Estate Planning in a COVID-19 Environment and Relevant CARES Act Relief Provisions

March 30, 2020

As each of us copes with the ongoing challenges posed by COVID-19, we hope this finds you and your families safe and healthy. It can be difficult to think beyond the moment when faced with the daily anxiety and uncertainty impacting our communities and the world at large, so we wanted to reach out to let you know we are here to help ensure you are comfortable with your current estate planning documents – and to call attention to opportunities and relief that are currently available.

Here are the key points we wish to highlight:

  • Asset values are at least temporarily depressed and interest rates are extremely low while exemptions from the gift, estate and generation-skipping transfer taxes are at an all-time high. With tax rates likely to go up and exemptions likely to go down, this is an ideal time to transfer assets out of your estate and lock in significant transfer tax savings.
  • The CARES Act provides some relief related to retirement plans and the deductibility of charitable contributions.    
  • Individual and trust income tax payments and tax filing deadlines are extended to July 15, 2020 as are gift tax payments and filings, but estate tax payments and filings and certain other information returns have not been extended at the current time.

Estate Planning Opportunities

  • In 2020, the amount an individual can transfer free from federal gift tax is $11.58 million per individual ($23.16 million per married couple), subject to inflation adjustments each year. These exemption amounts are scheduled to decrease to $5 million per individual ($10 million per married couple), as adjusted for inflation, after December 31, 2025 but this could happen sooner (particularly in light of 2020 being an election year) and could be reduced even further.
  • With the recent decline in the stock market and the value of other assets, it is a good time to consider using your gift tax exemption to transfer assets out of your estate when their value may be depressed. This will lock in the current high exemption amounts and remove future income and appreciation on any transferred assets from your estate and possibly the estates of your children and grandchildren. Currently, the federal gift and estate tax rate is 40% and in certain states the combined estate tax rate can be as high as almost 50%.
  • Interest rates are low, and in particular the rate set for transfers between family members (or trusts for their benefit) is extraordinarily low. For April 2020, for example, the interest rate on a mid-term loan (between three years and nine years) to a related party is 0.99% (the same rate in January was 1.69%). Low interest rates also make opportunities like loans to family members, grantor retained annuity trusts and sales to grantor trusts particularly attractive. It is also a good time to revisit existing loans to see if refinancing may generate savings.

The CARES Act

The $2 trillion coronavirus-relief bill, called the Coronavirus Aid, Relief and Economic Security Act (or the “CARES Act”) was signed into law by President Trump on March 27, 2020. Below are the key takeaways of the bill as currently written from an individual taxpayer and estate planning perspective:

Special Rules for Use of Retirement Funds

  • Until December 31, 2020, taxpayers affected by the coronavirus pandemic (as specifically defined in the law) can take a distribution up to $100,000 of their retirement savings without being subject to the 10% penalty that normally applies to amounts withdrawn from such accounts before age 59½.
  • The taxpayer can recontribute the distribution to an eligible retirement account within three years of the date of the distribution without regard to that year’s contribution limit. 
  • To the extent that distributions are not recontributed, the amounts received will be taxable income; however the taxpayer may choose to treat such distributions as taxable income ratably over three years (instead of such distributions being taxable entirely in the year they are received). Further detail on the manner in which this new rule will be applied in various circumstances will hopefully be forthcoming in future guidance.
  • Individuals with outstanding eligible qualified retirement account loans on or after March 27, 2020 can delay any repayment due in 2020 for one year. 
  • The maximum amount an individual may borrow from a qualified retirement plan for loans made during the 180-day period beginning on March 27, 2020 is increased to the lesser of $100,000 (formerly $50,000) or 100% (formerly 50%) of the individual’s vested account balance.

Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts

  • The CARES Act waives the required minimum distribution rules for certain retirement plans in calendar year 2020.
  • This waiver applies both to 2019 RMDs that needed to be taken by April 1, 2020, as well as to 2020 RMDs.

Allowance of Partial Income Tax Deduction for Charitable Contributions

  • To encourage charitable giving that is otherwise expected to decline during the coronavirus pandemic, the CARES Act permits a $300 charitable income tax deduction for cash gifts, even if the individual takes the standard deduction.

Temporary Suspension of Limitations on Certain Charitable Cash Contributions

  • For individuals who do itemize income tax deductions, the CARES Act temporarily suspends the 50% AGI limitations for certain charitable contributions and allows deductions up to 100% of AGI (excess contributions are eligible to be carried over as deductions for the next five years). However, contributions must be made in cash and cannot be made to a donor advised fund, certain supporting organizations or certain private foundations.
  • For corporate donors, the limit on charitable giving is increased to 25% of taxable income in 2020.

Disaster Relief

  • The CARES Act does not itself add provisions related to disaster relief or personal hardships. However, there has been a presidential declaration of a national emergency due to COVID-19, so employers (and in some cases employer-sponsored charities) may now take advantage of currently existing rules which allow the making of a broad array of payments to employees to defray economic hardships created by the emergency. Such payments are tax-deductible to employers and not taxable to employees so long as they are reasonable in amount.
  • Payments may be made for items such as unreimbursed medical expenses, certain housing expenses, purchases of nonperishable foods and certain alternative commuting expenses.

For a more detailed explanation of the federal income tax provisions of the CARES Act related to businesses, please see the OnPoint from our Global Tax Group and for more information on the provisions related to retirement assets and other employee benefits, please see the OnPoint from our Employee Benefits group.

Tax Filing Extensions

In IRS Notice 2020-20, the IRS has now granted an automatic extension for the filing of 2019 federal gift tax returns and the payment of federal gift tax to July 15, 2020. This follows the relief summarized in our prior updates on the extension of the April 15, 2020 federal income tax payment deadline and filing deadline to July 15, 2020, and the FAQs to IRS Notice 2020-18. However, estate tax returns are still due at their current scheduled date. The relief also does not apply to the filing of certain information returns. For example, U.S. persons who received a distribution from a foreign trust or a gift from a nonresident alien or a foreign estate still must file IRS Form 3520 by April 15 or request an extension by that time.

Dechert’s Private Client team is always ready to review your current estate planning documents and help you make the most of the opportunities available to you.