This is part of an ongoing series of articles about estate planning and succession planning, written by Joe Maier, JD, CPA, Senior Vice President, Director of Wealth Strategy
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). The CARES Act provides approximately $2.2 Trillion of economic relief and stimulus designed to help the United States economy and its citizens endure the shutdowns and hardships caused by the Coronavirus. While the CARES Act has several different provisions and areas of focus, the purpose of this blog is to focus on some key planning opportunities created by this Act.
Elimination of any 2020 Required Minimum Distribution
The CARES Act suspends any Required Minimum Distributions (RMDs) that were scheduled for 2020. For account owners, this includes not only 2020 RMDs, but also 2019 RMDs (due to the account owner turning 70 ½ during that year) that were otherwise required to be taken prior to April 1, 2020. Further, it also includes beneficiaries under inherited IRAs. The planning advantages to this provision are (1) extending tax deferred growth and (2) eliminating the requirement to liquidate assets in a volatile market with depressed stock prices.
For more information view our article on RMDs Under the CARES Act.
Coronavirus Related Distributions (CRDs)
While the elimination of RMDs is designed to empower people to protect their long term plans, CRDs are designed to protect the short term economic viability of those impacted by the virus. Impact is broadly defined to include both actual infection and economic impact. For those so impacted, in 2020, they can take a penalty free withdrawal of up to $100,000 from their employer plan or IRA (or a combination of both). These distributions are eligible to be taxed equally over a three year period (2020, 2021 and 2022). Finally, the recipient can, at any time within 3 years of receiving the distribution, pay it back to the plan and file a refund claim for any taxes paid.
Enhancements to Loans from Employer Sponsored Plans
In 2020, the maximum amount that may be borrowed from an employer sponsored plan is increased from $50,000 to $100,000 and the percentage of the vested balance is increased from 50% to 100%. Further, any plan loan payments that would be due in 2020 are deferred for up to one year.
2020 is Not Counted in the Five Year Rule
For IRA beneficiaries who are required to take full distribution of the IRA balance by the end of the fifth year following the account owner’s death (charities and certain trusts, for example), 2020 will not be counted as one of the five years. So for “non designated beneficiaries” who inherited an IRA from an account owner who died in 2015-2019, the five year rule in essence becomes a six year rule.
$300 Above the Line Charitable Deductions
Since the 2017 Tax Act dramatically increased the standard deduction, materially fewer taxpayer have received any income tax benefit from their charitable contributions. Starting in 2020, for those taxpayers who utilize the standard deduction, they will have the additional benefit of being able to deduct up to $300 of charitable contributions as well. These contributions need to be cash contributions directly to qualifying charities, not contributions to donor advised funds or foundations.
Repeal of the AGI Limit for Charitable Cash Contribution
Under current law, cash contributions to charities can be deducted up to 60% of AGI. In 2020, that 60% cap is repealed. So in 2020, taxpayers can completely wipe out their tax liability through equivalent charitable cash contributions. And, if taxpayers contribute more than their 2020 AGI, they can carryforward the contribution for five years.
In these uncertain times, it is critical to take advantage of all available tools to protect your needs, wants and wishes. The CARES Act provides several planning tools that, if implemented correctly, allow plans to work more effectively. Please contact your adviser for a discussion on incorporating these ideas into your plan. We look forward to sharing regular updates with you as more information is released with respect to these important stimulus measures.
ABOUT THE AUTHOR
SVP Director Wealth Strategy JD, CPA | Johnson Financial Group
Joe has extensive experience helping high‐net worth individuals, family offices, business owners and corporate executives meet their wealth and legacy goals. His areas of specific interest and skill include business succession planning, financial and estate planning, and wealth transfer strategies.