Estate Planning Considerations in the COVID-19 Era
Update April 20: This blog has been updated to reflect updated guidance about estate planning considerations.
Over the past several weeks, federal and state agencies have taken extraordinary steps to address the impact of COVID-19, including those with respect to tax and probate filings. This advisory provides updates on extensions for some tax filings and payments, current process for probate court filings and document recordation, and a note about reviewing existing estate planning documents and some planning opportunities that may be of interest due to the current economic situation and corresponding low interest rates.
- 1. Tax Filing and Payment Extensions - The IRS officially extended the federal income tax filing and payment deadline from April 15, 2020 to July 15, 2020. This means taxpayers who will owe money do not need to file certain tax returns until July 15 of this year, and if they owe money they do not need to make payments until then.
This relief applies to income (individuals, businesses, trusts, and estates), gift, and generation-skipping tax returns; but does not grant relief to returns with filing dates that have already passed (e.g., returns due on March 16, 2020, such as Form 1065, Form 1065-B, Form 1066, and Form 1120-S for calendar year taxpayers). The IRS has also extended deadlines for most payments, filing obligations, and other actions relating to taxes which are due to be performed on or after April 1, 2020 and before July 15, 2020. The actions due to be performed during this period are extended to July 15, 2020. For instance, federal estate tax returns due during this period, even on extension, are now due July 15, 2020. These extensions are automatic and taxpayers do not need to file any additional forms to take advantage of the relief.
First and second quarter estimated income tax payments, including self-employment tax, are also extended. First and second quarter payments are now due on July 15, 2020.
In addition to the July 15th extension for federal filings and payments, most states have extended filing and payment deadlines, although it is important to review each state’s extension date as each state differs. For example, California has extended its deadline for estimated California income tax payments, but Oregon has not.
Please be aware that the current situation is rapidly evolving and that new decisions and guidance are being released by the IRS and state departments of revenue daily. If you have questions regarding federal or state tax deadlines please do not hesitate to contact us.
- 2. Probate Filings/Recording Documents - While all county sites for the Superior Court of Washington are currently closed to the public, we maintain the ability to initiate new probates and electronically file documents in the King County Superior Court, which we can designate as the venue for any required Washington probate, as provided under state law. Additionally, county Recorders’ Offices state-wide continue to accept documents for recording by mail only.
- 3. Temporary Retirement Account Relief
- a. 2019 IRA Contribution Extension - Due to the income tax return filing date extension, taxpayers also now have until July 15, 2020 to make 2019 IRA contributions.
- b. Waiver of 2020 Required Minimum Distributions - The 2020 CARES Act suspends the need to take 2020 required minimum distributions (RMDs) from individual retirement accounts and qualified retirement plans. There is a 60 days grace period for those taxpayers to rollover any RMDs already taken into a new IRA. There is no option to return already taken RMDs to the original retirement account.
- c. Waiver of Early Withdrawal Penalty - The 10 percent early withdrawal penalty is waived under the CARES Act for distributions up to $100,000 made to participants younger than 59½ for COVID-19 related purposes. While the early withdrawal penalty is waived, any such distributions remain subject to income tax; though, a participant may elect to pay such tax over a three year period. Additionally, a participant may repay some or all of such distributions to the plan within 3 years of the distribution.
- d. Roth Conversion - Due to current down market values, low income tax rates, and tax free growth of Roth IRA assets, now might be a time to consider converting a traditional IRA into a Roth IRA. Before doing so, we recommend consulting with your tax advisor as income tax will be recognized on any such conversion.
- 4. 100 percent AGI Charitable Contribution Deduction in 2020 - The CARES Act also removes the 60 percent percentage of adjusted gross income limitation on contributions of cash to public charities, meaning that donors may deduct charitable contributions of cash up to 100 percent of their adjusted gross income. This additional deduction may be particularly beneficial if a taxpayer converts a traditional IRA to a Roth IRA in 2020 or for a business that operates as an income tax pass-through like a partnership, LLC or S corporation. This new law does not apply to contributions to donor advised funds or private foundations.
- 5. Small Business Assistance - The CARES Act also provides several programs to provide loans and other assistance for qualifying businesses. DWT has a dedicated cross-industry team of attorneys who are intimately familiar with this program, and the CARES Act, to assist you or your business. Please let us know if you would like to speak with a member of our CARES Act team.
- 6. Review of Current Estate Planning Documents - The COVID-19 pandemic and its impacts have made clear the importance of an up to date estate plan. We are working daily to review and update or prepare important documents such as Wills, Trusts, Durable Powers of Attorney, Health Care Directives, and beneficiary designations for life insurance and retirement accounts. Our ability to work with clients remotely, as outlined above, is working well, and our clients have been able to gain peace of mind by knowing they have up-to-date documents in place which capture their intent. We have also been able to assist clients in the execution of documents while complying with social distancing and safety restrictions. Please let us know if you like us to review your estate planning documents.
- 7. Low Interest Rates Beneficial for Planning - Certain interest rates used for intrafamily loans and estate planning strategies are at historically low levels. For April, the Applicable Federal Rate for a loan of up to three years is 0.91 percent (dropping to 0.25 percent for May) and the rate for loans of over nine years is 1.43-1.44 percent (dropping to 1.15 percent for May). In addition to making new loans at such rates, it is typically possible to refinance existing loans to such lower rates. The Section 7520 rate for April is 1.2 percent (down from 1.8 percent in March) and will drop to 0.8 percent for May. The Section 7520 rate is the rate that must be used for strategies such as grantor annuity trusts (GRATs) and charitable lead annuity trusts (CLATs). It is the “hurdle rate” which is set in the month of funding of such trusts and if the underlying assets appreciate in excess of the Section 7520 rate, assets can be transferred free of tax from one generation to a lower generation. Please let us know if you would like to discuss any of these planning options.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.