Serving Indiana Since 1975

November 2020 Newsletter

| Nov 18, 2020 | Firm News



     The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

Year-End Charitable Gift Issues. Previous issues of this newsletter have addressed various aspects of charitable giving. As we approach the end of the year, it may be helpful to readers if they review some of those comments relating to charitable giving. The July 2018 issue of this newsletter noted that federal tax law and the applicable federal regulations provide that a charitable contribution will be deductible only if it is verified and meets certain substantiation requirements. What is required depends on the type and value of the property contributed. For example, cash contributions of less than $250 typically require bank records to document the contribution. Other requirements, somewhat detailed, are required for charitable gifts of property depending on the value of the property donated. The October 2018 issue of this newsletter pointed out that there are significant tax restrictions if a charitable gift is given while retaining or reserving certain rights, i.e., if the property is to be returned to the donor should the property no longer be used for a specific charitable purpose. In general, charitable gifts should be absolute. It should be noted that there could be tax advantages associated with the gift of appreciated securities since the fair market value may be deductible, subject to certain limitations, and the donor will not need to recognize income or capital gain to the extent of the excess value over the amount that the donor paid for the securities. The public charity can then sell the securities and not have to pay capital gains tax on the gain that the donor would have had to pay if the donor had sold the securities and given cash. As we approach the end of the year, many people will consider making charitable gifts as a way of reducing their tax liability for the 2020 calendar year. Readers should be mindful of the many complicated tax rules applicable to charitable gifts.

IRAs And Special Needs Trusts. Many parents or grandparents establish special needs trusts (SNTs) for a disabled child or grandchild. If the SNT will be funded at death with assets in an IRA, there can be serious tax consequences to result from doing so. IRAs must be paid out over a limited period of time, which in the case of many taxpayers is now ten years following the death of the IRA owner. There is an exception for minor beneficiaries and for a qualified special needs trust. However, keep in mind that for a minor beneficiary, once the beneficiary attains the age of 18, the payout would then need to occur over a ten year period thereafter. In the case of a qualified special needs trust, the payout could be over the lifetime of the SNT beneficiary, but the distributions to the trust would be taxable. Since SNT’s are designed to preserve the assets in the trust, if the IRA distributions remain in the trust, the trust would pay income taxes, and trusts pay taxes at relatively high rates. In general, then, an IRA is not an ideal asset to use to fund an SNT. If the IRA is the only asset that can be used to fund the SNT, then there may not be any choice. In that case there should be special planning implemented. If other non-special needs beneficiaries are to be included, then the income could be distributed to one or more non-special needs beneficiaries who would then pay taxes at their individual rates rather than for the trust to pay taxes at relatively high rates. In that case, however, the SNT would not be a qualified special needs trust, and the payout period would have to be ten years from the date of death of the IRA participant.

Can An IRA Be Transferred To A SNT? If an IRA owner dies and the IRA beneficiary is a disabled beneficiary whose Medicaid or SSI eligibility would be adversely impacted by receiving the IRA, can the beneficiary transfer the IRA to an appropriate SNT? Although there are certain types of so-called “first-party” or “self-created” SNTs that a beneficiary can establish, to which assets can be transferred without adversely impacting benefits, it is not clear whether or not an IRA beneficiary could transfer an inherited IRA to a SNT. In PLR 2006-20025, the IRS determined that the beneficiary of an inherited IRA could transfer the account to an IRA in the name of the SNT without causing a taxable event on the basis that the SNT was a grantor trust with respect to the beneficiary and the grantor was the sole beneficiary during the grantor’s lifetime. However, in PLR 2011-17042, the IRS determined that the owner of an IRA could not transfer the IRA to a self-settled SNT without a taxable event. Consequently, until a specific ruling on this issue has been made, people must proceed with caution when IRAs are inherited by a disabled beneficiary. As noted in the section above, while an SNT may not be an ideal IRA beneficiary, it may be better to make the SNT for a disabled person the beneficiary of the IRA rather than to name the disabled person as the beneficiary. Even though taxes may be greater when an SNT receives IRA distributions, at least the after-tax funds can be preserved. If a disabled person is designated as the IRA beneficiary, the inheritance of the IRA, as well as future IRA distributions to the beneficiary, can adversely impact the disabled beneficiary’s eligibility for public benefits, such as Medicaid.

Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.