Dear Clients:

With the CARES Act, Congress decided to waive all 2020
required minimum distributions (RMDs).

What if you already took out your annual RMD before Congress
changed the law?

The IRS just granted you brand-new mercy to fix the issue,
but you need to take action before August 31, 2020.

2020 RMD Waiver

The CARES Act waived all 2020 RMDs for IRAs and defined
contribution plans. This waiver applies to your RMD if you

• turned age 70.5 during tax year 2019 and had to take your
  first RMD by April 1, 2020, and waited until 2020 to take it;
• turn age 72 during tax year 2020 and have to take your
  first RMD by April 1, 2021; or
• inherited an IRA or retirement account and have to take an
  RMD for tax year 2020.

Relief Provided

Let’s say you did not know about the waiver and you took
your RMD. You want to put it back and avoid paying taxes on it. You have two
ways to undo your 2020 RMD:

• Do an indirect rollover to another account, or
• Repay the funds to the same account.

Indirect rollover. You generally have 60 days from
the distribution date to complete an indirect rollover. But in Notice 2020-51, the
IRS extends this indirect rollover deadline so that you have until August 31,
2020, for RMD distributions you took earlier in tax year 2020.

As a reminder, you can’t do an indirect rollover from an
inherited non-spousal IRA. Instead, to avoid being taxed on your RMD, you have
to use the repayment method.

Repayment. You can repay the RMD to the original
account by August 31, 2020, and pay no tax on it. And when you make this repayment
under Notice 2020-51, it doesn’t count as the “one” indirect rollover per year
that you can use.

Important note. These rules apply only to RMD amounts
distributed (taken out of the IRA). Any amounts you took out exceeding your RMD
amount aren’t eligible for relief.

Example. Jo-Ann had a $4,000 RMD requirement for her
traditional IRA for tax year 2020 and took out $5,000 on January 15, 2020.

Jo-Ann has two options:

1.      Jo-Ann
can put $4,000 in another traditional IRA by August 31, 2020, or

2.      Jo-Ann
can put $4,000 back into the same traditional IRA by August 31, 2020.

In either scenario, Jo-Ann must pay tax on the $1,000 she
took above and beyond her RMD amount.

The August 31 date is coming soon. If you would like my help
with your RMD, please call me on my direct line at 408-778-9651.

Over the past few decades, federal taxes have generally
trended lower.

That era may be coming to an end, especially for well-off
individuals.

The major factor to consider is that our country might
finally be forced to confront the issue of ongoing huge federal budget
deficits—which have been made that much bigger by costly federal COVID-19
relief measures.

Can you protect what you currently possess from a possible
oncoming federal estate and gift tax threat? Maybe.

Before suggesting a strategy to (hopefully) dodge the
threat, let’s first cover the necessary background information. Here
goes.

Today’s Federal Estate and
Gift Tax Picture

The Tax Cuts and Jobs Act (TCJA) drastically increased the
unified federal estate and gift tax exemption from $5.49 million for 2017 to
$11.58 million for 2020—with inflation adjustments scheduled for 2021-2025. If
you’re married, your spouse is entitled to a separate exemption in the same
amount.

If you make cumulative lifetime taxable gifts in
excess of the exemption amount, the excess is taxed at a flat 40 percent rate.
If you pass away with an estate valued at more than the exemption amount, the
excess is taxed at the same flat 40 percent rate.

Taxable gifts mean gifts made in one year to one individual
that exceed the annual federal gift tax exclusion. The exclusion for 2020 is
$15,000, and it will probably stay at that number for the next few years
(unless our duly-elected politicians reshuffle the deck).

If you make taxable gifts during your lifetime, you won’t actually
owe any federal gift tax until the cumulative amount of such gifts exceeds the
unified federal estate and gift tax exemption. Excess gifts reduce your unified
exemption dollar-for-dollar, but only a few very generous individuals ever
actually owe federal gift tax.

Snapshots of Earlier
Federal Estate and Gift Tax Regimes

Today’s federal estate and gift tax regime is far more
taxpayer friendly than the regimes that existed earlier in this century.

• For 2000, the federal estate
  tax exemption was $675,000, and the maximum tax rate was 55 percent.
• For 2005, the exemption was
  $1.5 million, and the maximum tax rate was 47 percent.
• For 2009, the exemption was
  $3.5 million, and the maximum tax rate was 45 percent.
• For 2010, but just for that
  one year, estate executors could opt for a zero federal estate tax bill in
  exchange for giving up tax-basis step-ups for certain assets inherited by
  beneficiaries of the deceased individual.
• For 2015, the unified federal
  estate and gift tax exemption was $5.43 million. The tax rate on
  cumulative lifetime gifts in excess of the exemption and estates valued in
  excess of the exemption was a flat 40 percent.
• For 2020, the unified federal estate and gift tax
  exemption is $11.58 million. The tax rate on cumulative lifetime gifts in
  excess of the exemption is a flat 40 percent. The tax rate on the estate
  of an individual who passes away this year with an estate valued in excess
  of the exemption is a flat 40 percent.

The Portable Exemption
Privilege

Since 2011, we’ve had so-called federal estate and gift tax exemption
portability for married couples. If one spouse dies without using his or
her exemption, the surviving spouse is allowed to inherit the deceased spouse’s
unused exemption.

Scheduled Federal Estate
and Gift Tax Regime for 2021-2025 and Sunset Provision Scheduled for 2026

For 2021-2025, today’s version of the Internal Revenue Code
stipulates that the unified federal estate and gift tax exemption (currently
$11.58 million) will be adjusted annually for inflation.

The flat tax rate on excess lifetime gifts and excess estate
values will remain at 40 percent.

So far, so good. But a so-called sunset provision stipulates
that the exemption for 2026 will revert back to the 2017 amount of $5.49
million, with a cumulative inflation adjustment for 2018-2025. About $6.5
million is a good guess for the 2026 exemption amount if the sunset provision
takes effect for that year.

The flat tax rate on cumulative lifetime gifts in excess of
that number and estate values in excess of that number would remain at 40
percent.

The Looming Federal Estate
and Gift Tax Threat

There’s no guarantee that today’s super-favorable federal
estate and gift tax regime will survive beyond this year.

What actually happens to the federal estate and gift tax
regime (if anything) will depend on events. The current regime might survive,
or it might be trashed and replaced with something not nearly so taxpayer friendly.
Possible outcomes could include:

• The existing taxpayer-friendly
  regime stays in place through at least 2024 (the next general election
  year).
• The portable exemption
  privilege is repealed, and the effective date of the aforementioned sunset
  provision is accelerated to January 1, 2021. The 2021 exemption would be
  about $6 million.
• Starting next year, we go back
  to the 2009 regime with its much-smaller $3.5 million exemption, 45
  percent maximum tax rate, and no portable exemption.
• Starting next year, we get
  something much worse. For instance, we could go all the way back to the
  2000 regime with its skimpy $675,000 exemption, confiscatory 55 percent
  maximum tax rate, and no portable exemption. Ugh!

What to Do?

Very good question. Here’s one idea. If you have an estate
in the large-to-very-large category, put yourself in position to make large-to-very-large
gifts before year-end to reduce the value of your taxable estate.

You can shelter the gifts from the federal gift tax with
this year’s unified federal estate and gift tax exemption. Remember, it’s that
hefty $11.58 million.

Considerations

1. Depending on the assets on your personal balance sheet,
it could be easy or hard to position yourself to make large-to-very-large gifts
before year-end. You may need to make some moves to get into position.

2. Depending on who would receive your large-to-very-large
gifts, you may need to take some extra steps, such as setting up trusts for
some or all of your intended gift recipients.

3. If you’re married, remember that both you and your spouse
are entitled to separate unified federal estate and gift tax exemptions.

4. If your spouse passed away after 2010, we hope the
executor of your spouse’s estate filed Form 706 (the federal estate tax return)
to elect to take advantage of the portable exemption privilege. If so, your
exemption is that much bigger. If not, consult a good estate planning pro to
see if the election can still be made. If so, it could make a big difference in
your favor.

5. If you make gifts to someone who is more than one
generation beneath you (like a grandchild or great-grandchild), the federal
generation-skipping transfer tax (GSTT) can become a factor. The GSTT is
sneaky. It can come into play with gifts to a trust that will eventually
benefit someone who is more than one generation beneath you. Talk to your estate planning pro about the GSTT, especially
if you’re considering making a gift to a trust.

If you or a loved one is giving this a good look and would
like my input, please call me on my direct line at 408-778-9651.

IRS Enables Millions to Qualify for the $100,000 IRA Grab and Repay

New IRS guidance expands the possibilities for what is an
adverse COVID-19 impact on you for purposes of taking up to $100,000 out of
your retirement accounts and repaying it without penalties.

First, let’s look at the rules as they existed before this
new IRS guidance. The CARES Act created the first set of favorable rules, and
those rules are still in play.

What the CARES Act Says

A coronavirus-related distribution from your qualified
retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

1. If you withdraw and keep the money, you pay no 10 percent
   early withdrawal penalty and you can spread the income equally over tax
   years 2020, 2021, and 2022. You also can elect to include it all in tax
   year 2020, if you want.
2. You can repay the money within three years of the
   distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a
coronavirus-related distribution if

• you, your spouse, or your dependent is diagnosed with
  COVID-19 with a CDC-approved test;
• you experience adverse financial consequences as a result
  of being quarantined, being furloughed or laid off, or having work hours
  reduced due to COVID-19;
• you experience adverse financial consequences as a result
  of being unable to work due to lack of childcare due to COVID-19; or
• you experience adverse financial consequences as a result
  of closing or reducing your business hours due to COVID-19.

And then there are two additional CARES Act rules for
coronavirus-related distributions:

1. You can’t treat more than $100,000 per person as a
   coronavirus-related distribution, and
2. You must take the distribution on or after January 1, 2020,
   and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for
coronavirus-related distributions if you experience adverse financial
consequences because

• you, your spouse, or a member of your household has a
  reduction in pay or self-employment income due to COVID-19;
• you, your spouse, or a member of your household has a job
  offer rescinded or start date for a job delayed due to COVID-19;
• your spouse or a member of your household is quarantined, is
  furloughed or laid off, or has work hours reduced, due to COVID-19;
• your spouse or a member of your household is unable to
  work due to lack of childcare due to COVID-19; or
• your spouse or a member of your household owns or operates
  a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of
the individual’s household is someone who shares the individual’s principal
residence.

Merriam-Webster defines a household as

• those who dwell under the same roof and compose a family,
  and
• a social unit composed of those living together in the
  same dwelling.

You have to think roommates living together create a
household, and if one of them is affected by COVID-19—say, lost his or her job
and stopped contributing to the rent—the remaining roommates were adversely
affected and should be entitled to the IRA grab and repay strategy.

Your Repayment Options

You have many repayment options, as we explain below. To
make this easy, let’s say you grab $30,000 from your IRA today and you want to
know how you can repay the $30,000 with no taxes or penalties. Here are five
scenarios:

Scenario 1. You repay the $30,000 before you timely
file your 2020 tax return:

• You don’t include any of the $30,000 in income on your
  2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as
income on your timely filed 2020 tax return, but then repay the full $30,000
sometime between filing the 2020 return and July 15, 2023:

• You amend your 2020 tax return to remove the $30,000 from
  income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your
timely filed 2020 tax return, but then repay the full $30,000 sometime between
filing the 2020 return and July 15, 2023:

• You claim $10,000 of income on your original 2020 tax
  return, and
• You later amend your 2020 tax return to remove the $10,000
  from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $10,000 of the total
$30,000 distribution, which you do on March 1, 2022:

• You claim $10,000 of income on your 2020 tax return,
• You claim no income on your 2021 tax return (because you
  made the $10,000 repayment prior to filing the return), and
• You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $20,000 of the total
$30,000 distribution, which you do on November 1, 2021. This one is tricky
because you have two ways to do it:

• You claim no income from the distribution on either your
  2021 or 2022 tax return, or
• You claim $10,000 of income on your 2022 tax return and
  amend your 2020 tax return to remove the $10,000 from income and claim a
  refund of tax paid on that amount.

As you can see, you have many options when it comes to
taking up to $100,000 from your retirement plan. If you would like to discuss
your options with me, please call me on my direct line at 408-778-9651.