On April 9, 2020, the IRS updated its guidance originally provided in Notice 2020-18, Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, to provide extension relief to taxpayers in response to the coronavirus emergency.  In addition to the prior extension of time for the filing and payments with respect to federal income tax returns (Forms 1040, 1120, 1120-S and 1065) and federal gift tax returns (Form 709) until July 15, 2020, the IRS has now also postponed a variety of additional federal tax form filings and payment obligations that were due between April 1, 2020 and July 15, 2020.

In Notice 2020-23, the IRS extended the relief until July 15, 2020 for federal estate tax returns (Form 706), including estate tax returns that are filed in order to make portability elections under Revenue Procedure 2017-34, the information form to report the basis in assets received from a decedent (Form 8971), income tax returns for estates and trusts (Form 1041), and exempt organization business income tax returns and private foundation returns (Forms 990-T and 990-PF).  In addition, the updated guidance extended the due date until July 15, 2020 for estate tax payments of principal or interest that would have been due between April 1, 2020 and July 15, 2020 as a result of elections made under Sections 6166, 6161 and 6163 of the Internal Revenue Code, and the annual recertification requirements under Section 6166 of the Internal Revenue Code.  Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020.  First and second quarter estimated federal income tax payments for exempt organizations, individuals, estates and trusts and corporations are both now due on July 15, 2020.


 

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The coronavirus outbreak, the subsequent passage of the CARES Act by the federal government, and current low interest rates have changed the landscape of charitable contributions and planning in 2020.

Charitable Contributions

The CARES Act changes the limitations on charitable giving to encourage individuals and corporations to make cash contributions to public charities.

  1. Above-the-line deduction. Under prior rules, individuals who do not itemize their deductions on their income tax returns could not take a charitable deduction for cash contributions to qualified charities.  The passage of the Tax Cuts and Jobs Act of 2017 drastically reduced the number of individuals who chose to itemize deductions by (a) raising the standard deduction to $12,400 for single taxpayers and $24,800 for taxpayers that are married filing jointly, and (b) capping the deduction for state and local taxes at $10,000.  The CARES Act adds a new above-the-line deduction that allows an individual who does not itemize to deduct up to $300 of cash contributions to a qualified charity.  This is in addition to the standard deduction.
  2. Relaxed limitations on deductions for individuals. For individuals who choose to itemize, IRC Section 170(b)(1) limited the deduction for cash contributions to qualified charitable organizations to 60% of the individual’s adjusted gross income.  Under the CARES Act, however, the deduction for cash contributions to a qualified charitable organization in 2020 is increased to 100% of the individual’s adjusted gross income.  If the contribution exceeds the limitation, the individual can still carry forward and utilize the excess amount over the following five years.
  3. Relaxed limitations on deductions for corporations. Under prior law, corporate deductions for cash contributions to qualified charities were limited to 10% of taxable income.  The CARES Act increases this limitation for cash contributions to qualified charities in 2020 to 25% of the taxable income of such corporation.  The corporation can also carry forward and utilize any access amount over the following five years.  In addition to the increase in the limitation for deductions of cash contributions, the limitation for deductions of contributions of food inventory by a corporation is also increased from 15% to 25%.
  4. Qualified charitable organizations. Cash contributions must be made to a public charity and cannot be made to a donor advised fund or private foundation.

Charitable Planning

The low interest rates that resulted in the wake of the coronavirus outbreak create an opportunity for individuals that are charitably inclined but also want to plan for future generations to utilize a Charitable Lead Annuity Trust or CLAT.

A CLAT is a trust that most often provides an annuity payment to a charity for a predetermined term of years.  At the end of the term, the remaining assets can be used to fund a trust for the grantor’s family members.  At the start, the grantor receives an income tax deduction based on the fair market value of the present interest of the annuity payments going to charity.  The grantor also uses a small portion of his or her federal estate and gift tax exemption based on the remainder interest going to the trust for his or her family.

The historic low interest rates result in a higher income tax deduction providing an immediate benefit to the grantor.  If the assets contributed to the CLAT outperform the estimated rate of return based on these low interest rates, the grantor’s family would also receive considerable assets while using minimal federal estate and gift tax exemption.  This situation could be ideal for an individual who has a large income tax burden and was already considering providing for charities.

For individuals that are looking to make charitable gifts in 2020, the CARES Act and the current interest rate environment provide several options.

 


*As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

In New York and New Jersey, Revocable Trusts, also known as Living Trusts, have started to be used with greater frequency in estate planning.  In a typical Revocable Trust, the creator of the trust (ie, the grantor) is also the sole beneficiary and sole trustee during his or her lifetime.  This structure allows the grantor unfettered access and control over the assets that were transferred into the trust during the grantor’s lifetime.

During the coronavirus pandemic, with courts being limited to only emergency filings, stock market volatility and businesses on pause, the use of Revocable Trusts can provide even greater benefits.

Immediate Access to Assets

Probate (ie, the determination by a court as to the validity of a Will) can be a lengthy process in many states causing delays in a fiduciary gaining access to assets.  In many instances, immediate access to an individual’s assets at his or her death is essential.  If a Revocable Trust has been funded, such assets can be used immediately to help pay for expenses (such as funeral expenses or medical bills), while also providing immediate control over (a) brokerage accounts with fluctuating assets due to market volatility allowing beneficiaries to adjust investments, and (b) businesses that may be subject to constantly changing governmental orders.

Reduces Probate and Administrative Fees

Probate can also be a time-consuming, expensive and arduous process in many states.  A Revocable Trust, if fully funded, will avoid the probate process since all assets will pass pursuant to the terms of the trust.  If there are no assets in an individual’s name at his or her death, such individual completely eliminates the need to probate a Will.  This can be even more important for individuals with assets in more than one state.  With a Will, each state would generally require an ancillary probate proceeding to allow for the transfer of that state’s assets.  By funding a Revocable Trust, the need for such ancillary probate proceedings would also be eliminated.

In addition to avoiding probate, many state courts continue to oversee the actions of fiduciaries when assets pass under a Will.  Whether it is requiring periodic accountings or permission from the court anytime a fiduciary change is needed, the ongoing administrative costs with a Will can be burdensome.  Revocable Trusts can avoid these costs.

Tax Advantages

While a Revocable Trust is generally not considered a tax saving vehicle, the Revocable Trust can still offer tax advantages if continuing trusts will be established for beneficiaries.  In some states (such as Connecticut), trusts are taxed differently if they are created under a Revocable Trust rather than a Will.  In these states, continuing trusts established under a Will remain subject to state income tax regardless of the location of the assets and the domicile of the beneficiaries.  Continuing trusts established under a Revocable Trust, on the other hand, may be able to minimize such state income taxes.

Privacy

Revocable Trusts also provide a level of privacy over the disposition of assets.  Probate is a public process.  When a Will is offered to the court for probate, the Will becomes part of the public record, allowing anyone to access the Will and ascertain how and to whom assets will be distributed.  A Revocable Trust that governs the disposition of an individual’s estate would not allow for the public to access to this information.

The COVID-19 crisis has highlighted the utility of Revocable Trusts as part of an individual’s estate plan.

We often advise clients to consider any changes in their life every two to three years and determine if any adjustments need to be made to their overall estate plan to ensure that their personal and financial goals are met.  However, during these uncertain times, when clients are facing potential risks to their health and financial stability, it is even more prudent for clients to evaluate their estate planning needs.

Although much of the world may be “shut down,” we are working around the clock to assist clients in establishing comprehensive estate plans and retitling assets.  Through virtual meetings, telephone conferences and electronic communication, we are available to analyze assets, evaluate old documents, draft new documents, supervise document execution, and coordinate with financial institutions and advisors to transfer assets and change beneficiary designations.

For individuals with higher net worth, there are numerous advanced planning techniques that should be considered.  With low interest rates and depressed asset values, conditions are favorable for lifetime gifting, sales to grantor trusts, the funding of grantor retained annuity trusts (GRATs) and/or the renegotiation of older promissory notes.  If formed in an appropriate jurisdiction, these techniques could allow substantial assets to escape the tax system and pass to multiple generations free of federal and state estate taxes, as well as generation-skipping transfer taxes.

Wills

Every individual regardless of net worth should have a Will.  Under a Will, an individual provides for the distribution of assets at death, names the person(s) to oversee the distribution of their estate, designates guardian(s) for minor children if necessary and is able to protect assets for future generations.

With proper drafting, the Will would be able to minimize or eliminate potential state and federal estate, inheritance and generation-skipping transfer taxes.  The Will could also provide valuable asset protection by forming trusts for children to (1) establish guidelines for how the assets should be used and distributed to the children, and (2) provide a degree of creditor protection, including protection from a divorcing spouse in most states.

Revocable Trusts

In addition to Wills, in many states (such as Florida, New York and Connecticut) using a Revocable Trust (a/k/a Living Trust) together with a Will (a/k/a Pour Over Will) could be advantageous.  The use of Wills which pour over to Revocable Trusts can (1) avoid the somewhat time-consuming and expensive probate process, (2) provide potential future administrative and income tax savings for the lifetime trusts created for children, and (3) provide some privacy concerning the ultimate disposition of assets.

Coordinating Beneficiary Designations and Funding Revocable Trusts

While executing new or updated Wills and Revocable Trusts may be the first step, it is also imperative that clients carefully review the titling of their assets.  Are life insurance policy designations coordinated with the estate plan?  Are retirement accounts designated correctly to ensure that the beneficiaries will receive maximum tax deferral?  Have all individually held assets been transferred to a Revocable Trust if one was created?  What about jointly held assets and other beneficiary designated accounts?  Analyzing these questions is often as important as making sure appropriate documents are in place.

Health Care Directives

It is important for individuals to make sure their health care directive is up to date.  A health care directive serves two purposes.  First, these documents assert one’s desire to be free from the use of life-sustaining or prolonging procedures and medications if he or she becomes irreversibly or terminally ill.  Second, these documents allows an individual to appoint a health care agent to make a wide range of medical and health care decisions for him or her if he or she is unable to articulate his or her own preferences.

Powers of Attorney

A power of attorney, on the other hand, allows an individual to name an agent (a/k/a attorney-in-fact) to manage his or her assets and make investment decisions on his or her behalf if he or she is unable to make such decisions for himself or herself.  It is important to have this document in place to avoid the necessity of having to go to court for the appointment of a guardian if such individual cannot manage his or her own affairs.

Lifetime Gifting

The COVID-19 outbreak has caused extreme financial volatility, depressing the fair market value of many assets.  This volatility, combined with the increase to the federal estate and gift tax exemption under the Tax Cuts and Jobs Act of 2017, has presented a unique gifting opportunity for individuals to remove assets from their taxable estates at lower values. Through proper estate planning, individuals may even be able to access these gifted assets, if needed, while allowing all future appreciation to escape the estate tax system.

Sales to Grantor Trusts

In this extremely low interest rate environment, even individuals that have limited estate and gift tax exemption remaining have an opportunity to remove assets from their taxable estates by selling assets to “grantor trusts.”  In a grantor trust, the grantor is treated as the owner of the trust for income tax purposes.  This means that during the grantor’s lifetime, items of income, deduction, gain, loss or credit attributable to the grantor trust would be reported on the grantor’s individual income tax return.

By selling assets to a grantor trust, an individual can transfer assets out of his or her estate in exchange for a secured promissory note bearing interest at the lowest interest rate permitted by the Internal Revenue Service to avoid imputed interest (e.g., the interest rate on a 9-year promissory note created in April, 2020 would be 0.99% per year).  The promissory note would require annual interest payments, specify the length of the repayment term and require a balloon payment of principal at the term’s end.  Because the sale is from an individual to a grantor trust that he or she created, neither the sale nor the interest payments received from the trust on the promissory notes would trigger income tax.

Through this technique, the future appreciation of the assets sold to the trust escapes the estate tax system, while the grantor retains an income stream from the underlying promissory notes.

Grantor Retained Annuity Trusts

A grantor retained annuity trust or GRAT is a trust into which an individual would transfer assets while at the same time retaining the right to receive an annual payment for a term of years.  The GRAT could be “zeroed out,” which means that the present value of the annuity payments that the individual would receive equals the gift tax value of the assets being transferred to the GRAT.  The annuity value payments are determined by a rate published by the Internal Revenue Service.  If the GRAT assets outperform this rate, all remaining assets in the GRAT would escape the estate tax system without using any estate and gift tax exemption.  Similar to the strategies discussed above, depressed asset values and low interest rates provide an ideal environment for GRATs.

With the worldwide spread of coronavirus, this is an unprecedented and unsettling time.  Our health care systems are overwhelmed.  Markets have been upended.  Social distancing and self-quarantine are terms and practices we are adjusting to.

We are wishing others well and trying to help.  Also, for those who are thinking about their personal and closely-held business planning, there are a few points worth considering:

  1. Are your estate planning documents current?  The world is unpredictable (what an understatement!).  For most people, estate planning documents are a form of insurance – you do not think they will be needed in the short term, but you have them anyway.  Do your estate planning documents reflect your current wishes?  Have there been changes in your life and finances that require an update?  Are your fiduciary choices (including guardians for minor children) the people you want?  If not, this should be addressed.
  2. For those with taxable estates, the current economic climate presents an opportunity to gift assets (including securities and real estate) out of your taxable estate at relatively lower values.  If this applies to you, seize the opportunity.
  3. Interest rates are also approaching the lowest levels in years.  As a result, advanced planning techniques that are affected by interest rates, such as the use of GRATs and sales to intentionally defective grantor trusts, produce even more attractive results to reduce potential estate tax exposure and provide financial security to lower generations.
  4. Many, if not most, employers are considering significant employment law and insurance issues, including business interruption insurance claims, force majeure clauses in contracts, layoffs or reduced work schedules for staff, determinations as to whether their business is an “essential business” that can continue to operate, and more.
  5. In New Jersey, property tax appeal deadlines have been extended (currently until May 1).
  6. New York City Small Business Services is offering grants to businesses with fewer than five employees to cover a portion of payroll costs for two months.  New York City businesses with fewer than 100 employees and sales decreases of 25% or more are eligible for no interest loans of up to $75,000.
  7. Interestingly, “qualified disaster relief payments” made by an employer to employees are generally deductible by the employer but do not count as taxable income to the employees.  The coronavirus pandemic has been designated as a disaster by the federal government.  As a result, employers can make certain reimbursements and payments to employees.  This does not include wages, but could include amounts paid to an employee for reasonable and necessary personal, family, living or funeral expenses incurred as a result of coronavirus.  Such payments could include medical expenses, child care expenses as a result of school closures, or increased expenses in the home, such as increased utilities.