Paul O. Dillon, Attorney at Law

Can Estate Planning Reduce Inheritance Taxes?

If not renewed, the expiration of changes in estate and gift taxes from the Tax Cuts and Jobs Act of 2017 (TCJA) on Dec. 31, 2025, will reduce federal estate tax exemptions to $7 million for individuals and $14 million for married couples. A recent article from CPA Practice Advisor, “A Crucial Window for Estate Planning: Preparing for 2026 Changes,” reminds us the IRS has said any benefits used under the current exemption are not subject to any “claw-backs.” In other words, use this tax advantage while you can.

It’s important to note the many benefits of estate planning are not just for wealthy people. The cohort referred to as “mid-affluent”—individuals and couples with or who will have significant assets and growth—should carefully plan for future tax exposure. Someone with $5 million in assets today could see their wealth grow to exceed the future exemption thresholds, making estate planning a vital means of protecting their wealth.

There are several techniques to minimize estate tax consequences, and your estate planning attorney will be able to identify the most appropriate for your unique situation.

Lifetime and Annual Gifting. Making gifts while living transfers wealth to the next generation while minimizing your estate’s tax exposure. Right now, you may gift $18,000 per person, or $36,000 per married couple, to as many people as you wish. Making these gifts annually allows you to reduce your taxable estate and enjoy seeing the recipients benefit from your gifts.

If you’d like to help someone with tuition or medical costs, you may pay any amount you wish without generating gift taxes as long as the payments are made directly to the educational institution or healthcare provider.

Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust designed to benefit the spouse. Other family members can also be named as beneficiaries. The spouse has access to the income from the trust during their lifetime, and upon the spouse's death, the remainder can be distributed as per the grantor’s wishes.

Grantor Retained Annuity Trusts (GRATs). These trusts are best in a low-interest rate environment. Assets are transferred to the trust, with the right to receive annuity payments for a set period, usually two to ten years. When the grantor dies, assets pass to designated beneficiaries.

Intentionally Defective Grantor Trusts (IDGTs). No, they’re not broken. By creating an “intentionally defective” trust, the grantor splits the income tax responsibility from the estate and gift tax implications. The grantor pays the income taxes, allowing assets in the trust to grow tax-free.

There are more, including Qualified Personal Residence Trusts, Charitable Remainder Trusts, Charitable Lead Trusts, Dynasty Trusts and Irrevocable Life Insurance Trusts.

If you expect the value of your taxable estate to come close to or exceed the future estate tax threshold, now is the time to discuss the various options with your estate planning attorney.

Reference: CPA Practice Advisor (June 13, 2024) “A Crucial Window for Estate Planning: Preparing for 2026 Changes”

Are Charitable Remainder Trusts a Good Idea?

For many years, the Stretch IRA was used to leave assets to heirs very tax-efficiently. Then came the SECURE Act, according to the article “Charitable Remainder Trust: The Stretch IRA Alternative” from Kiplinger. The ability for IRA beneficiaries to take the smallest of RMDs (Required Minimum Distributions) annually and leave a large sum in the IRA to grow tax-deferred over their lifetimes was over.

The SECURE Act in 2019 brought significant changes, taking away a valuable tool from anyone who died after Dec. 31, 2019. The new rules require the entire amount in an inherited IRA to be withdrawn by the end of the tenth year of the original account owner’s death. These withdrawals are taxable, so instead of stretching the withdrawal out over an extended period, accounts must be emptied, and taxes paid within a relatively short period. Compared to the stretch, the Ten-Year Rule is, in a word, taxing. It's crucial to understand these changes and their implications.

There are exceptions to the rule for certain beneficiaries, including spouses and disabled individuals, non-spouse beneficiaries no more than ten years younger than the original account owner and a biological or adopted minor until they reach age 21. On their 21^st birthday, they have ten years to empty the account.

There are alternative strategies for IRA owners to consider to help heirs enjoy more of their legacy, which an experienced estate planning attorney will know. One is the Charitable Remainder Trust (CRT), which offers both tax benefits and charitable giving.

Start by designating a CRT as the beneficiary of your IRA. When you die, the assets will pass to the CRT. Since the CRT is a tax-exempt entity, the assets in the IRA continue to grow tax deferred. The CRT’s beneficiaries receive income distributions over a specified period. At the end of the CRT, any remaining funds go to a charitable beneficiary.

CRT beneficiaries may receive distributions over a much longer period than a direct inheritance or inherited IRA, which has a mandated 10-year distribution.

The CRT strategy is best for charitably minded people who would have donated to the charity regardless of the IRA restrictions. If this aligns with your values, it makes sense from an estate planning perspective. There are costs associated with setting up a CRT, which should be considered when considering the totality of your estate plan. Speak with your estate planning attorney to see if this makes sense for you and your family.

Reference: Kiplinger (April 19, 2024) “Charitable Remainder Trust: The Stretch IRA Alternative”

Do You Need to Worry About Estate Taxes in 2024?

There are many common misconceptions about estate taxes when a person dies. First, any amounts left to spouses are tax-free. As reported in the article “Attorney At Law: What you should know about estate taxes” from TBR Newsmedia, any amounts above your state’s estate exemptions and the current federal estate tax exemption, which is $13,610,000, need estate planning.

Before considering these taxes, let’s clarify what makes up a taxable estate. All assets owned by an individual are counted towards their taxable estate, including IRAs, annuities, bank accounts, real estate and life insurance owned by the individual or for which the individual has the power to change the beneficiary.

Many states still have an estate tax, which often have far lower exemption levels than the current federal exemption. Your estate planning attorney will know what state estate or inheritance taxes your estate must address.

Many techniques are used to avoid estate taxes, including making tax-free annual gifts. In 2024, each individual may make tax-free annual gifts of up to $18,000 per person. These annual gifts can be used during your lifetime to bring the value of an estate under the threshold for state estate taxes and possibly even under federal estate taxes.

Charitable Remainder Trusts (CRT) or Charitable Lead Trusts (CLT) are used to reduce the size of an estate. A Charitable Lead Trust transfers property from your ownership to a trust set up to benefit a qualified 501(c)(3) nonprofit of your choice. The charity receives the income from the trust for a set period of years or the donor's life, after which time the remaining assets either go back to the donor or to their beneficiary.

The Charitable Remainder Trust is the opposite. In this trust, the grantor or another beneficiary receives income for life or a set period of years. The charity receives the remaining assets at the death of the last income beneficiary or the end of the term.

Anyone concerned with exceeding the federal exemption for federal estate tax needs to begin planning now, since the exemption will be dramatically reduced as of January 1, 2026, unless Congress acts.

An estate planning attorney is needed to guide you through the process.

Reference: TBR Newsmedia (March 8, 2024) “Attorney At Law: What you should know about estate taxes”

Common Questions Concerning SECURE Act 2.0

A webinar from Trusts & Estates presented a discussion on SECURE Act 2.0 and the many planning opportunities it made possible, as well as proposed IRA regulations, which was reviewed in Wealth Management’s article, “SECURE Act 2.0: Q&A,” covered a number of commonly asked questions about SECURE Act 2.0.

Charitable Remainder Trusts (CRT)

In the case of a trust for a disabled or chronically ill beneficiary, a charity permitted to receive qualified charitable distributions (a registered charity other than a donor-advised fund), which is a remainder beneficiary, will be treated as a designated beneficiary. This allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary while qualifying for the life expectancy stretch.

For a disabled beneficiary of an IRA, are CRTs and Special Needs Trusts Eligible for Stretch Distributions?

Because a CRT is tax-exempt, it can take the IRA benefits all at once and then make annual or more frequent payments to one or more individuals, usually for their lifetime. Payments are treated as first-in, first-out. They are considered ordinary income until the payments cumulatively equal the amount of the IRA benefits considered. After that, the nature of the payments depends upon the nature of the trust’s investment income. This effectively replicates the stretch that had previously been available. A disabled or chronically ill beneficiary or (if there’s no beneficiary who isn’t disabled) a trust for the beneficiary or a disabled or chronically ill person may stretch distributions over the life expectancy of the disabled or chronically ill person.

Can a Minor Child be Named as a Beneficiary of the CRT to Get the Stretch Benefit?

No. The actuarial value of the CRT has to be at least 10% of the value of the trust, and the payments to the beneficiaries must be at least 5% of the trust each year. Both of these requirements cannot be satisfied if the individual beneficiary is a minor. An estate planning attorney will need to run the numbers on any beneficiary under age 30 or so who might start payments. The solution is to do a term-of-years CRT for the maximum 20-year period. This will likely be less than the young beneficiary’s life expectancy, but it’s double the ten-year stretch maximum.

What about a non-spouse who inherits an IRA from an owner who had been taking Required Minimum Distributions (RMDs), and the IRA owner died before the rule changes under the SECURE Act of 2019?

The ten-year rule does not apply to this specific instance. However, if the primary beneficiary was taking life expectancy distributions and dies after 2019, their beneficiary (the successor beneficiary) will be subject to the ten-year rule. Under this ten-year rule, the successor beneficiary must continue taking life expectancy distribution (using the life expectancy that the primary beneficiary was using) and must fully distribute the account no later than ten years after the primary beneficiary’s death.

The changes created by SECURE Act 2.0 have a wide range of impacts on IRAs, certain types of charitable gifts, and estate plans. Your estate planning attorney will be able to address your unique situation, making the SECURE Act 2.0 regulations work for your own family’s distribution of assets.

Reference: Wealth Management (Feb. 13, 2024) “SECURE Act 2.0: Q&A”

What are the Rules for Inheriting an IRA?

Inherited Individual Retirement Accounts (IRAs) are created when the funds in an IRA or employer-sponsored retirement plans are inherited after the original owner dies. The beneficiary may not make any additional contributions to the account and must comply with a series of rules regarding the inherited account or face an expensive tax situation. A recent article from U.S. News & World Report, “What Is the Inherited IRA 10-Year Rule?” explains the basics beneficiaries need to know.

What is the Inherited 10-Year Rule? The rule applies to those who inherit an IRA on or after January 1, 2020. In most situations, all funds must be withdrawn within ten years of the previous owner’s death, but there are exceptions depending on your age and relationship with the deceased. Spouses who inherit an IRA have options, as do beneficiaries who meet certain criteria.

The inherited IRA 10-year rule was part of the SECURE Act. Before then, a non-spouse beneficiary could take required minimum distributions (RMDs) based on the heir’s life expectancy. Following the SECURE Act, funds from an inherited IRA must be withdrawn over ten years. This eliminated the ability of the beneficiary to keep the retirement account funded for the rest of their life and gain the advantages of the long-term tax-free growth of the IRA.

Does the 10-year rule apply to you? The exceptions to the 10-year rule are:

• The IRA owner’s surviving spouse
• The IRA owner’s minor child
• An individual who is not more than 10 years younger than the IRA owner
• A disabled or chronically ill person, as determined by IRS rules.

If a minor child inherits the IRA, the 10-year clock starts ticking once they reach the legal age of adulthood.

Heirs may take the entire amount from the IRA, but it will be taxable as regular income.

For spouses, there are decisions to make. The surviving spouse may open and transfer the assets into an inherited IRA and then withdraw funds during the 10-year timeframe. If the decedent was taking RMDs from a traditional IRA at the time of their passing, the spouse would need to take the RMD during the year of death if it wasn’t already taken. Otherwise, the spouse can wait until they reach the required age to take RMDs from the account.

If funds are taken from your own IRA before 59 ½, there is a 10% penalty plus taxes on the withdrawals. However, a surviving spouse under age 59 ½ could open an inherited IRA and start taking distributions.

There are strategies to optimize the 10-year rule. One strategy is for the owner to name a Charitable Remainder Trust as a beneficiary for your IRA. A CRT is an irrevocable trust that generates an income stream for the beneficiary with the remainder of the assets after the trust term. The trust term can be longer than the 10-year inherited IRA limit, allowing the beneficiary to stretch tax benefits longer.

An estate planning attorney can help you navigate the complex rules about inherited IRAs and determine how to use traditional and Roth IRAs to manage your tax liability.

Reference: U.S. News & World Report (Dec. 18, 2023) “What Is the Inherited IRA 10-Year Rule?”

How Do Qualified Charitable Distributions Work?

Qualified Charitable Distributions use the federal tax code to benefit older taxpayers and must take Required Minimum Distributions (RMDs). Recent changes in federal law under the SECURE Act 2.0 present even more opportunities to use QCDs, according to a recent article, “Planning Ahead: Expanding on year-end tax strategies for Qualified Charitable Distributions,” from The Mercury. How does it work?

Required Minimum Distributions for seniors can become a problem since taxpayers above a given age must withdraw specific amounts based on their age from traditional retirement accounts and pay taxes on the withdrawals, regardless of whether they need the money. The reason is obvious: if people weren’t required to take funds out of their accounts, the government would never have the opportunity to generate tax revenue. The QCD lessens the blow of the additional year-end taxes by providing some relief through donations to qualified charities.

Used correctly, the QCD serves two purposes: saving on taxes and benefiting a favorite charity. Charities include any 501(c)(3) entities under the federal tax code. Before using a QCD, ensure the charity you choose is a qualified 501(c)(3). Otherwise, you’ll lose any tax benefits.

Your estate planning attorney can help you understand the process of making a QCD. You’ll need to coordinate with the custodian of the IRA. While some may provide step-by-step information, others require you to coordinate with your estate planning attorney and financial advisor. A reminder—the point of the QCD is that the distribution does not appear in your adjusted gross income and goes directly to the charity.

Usually, taking RMDs adds funds to your taxable income, which can, unfortunately, push you into a higher income tax bracket. It could also limit or eliminate some tax deductions, such as personal exemptions and itemized deductions. There may be increases in taxes on Social Security benefits as well. Whether you want or need to take the RMD, you must take it and include it as taxable income.

A QCD allows individuals required to take RMDs to donate up to $100,000 to one or more qualified charities directly from a taxable IRA without the funds being counted as income.

The RMD age has increased to 73, but the $100,000 will be indexed for inflation. Under SECURE Act 2.0, individuals will be allowed to make a one-time election of up to $50,000 inflation-indexed for QCDs to certain entities, including Charitable Remainder Annuity Trusts, Charitable Remainder Unitrusts and Charitable Gift Annuities.

QCDs cannot be made to donor-advised funds, private foundations and supporting organizations, even though these are often categorized as charities.

It must be noted that the rules concerning QCD are detailed and strict—you’ll want the help of an experienced estate planning attorney.

The QCD must be made by December 31 of the tax year in question.

Reference: The Mercury (Nov. 22, 2023) “Planning Ahead: Expanding on year-end tax strategies for Qualified Charitable Distributions”

Do I Have to Pay Taxes on Trusts?

Dealing with trusts and the tax implications for those who create them, and their beneficiaries can seem confusing. Nevertheless, with the help of an experienced estate planning attorney, those issues can be managed, according to a recent article, “5 Taxes You Might Owe If You Have a Trust,” from Yahoo! Finance.

Trusts are legal entities used for various estate planning and financial purposes. There are three key roles: the grantor, or the person establishing the trust; the trustee, who manages the trust assets; and the beneficiary, the person or persons who receive assets from the trust.

Trusts work by transferring ownership of assets from the grantor to the trust. By separating the legal ownership, specific instructions in the trust documents can be created regarding using and distributing the assets. The trustee’s job is to manage and administer the trust according to the grantor’s wishes, as written in the trust document.

Trusts offer control, privacy, and tax benefits, so they are widely used in estate planning.

There are two primary types of trusts: revocable and irrevocable. Revocable trusts are adjustable trusts that allow the grantor to make changes or even cancel during their lifetime. They avoid the probate process, which can be time-consuming and expensive, especially if assets are owned in different states. However, the revocable trust doesn’t offer as many tax benefits as the irrevocable trust.

Think of irrevocable trusts as a “locked box.” Once assets are placed in the trust, the trust can’t be changed or ended without the beneficiary’s consent. In some states, irrevocable trusts can be “decanted” or moved into another irrevocable trust, requiring the help of an experienced estate planning attorney. However, irrevocable trusts are not treated as part of the grantor’s taxable estate, making them an ideal strategy for reducing tax liabilities and shielding assets from creditors.

Trust distributions are the assets or income passed from the trust to beneficiaries. They can be in the form of cash, stocks, real estate, or other assets. For instance, if a trust owns a rental property, the monthly rental property generated by the property could be distributed to the trust’s beneficiaries.

Do beneficiaries pay taxes on distributions from the principal of the trust? Not generally. If you receive a distribution from the trust principal, it is not usually considered taxable. However, the trust itself may owe taxes on any income it generates, including interest, dividends, or rental income. The trust typically pays these before distributions are made to beneficiaries.

It gets a little complicated when beneficiaries receive distributions of trust income. In many cases, the income is taxable to the beneficiaries at their own individual tax rates. This can create a sizable tax wallop if you are in your peak earnings years.

There are ways to plan to minimize the tax consequences strategically. One approach is to structure trust distribution with a Charitable Remainder Trust, where income goes to a charity for a set number of years, and the remaining assets are then distributed to beneficiaries. An estate planning attorney will be a valuable resource, so grantors can achieve their goals and beneficiaries aren’t subject to overly burdensome taxes.

Reference: Yahoo! Finance (Sep. 27, 2023) “5 Taxes You Might Owe If You Have a Trust”

What’s Is the Best Way to Give to Charity?

Charitable giving plays a valuable role in estate and tax planning. A well-planned donation can also provide a healthy income tax deduction, along with a reduction of estate taxes. Your generous donation could help to maintain financial security, exert control over assets during life and after death and provide for heirs, as explained in a recent article titled “Charitable giving good for heart, 1040” from the Valdosta Daily Times.

To accomplish any of these objectives, you’ll want to work with an experienced estate planning attorney who can help tailor an estate plan to your individual circumstances. Here are some strategies to consider.

Gifts of appreciated property might allow you to avoid capital gains tax owed when the asset is sold and, if planned properly, might allow you to receive an income tax deduction, usually worth the fair market value of the asset.

Removing any assets from your estate reduces the potential estate tax liability.

If you want to make a donation to a charity but you’d like to maintain some control over it, a Charitable Remainder Trust (CRT) might be a good fit. A CRT works best when funded by an appreciated asset, such as real estate or stock in a family owned business.

Once the property is transferred to the CRT, the CRT can sell the appreciated assets it holds without paying capital gains taxes. It then continues to provide income generated by the CRT to the beneficiaries for a period of time, as instructed by the CRT. At the end of this period, the remainder of the CRT is donated to the charity. You avoid capital gains on the assets you donated, an income stream and you also receive a tax deduction.

Another strategy is to use a Charitable Lead Trust or CLT. With a CLT, you give the charity the use of the asset and the right to any income generated for a predetermined time. When the time period ends, the asset reverts to you or is given to whoever you designate in the CLT. Appropriate assets for a CLT could be income-producing stocks and bonds, a valued collection or a painting transferred to a museum for a certain period of time.

You likely receive a current income tax deduction for the value to the charity. However, you receive no other direct benefit during the term. If a CLT is created upon your death, estate tax liability could be reduced.

Early tax planning can help make the most of any charitable giving opportunities and let you take full advantage of any additional benefits. Talk with an experienced estate planning attorney to receive guidance appropriate to your unique situation.

Reference: Valdosta Daily Times (Dec. 4, 2022) “Charitable giving good for heart, 1040”

How to Transfer Business to the Next Generation

The reality and finality of death is uncomfortable to think about. However, people need to plan for death, unless they want to leave their families a mess instead of a blessing. In a family-owned business, this is especially vital, according to a recent article, “All in the Family—Transition Strategies for Family Businesses” from Bloomberg Law.

The family business is often the family’s largest financial asset. The business owner typically doesn’t have much liquidity outside of the business itself. Federal estate taxes upon death need special consideration. Every person has an estate, gift, and generation-skipping transfer tax exemption of $12.06 million, although these historically high levels may revert to prior levels in 2026. The amount exceeding the exemption may be taxed at 40%, making planning critical.

Assuming an estate tax liability is created upon the death of the business owner, how will the family pay the tax? If the spouse survives the business owner, they can use the unlimited marital deduction to defer federal estate tax liabilities, until the survivor dies. If no advance planning has been done prior to the death of the first spouse to die, it would be wise to address it while the surviving spouse is still living.

Certain provisions in the tax code may mitigate or prevent the need to sell the business to raise funds to pay the estate tax. One law allows the executor to pay part or all of the estate tax due over 15 years (Section 6166), provided certain conditions are met. This may be appropriate. However, it is a weighty burden for an extended period of time. Planning in advance would be better.

Business owners with a charitable inclination could use charitable trusts or entities as part of a tax-efficient business transition plan. This includes the Charitable Remainder Trust, or CRT. If the business owner transfers equity interest in the business to a CRT before a liquidity event, no capital gains would be generated on the sale of the business, since the CRT is generally exempt from federal income tax. Income from the sale would be deferred and recognized, since the CRT made distributions to the business owner according to the terms of the trust.

At the end of the term, the CRT’s remaining assets would pass to the selected charitable remainderman, which might be a family-established and managed private foundation.

Family businesses usually appreciate over time, so owners need to plan to shift equity out of the taxable estate. One option is to use a combination of gifting and selling business interests to an intentionally defective grantor trust. Any appreciation after the date of transfer may be excluded from the taxable estate upon death for purposes of determining federal estate tax liabilities.

For some business owners, establishing their business as a family limited partnership or limited liability company makes the most sense. Over time, they may sell or gift part of the interest to the next generation, subject to the discounts available for a transfer. An appraiser will need to be hired to issue a valuation report on the transferred interests in order to claim any possible discounts after recapitalizing the ownership interest.

The ultimate disposition of the family business is one of the biggest decisions a business owner must make, and there’s only one chance to get it right. Consult with an experienced estate planning attorney and don’t procrastinate. Succession planning takes time, so the sooner the process begins, the better.

Reference: Bloomberg Law (Nov. 9, 2022) “All in the Family—Transition Strategies for Family Businesses”

What Is the Purpose of a Pet Trust?

You don’t have to be a billionaire to want to protect your pets. However, you do need to plan for their well-being, if something happens to you. Since pets are considered property, they can’t inherit money to be used for their care. Instead, as explained in a recent article from Barron’s Penta “Future Returns: Why Fido Needs a Trust” titled owners can create pet trusts to protect them, if something happens to their humans. With close to 70% of American households having pets, pet trusts have now become mainstream.

Owners need to designate a reliable caregiver, just as they would designate a guardian for minor children. If you don’t have family members or friends who love animals, contact a local animal rescue group to learn if they have a life-long care program for animals. Many do, with programs incorporating Charitable Remainder Trusts to cover the cost of the pet’s care.

If you want a friend or relative to care for your pet, make sure they are willing and able to do so.  You should have another person as a back-up, in case something happens to them. Circumstances change, and someone who wants to take care of your pet now may not be able to in future years. How long you need to plan for depends upon the lifespan of your pet.

An experienced estate planning attorney can create a pet trust. Because state law enforces conditional distributions from the trust, the care of your pet can be enforced in court, if necessary. The pet owner names a beneficiary, the caregiver and funds the trust with enough assets to care for the pet.

The pet owner also names a trustee. They are a responsible person who will be in charge of distributing funds and making sure they are used for the pet’s well-being. The trustee also makes sure that the pet is healthy and being properly cared for, following the directions of the trust.

Your estate planning attorney will know what your state’s laws are regarding pet trusts, which varies from state to state. For instance, Pennsylvania requires a pet trust to end when the last pet in the trust dies, while other states may limit the trust’s length to 21 years. For dogs and cats, 21 years is a reasonable period of time. However, for other pets, like birds who can live to 100 years, this won’t be long enough.

You’ll need to fund the trust, making sure that there’s enough money to cover the pet’s needs throughout their lifetime. You may also consider the caregiver’s needs, depending on circumstances. How much is reasonable will depend upon the type of pet and the lifestyle of the caretaker. An apartment dweller caring for an elderly cat will need a different level of resources than a person tasked to care for a young horse.

Some states limit the amount of money in a pet trust and will penalize overfunding. Making sure your pet trust is appropriately funded may limit the likelihood of its being challenged.

Reference: Barron’s Penta (April 18, 2022) “Future Returns: Why Fido Needs a Trust”