There are two bills pending in the New York legislature that would increase the New York estate tax. Assembly bill 3009 would increase the top New York estate tax rate that applies to estates over $10.1 million from 16% to 20%. Senate bill 2509 would increase all of the New York estate tax rates by 2%, so that the top estate tax rate would be 18%. Each of the bills would apply to estates of New York residents who die on or after April 1, 2021.
The IRS recently announced that the Federal estate and gift tax lifetime exemption and the gift tax annual exclusion for 2021. The estate and gift tax lifetime exemption will be $11,700,000 per person. The gift tax annual exemption will remain at $15,000.
Recently, attorneys for New York, New Jersey and Connecticut appeared before a three judge panel of the Court of Appeals to appeal a District Court's decision to throw out a lawsuit filed to challenge the cap on deductions for state and local taxes. The cap was enacted as part of President Trump's 2017 tax reform package. The attorneys faced tough questioning from the panel about whether courts have the power to interfere with the cap.
Some taxes, such as Connecticut, have enacted laws that permit a business' owner to avoid or minimize the cap on state and local taxes. Connecticut's pass-through entity tax is an example. The IRS approved the pass-through entity tax workaround in early November 2020.
On April 9 the IRS issued Notice 2020-23. This Notice amplifies prior Notices regarding the due dates for various tax returns and payments. It confirms that the due date for individual income tax returns is extended to July 15, 2020. It also states that the due date for any of the following returns that would otherwise be due between April 1 and July 15 is extended to July 15: Estate income tax return (Form 1041); Estate estate tax return (Form 706); and Gift tax return (Form 709). The relief is automatic. There is no need to contact the IRS or file an extension. Also postponed to July 15 are quarterly estimated income tax payments (Form 990-W), estimated tax payments for individuals (Form 1040-ES) and estimated income tax payments for estates and trusts (Form 1041-ES).
At a news conference today, Treasury Secretary Mnuchin announced that the IRS has extended the April 15 deadline to pay taxes by 90 days. Individuals can defer up to $1,000,000 of taxes owed without penalty or interest. Tax returns must still be filed by April 15. The administration is considering delaying the estimated tax payments that self-employed workers and businesses pay to the IRS throughout the year.
Fraud detection experts are advising against abbreviating 2020 when dating documents. For example, "1/7/20" could be altered to read "1/7/2019" or "1/7/2021." The article at www.cnn.com/2020/01/04/us/dont-abbreviate-2020-date-fraud-trnd/index.html is helpful.
A common estate planning tool is to leave an IRA to a spouse and then grandchildren. This allows the payments to be made over the lifetime of a grandchildren after the death of a spouse. This is known as "stretch" IRA planning. A provision attached to the current federal appropriations bill would limit stretch IRA planning to 10 years. The bill is expected to be passed and signed this week. This will mean leaving retirement benefits to spouses and then children, rather to spouses and then grandchildren. The required beginning date for distributions will be increased to a age 72.
The 2017 tax law increased the federal combined estate and gift exclusion to $11,400,000. The means that a taxpayer may make lifetime gifts and have a taxable estate of up to $11,400,000 without paying federal gift or estate tax. Lifetime gifts reduce the estate tax exclusion dollar for dollar. For example, if a taxpayer makes lifetime taxable gifts of $10,000,000, he would have a remaining estate tax exclusion of $1,400,000. On January 1, 2016, the estate and gift tax exclusion is scheduled to decrease back to the pre-2017 level of approximately $5,600,000.
It was unclear if a taxpayer would be subject to estate tax if prior to 2026 the taxpayer made gifts that exceed $5,600,000 and the taxpayer died after January 1, 2026. On November 22 the IRS issued regulations that make clear that gifts made before 2026 that exceed $5,600,000 will not cause a taxpayer to be subject to estate tax if a taxpayer dies after January 1, 2026. For example, if a taxpayer makes lifetime taxable gifts of $10,000,000 and dies on February 1, 2026, he will not pay estate tax on $4,400,000 ($10,000,000 minus $5,600,000).
The bottom line is that the temporary increase in the federal combined estate and gift tax exclusion is truly "use it or lose it."
On November 6, the IRS issued a listing of inflation adjustments for 2020. These adjustments included (1) the estate and gift tax exemption for 2020 will be $11,580,000 and (2) the annual gift tax exclusion will remain at $15,000.
Current law requires taxpayers to take minimum distributions from their retirement accounts commencing at age 70 and 1/2. The minimum distribution is calculated using life expectancy tables. Currently, a person who takes his first minimum distribution would use a life expectancy of 27.4 years. The would result in the first minimum distribution being equal to 1/27.4 of the balance of the retirement account. The revised regulations would increase taxpayers' life expectancy. For example, the first minimum distribution would be based upon a life expectancy of 29.1 years. The result is that required minimum distributions would be reduced and taxpayers will retain larger amounts in their retirement plans to account for the possibility of living longer.
Mr. Hendel has been practicing wealth preservation planning for over thirty -five years.