2022/2023 Legislative and Case Updates and How They May Impact Your Estate Plan

2022/2023 Legislative and Case Updates and How They May Impact Your Estate Plan

By Barry A. Nelson | Jennifer E. Okcular | Cassandra S. Nelson

Reproduced Courtesy of Leimberg Information Services, Inc. (LISI).

READ THE LETTER at our web site

In this letter to our clients, we discuss a number of legislative and case developments relating to estate planning and asset protection. This letter focuses on specific legislative developments that we believe are most relevant to our clients.

Increases in Estate, Gift, and GST Exemptions and Exclusions for 2024

​The IRS released the 2024 inflation-adjusted exemptions and exclusions for estate, gift, and GST tax in Rev. Proc. 2023-34 as follows:

• The estate and gift exemption amount (currently $12.92 million) will increase to $13.61 million for 2024 ($27.22 million per couple). The GST exemption will likewise increase by the same amount.
• The annual gift tax exclusion will increase from the current $17,000 up to $18,000 in 2024.
• The gift tax exclusion amount that can be given annually to a non-citizen spouse is increasing from $175,000 up to $185,000 next year.
• Rev. Proc. 2023-34 also provides that trusts and estates are in the highest tax bracket for ordinary income over $15,200.

SECURE Act 2.0 Provisions “Retirement Plans”

SECURE Act 2.0 revises aspects of the original SECURE Act passed in 2019. Some of the most important changes that tie into our clients’ estate planning are as follows:​

• Beginning January 1, 2023, the Required Minimum Distribution (“RMD”) date (when the original account owner must begin to receive distributions) was raised based upon the age of the retirement account owner as follows:
• If the original account owner was born in 1950 or earlier, the original account owner must begin to take RMDs starting at age 72.
• If the original account owner was born between 1951 and 1959, the original account owner must take RMDs starting at age 73. No RMD is required in 2023 for those born in 1951 as the starting age will be 73 and thus, will begin in 2024.
• If the original account owner was born in 1960 or later, the original account owner must take RMDs starting at age 75 as there will be another increase in 2033 from age 73 to 75.

​Lifetime RMDs for Roth designated accounts in an employer-sponsored plan are no longer required, effective for taxable years beginning after December 31, 2023. However, for retirees who attain age 73 in 2023, Roth account RMDs must still be made by April 1, 2024 for these employer sponsored plans. Roth employer plans (i.e., 401(k), 403(b), governmental 457(b) RMDs) are eliminated by the Act, thus, effective 2024, owners of all Roth accounts (employer plans and IRAs), will not have to take lifetime RMDs until after the death of the original account owner.​​

• If the original account owner dies after his or her first beginning date for taking RMDs, then beneficiaries, other than spouses, disabled beneficiaries, minor children (until age 21), and certain other exception beneficiaries, must take out annual RMDs, with a full payout by year 10. In other words, annual required minimum distributions from such plans must be taken by beneficiaries if the original account owner had already started to take his or her RMDs.​

• If the account owner dies before his or her first beginning date for taking RMDs, then beneficiaries, other than spouses, disabled beneficiaries, minor children (until age 21), and certain other exception beneficiaries, must withdraw the principal benefits inherited from qualified plans and IRAs no greater than ten (10) years from the original account owner’s death. In other words, if the original account owner had not yet begun to receive the RMDs, then the beneficiary may elect to receive RMDs based upon the beneficiary’s life expectancy; however, the entire principal must be taken by the tenth (10th) year.
• This change limits planning that can be implemented for a non-spouse beneficiary who is not disabled, a minor child (until age 21), and/or an exception beneficiary, as this rule also applies to trusts, which must be structured to qualify as a designated beneficiary to obtain the ten (10) year maximum payout period. Otherwise, qualified plans payments to trusts need to be distributed over five (5) years rather than ten (10) years. Because the additional five (5) years may not be significant, the benefits of using a trust for retirement plan benefits for beneficiaries, other than a spouse, a disabled person, a minor child of the account owner (until age 21), or certain other permitted beneficiaries has been reduced. Nevertheless, payments to a trust provide asset protection and other benefits, especially for a beneficiary who may otherwise terminate the retirement plan benefit by withdrawing the entire account in a lump sum.​​

• Spouses and disabled beneficiaries continue to benefit from the ability to receive retirement distributions over their lives (as compared to the shorter ten (10) year duration under the SECURE Act). Therefore, retirement plan beneficiary designations should be reviewed and possibly reallocated amongst spouses and disabled beneficiaries with a corresponding reallocation of other non-retirement assets (such as life insurance or marketable securities) to other family members to maximize deferral of income tax on retirement plan assets.

​Income Tax Saving Charitable Alternative to Taking RMDs

The Pension Protection Act of 2006, which became permanent on December 18, 2015, allows individuals who are receiving RMDs to contribute up to $100,000 from an IRA to a qualifying charity without recognizing the amount transferred as income. As a result, individuals required to take RMDs from IRAs may direct up to $100,000 from their individual IRAs to qualified charities each year tax-free. There is no requirement that the entire $100,000 amount is made in one transfer or that the entire amount goes to a single qualified charitable organization. Rather, such distributions can be made in multiple direct transfers. Additionally, such distributions (i) may be excluded from the individual’s gross income, (ii) count towards the amount required for the minimum distribution, and (iii) may be an effective way to reduce income taxes as the IRA annual distribution to a qualifying charity is no longer taxable income.

Most contributions to public charities – other than supporting organizations – are considered qualified charitable contributions. It is important to be aware that distributions from IRA accounts to donor advised funds held by public charities are not considered qualified charitable contributions for purposes of the IRA $100,000 charitable contribution rule discussed above. Distributions from IRA accounts to qualified charitable sponsors, such as the Miami Foundation, can qualify for the IRA $100,000 charitable contribution rule and can be designated pursuant to a “designated fund agreement.” The donor of the designated fund agreement may (i) designate specific nonprofit organizations (provided such nonprofit organizations have 501(c)(3) status) that will receive such IRA distribution and (ii) specify how much or what percentage of the distribution shall pass to each nonprofit organization annually, but the donor cannot have the power to alter the charitable plan once the IRA direct contribution is made.

This year, Give Miami Day is November 16, 2023, and if a designated fund agreement is entered into before then or a charitable gift is made to the Miami Foundation that is directed toward any 501(c)(3) charity included on their organizations list, it is possible your charitable gift will be increased, in part, by the Miami Foundation’s matching program. givemiamiday.org

Regardless of who the designated charity may be, individuals must instruct their IRA trustee to make a qualified charitable distribution and the distribution must be sent directly from the IRA company to the charity. Timing of the year-end charitable gifts is important because IRA administrators need time to process these payments so it is suggested that action is taken long before the year-end, and if the charitable gift is intended to be made through the Miami Foundation’s Give Miami Program, the gift must be initiated no later than November 16, 2023. Note: Early giving opened on November 13, 2023 and Give Miami Day will end at midnight on November 16, 2023.

Caution: Not All Donor Advised Funds Are Created Equal

​Barry and Cassandra recently wrote an article entitled “Caution: Not All Donor Advised Funds Are Created Equal” that was published by Leimberg Services (LISI). The article explains why donors of donor advised funds (“DAFs”) must consider how their DAFs will be administered after their death or incapacity as the authors found that many DAF agreements do not provide a clear and comprehensive direction. A comprehensive DAF agreement should: (i) list successors to the donors who may request charitable distributions (e.g., the donor’s children, by majority, can make such requests) and (ii) specify the donor’s default charitable beneficiaries. Otherwise, the DAF charitable sponsor may have the authority to direct DAF assets to charities in the DAF charitable sponsor’s discretion as compared to charities desired by the DAF donor.​

​After considering the benefits and drawbacks of DAFs as compared to private foundations, donors may prefer a private foundation as compared to a DAF especially for larger charitable gifts. Some DAF charitable sponsors are more willing to be flexible in authorizing – and following – a DAF agreement that reflects the donors’ charitable desires and terms of succession (i.e., persons who may request charitable distributions upon the death or incapacity of the donor). To the extent that the donor’s current DAF sponsor is unwilling to work with the donor to achieve the donor’s objectives, the donor may want to interview other DAF charitable sponsors. For more details, click our link above to read the full article on this topic.

​Corporate Transparency Act, Effective January 1, 2024

Beginning January 1, 2024, the U.S. Corporate Transparency Act (“CTA”) will require corporations, limited liability companies, limited partnerships, and other similar entities formed or qualified to do business in the United States to disclose beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the U.S. Department of the Treasury, unless they fit within defined exemptions. The CTA was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities but has far-reaching consequences around privacy and compliance obligations.

Reporting companies that are in existence on January 1, 2024 must file their initial reports within one year. Reporting companies created after January 1, 2024 have 30 days after receiving notice of their creation or registration. However, FinCEN has proposed to extend the initial filing deadline for Beneficial Ownership Information (“BOI”) reports from 30 to 90 days for entities created or registered in 2024. Reports must be updated within 30 days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed. These reporting requirements will be burdensome and there are material penalties. Stay in tune so you are not subject to such penalties assuming filing requirements are not delayed. We suggest you discuss these filing requirements with your CPA or business lawyers.

If you are a client, you will receive a separate letter on this issue as our firm will be implementing a number of new protocols to limit our involvement with the new filing obligations.

Married Clients Should Consider Community Property Trust for Homestead

​A 2021 Florida law may provide an option for ownership of Florida homestead that could provide an income tax benefit upon the death of the first spouse.

Chapter 736, Part XV, the “Community Property Trust Act,” (effective July 1, 2021), allows the creation of a trust, referred to as a “Community Property Trust”, which may result in the property held in such trust receiving a full step up in income tax basis upon the death of the first spouse rather than a 50% step up in income tax basis for most property owned jointly by Florida resident spouses. The benefit of receiving such full step up in income tax basis to fair market value at the date of the first spouse’s death is that the surviving spouse can then sell such asset without incurring capital gains tax on the entire appreciation that occurred prior to the deceased spouse’s death (as compared to only one-half (1/2) of such appreciation that occurred prior to the deceased spouse’s death under the tax law where a property is owned jointly between spouses).

It should be noted that some tax commentators have expressed concern as to whether a state statute that effectively allows property owners to “elect” community property status will be respected by the Internal Revenue Service (“IRS”). If the IRS takes the position that the full (“double”) step up in income tax basis upon the death of the first spouse is not permitted, the taxpayers should not be in any worse of a position, other than the transaction costs to create the Community Property Trust and potential audit costs, if the community property election and associated double step up in income tax basis upon the death of the first spouse is challenged, including possible interest as to the late payment of income tax when the property is sold and possible late payment penalties.​

• Loss of Asset Protection for Non-Homestead Property Transferred to a Community Property Trust: Generally, assets transferred to a Community Property Trust are not protected from either spouses’ creditors. Under Florida law, assets owned as tenants by the entirety are generally protected from creditor claims while the couple is married and living provided such creditor is not a joint creditor of both spouses. Accordingly, there may be a loss of asset protection when conveying assets other than homestead to a Community Property Trust. Florida Statutes Section 736.151(1) provides that property transferred to or acquired subject to a community property trust may continue to qualify or may initially qualify as the settlor spouse’s homestead within the meaning of s. 4(a)(1), Art. X of the State Constitution and for all purposes of general law, provided that the property would qualify as the settlor spouse’s homestead if title was held in one or both of the settlor spouses’ individual names. Accordingly, although non-homestead property is more protected from creditors if held as tenants by the entirety and therefore should not be conveyed to a Community Property Trust by those concerned about asset protection, the Community Property Trust statute appears to protect Florida homesteads from the homestead owner’s creditors and permits all homestead to maintain property tax benefits assuming the appropriate filings are timely made with the county’s tax authorities.

• Caution as to Property Tax Reassessment for Homestead Conveyed to a Community Property Trust: There could be a reassessment of the value of the homestead for property tax purposes, loss of the Save Our Homes Cap, and loss of the homestead exemption if a timely filing with the appropriate property tax assessor’s office is not made after a homestead is conveyed to a Community Property Trust. Based upon our correspondence with a number of Florida property tax assessor’s offices, the transfer of homestead should not result in a property tax reassessment if the Community Property Trust has certain required protective provisions relating to homestead and a timely filing is made for property tax purposes and the Save Our Homes Cap, to reapply for homestead status on or before March 1 of the year after the homestead was transferred to the Community Property Trust (for example, if the transfer to the Community Property Trust is executed and recorded on August 10, 2023, then the application for homestead status should be submitted on or before March 1, 2024). Note: If either spouse did not have homestead status on such property prior to the transfer to the Community Property Trust, then following the transfer of such property to the Community Property Trust, the spouse that did not have homestead status on such property should apply for homestead status on or before March 1 the year after such transfer. In the past, our office has “walked” trusts through the property assessor’s office prior to initiating the transfer of real property to confirm that such transfer of real property to the trust would not result in a property tax reassessment. We recommend that others do so prior to initiating a transfer of title and suggest that the client’s real estate attorney handle this process.​

• Caution - When Encumbered Homestead is Conveyed to a Community Property Trust: Consult with your real estate attorney to confirm that transfer of an encumbered homestead to a Community Property Trust will not accelerate a mortgage nor be subject to Florida documentary stamps or other transfer taxes.

Golf Cart Owners Must be Aware of a September 19, 2023 Ruling in which a Miami-Dade County Circuit Judge Held that the Owner of a Golf Cart Was Legally Responsible for a Crash and Damages of $50 Million Resulting from Lending his Golf Cart to His Underage Niece

Owners of golf carts must be aware that lending their golf cart to others could, based upon a recent Miami-Dade County Circuit Court case, could expose them to a multi-million-dollar judgment, even if they are not the driver who negligently caused significant injuries. Such a judgment was rendered in Eileen Gonzalez et al v. Luis O. Chiong et al (Case No. 2017-010063-CA-01), which analyzed facts and circumstances surrounding a July 4, 2016 golf cart accident in Miami-Dade County, Florida.

Such case reflects what could happen to any golf cart owner, whether the golf cart owner is driving their own golf cart or the owner just allows another person, such as a licensed driver or a teenager (possibly regardless of whether such teenager has a driver’s license) permission to drive the owner’s golf cart if the driver gets into an accident and one of the passengers suffers severe and disabling injuries such as in Gonzalez et al v. Chiong et al. To mitigate these risks, any person who owns or intends to own a golf cart should notify their insurance carrier and acquire coverage for the golf cart, including coverage on the owner’s general liability personal umbrella policy which can be accomplished by adding the golf cart to such policies. Nevertheless, insurance will likely not cover a $50 million judgment so a careful analysis of asset protection techniques should be considered if you own a golf cart or other recreational vehicle such as a boat.

​As of July 1, 2023, golf cart drivers under age 18 must be at least 15 years old with a learner’s permit or 16 years old with a driver’s license to operate a golf cart on public roads or streets. Anyone who is 18 years old or older must have a valid government-issued ID to drive a golf cart on public roads or streets. Previously, Florida law allowed anyone 14-years-old or older to drive a golf cart. Golf cart owners should be cautious and aware of their potential financial exposure before allowing anyone to drive their golf cart, especially younger relatives, and should also confirm coverage in the event the golf cart owners is negligent and causes injuries.

Vicarious golf cart exposure (i.e., where the golf cart owner has liability exposure even when they are not the driver causing injuries) appears to follow the owner of the golf cart. In the event the golf cart is owned as tenants by the entirety, it appears that both owners would be jointly and severally liable. In the event a golf cart is currently owned as tenants by the entirety in Florida (or was acquired with joint assets), the golf cart owners should consider transferring ownership to the primary driver as doing so may reduce the amount of assets that are exposed in the event the golf cart is involved in an accident and the driver was negligent. Such a change of ownership can likely be reflected in the golf cart registration or, since many golf carts are not registered, through an affidavit signed by the golf cart owner and the golf cart owner’s spouse. In the event the golf cart was purchased with jointly owned assets, the affidavit should reflect that despite being purchased with jointly owned assets, it is solely owned by one spouse.

Gifting and Federal Gift Exclusion – Current Law Will Reduce Gift Exemption by About 50% as of January 1, 2026

The current $12.92 million estate and gift exemption is increasing to approximately $13.61 million on January 1, 2024. The estate and gift tax exemption is available to each spouse for married couples. The estate and gift tax exemption is scheduled to be reduced by about 50% on January 1, 2026 unless future legislation changes the date or the exemption amount. For those who can afford and are comfortable making irrevocable gifts to children or others such as spouses, typically in a long-term tax and creditor protected trust, gifting the property sooner is advisable as the appreciation on the gifted assets will pass to the beneficiaries free of gift tax. Those making such gifts must understand that they may not retain any right to such gifted property. Married couples can make use of the current gift exemptions by making gifts to one another with careful planning and awareness of multiple traps. Florida enacted favorable legislation in 2022 allowing asset protection for assets gifted to a trust for a spouse that could return to the original spouse upon the death of the original donee spouse. The spousal gift trusts are frequently referred to as Spousal Limited Access Trusts (“SLATs”). If successful, SLAT planning can provide great tax and asset protection benefits. Nevertheless, there are uncertainties as to the tax benefits of SLATs and even the best tax lawyers have differences in opinion as to how the IRS will approach a situation where one spouse creates a SLAT for the other and receives the assets back if the original donee spouse predeceases the original donor spouse, even if the SLAT assets returning to the original donor spouse are held in trust for the original donor spouse.

Planning for the Terminally Ill

​There are a multitude of tax/gift/estate planning opportunities for those with a terminal illness. While a difficult time to initiate planning, you should be aware that such planning is available to maximize tax and enhance distributions to your loved ones or charitable causes.

Conclusion

We identified a number of recent issues above that we believe are most important for our clients. For those who have not made full use of their annual exclusion gifting for the year 2023, consider utilizing the $17,000 annual exclusion for tax free gifts less prior 2023 gifts. As stated in this letter, above, the annual exclusion for tax free gifts will increase to up to $18,000 in 2024.

​We encourage our clients to schedule an "estate planning checkup” every three to five years or sooner, if personal or financial circumstances materially change. While we address matters we believe are of interest to many, there are an infinite number of year-end planning options that are not discussed in this letter.

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Disclaimer: This information has been prepared for educational purposes only and is not offered, nor should be construed, as legal advice. Use of this information without careful analysis and review by your attorney, CPA, and/or financial advisor may cause serious adverse consequences. We provide absolutely no warranty or representation of any kind, whether express or implied, concerning the appropriateness or legal sufficiency of this information as to any individual’s tax and related planning.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Barry Nelson
Jennifer Okcular
Cassandra Nelson

​CITE AS:

LISI Estate Planning Newsletter #3082 (November 27, 2023) at https://www.leimbergservices.com. Copyright 2023 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

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Disclaimer: This information has been prepared for educational purposes only and is not offered, nor should be construed, as legal advice. Use of this information without careful analysis and review by your attorney, CPA, and/or financial advisor may cause serious adverse consequences. We provide absolutely no warranty or representation of any kind, whether express or implied, concerning the appropriateness or legal sufficiency of this information as to any individual’s tax and related planning.