review when they find out that their estate plans can now be made simpler, or that more complex planning can now be even more beneficial for their loved ones.

B. What Should You Do Before Year End? If it’s been three years or longer since you signed your estate planning documents, call us to set up an estate planning review meeting. In addition to making sure that your basic estate plan is in order and up-to-date, wealthier clients should also consider what steps, if any, they may wish to take in order to take advantage of the temporarily doubled gift, estate, and GST tax exemption amounts.

If you have questions or would like to schedule an estate planning review, please contact us at either or (678) 720-0750.

1These numbers are based on the current per-person Basic Exclusion Amount (the combined gift and estate tax exemption amount) of $10,000,000 indexed for inflation since 2011, which will produce a Basic Exclusion Amount of $11,580,000 in 2020 per person (which effectively allows a married couple to cover up to $23,160,000 of assets with their combined Basic Exclusion Amounts and some minimal estate planning or a proper portability election). In the future, these figures may drop significantly. Under the 2017 Tax Act, the current $10,000,000-indexed-for-inflation amount is scheduled to drop to $5,000,000-indexed for inflation amount after the end of 2025. And, depending on possible changes in political party control of the House, the Senate, and the presidency, these figures could drop even before the end of 2025. For example, some Democratic candidates are proposing a per-person Basic Exclusion Amount of $3,500,000, along with other significant changes to our tax laws. We addressed the probability of significant changes in the Basic Exclusion Amount and related laws in a prior Newsletter, which can be found here.
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