August 1, 2022
The IRS has issued regulations that adversely affect estate and financial planning for many taxpayers. Following is an explanation of the effect of these regulations.
Inherited Retirement Accounts
In 2019, the Secure Act revised Federal rules with regard to required minimum distributions (RMD) for inherited retirement accounts. The previous rules allowed beneficiaries of retirement accounts to stretch the RMD based on their (or their children’s) life expectancies.
After December 31, 2019, most beneficiaries of inherited retirement accounts are required to take their RMD within a ten year period. Most practitioners assumed that the total RMD could be take in the 10th year. This in itself was a substantial reduction in the deferral period for RMDs.
The IRS has now issued regulations that go even further to limit the deferral period for RMDs. The new regulations require the RMD to be taken out ratably over the 10 year period, beginning with the year after the retirement account is inherited.
The result of the new regulations is that many beneficiaries have not taken out their RMD for 2020 and 2021. Whether amended returns need to be filed and penalties and interest paid, remains to be seen. Hopefully the IRS will explain what the next step is and will grant relief for taxpayers who find themselves behind in their RMD withdrawals.
The IRS issued proposed Anti-Clawback regulations on April 27, 2022. When finalized, they will be applicable to transactions after April 27, 2022. A little background is necessary to understand the regulations. They are meant to stop avoidance strategies with regard to the clawback regulations issued on November 26, 2019.
The TCJA doubled the basic estate and gift tax exclusion amount (BEA) to $10m in 2011 dollars. It is now $12,000,060. The exemption is scheduled to revert to $5m ($6.8m adjusted for inflation) on January 1, 2026. In 2019, the Treasury published clawback regulations, which created a special rule to preserve the BEA used on lifetime gifts to the extent that it exceeds the available credit at death. For example, Mr. X makes gifts of $12,060,000 prior to January 1, 2026. The exemption is $6.8m when he dies, after January 1, 2026. His estate is entitled to the $12,060,000 BEA. For a married couple you can double these amounts. The moral to this story is Use it or Lose it.
Taxpayers have created strategies to take advantage of the higher BEA before it expires. The anti-clawback regulations were issued to prevent these strategies. The strategies capture the benefit of the higher BEA without giving away the right to use or enjoy the assets.
Possible planning prior to the new regulations:
The regulations only affect GRATs, QPRTs and GRITs if the Grantor does not survive the term of the trust. Spousal Lifetime Access Trusts (SLATs) are not, as of now, subject to the new regulations.
There is a de Minimis rule which exempts transactions from the new regulations if the gift is 5% or less of the property’s value. There is an 18 month rule which exempts transactions, like promissory notes, which are paid off 18 months prior to death.
New York State has launched a program that aims at helping you secure the funding you need.