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The End of the Stretch: What to Do about the SECURE Act and Its Momentous Effects on Your Retirement Plan and Estate Plan

The SECURE (Setting Every Community Up For Retirement Enhancement) Act, passed by Congress and made effective as of January 1, 2020, made momentous changes to the Federal Tax Code and its rules regarding distributions from retirement accounts including 401(k) and 403(b) plans, IRAs, and tax-qualified annuities (referred to in this article as “Retirement Plans”).   […]

The SECURE (Setting Every Community Up For Retirement Enhancement) Act, passed by Congress and made effective as of January 1, 2020, made momentous changes to the Federal Tax Code and its rules regarding distributions from retirement accounts including 401(k) and 403(b) plans, IRAs, and tax-qualified annuities (referred to in this article as “Retirement Plans”).   These changes might affect you, as the owner of one or more Retirement Plans during your life, as well as the persons who inherit these accounts as the named beneficiaries of your Plan at your death.   Because the Act can result in unexpected income and tax and other consequences to you and your beneficiaries, you should speak with your estate planning attorney about these changes now.   In the meantime, let us review the Act’s most significant changes briefly.

How Will the Act Affect You as Owner?   The answer is a favorable one.    Among its many changes, the SECURE Act changes the age at which a Retirement Plan owner must begin taking Required Minimum Distributions (RMDs) from the Retirement Plan.   Prior Federal tax law required an owner to begin taking RMDs by April 1 of the year after the year in which he or she turned 70     The SECURE Act has extended this age to 72 and applies to those who turn 70  n 2020 or after.  This change might make a Roth IRA conversion advantageous for persons under age 72.

Another change by the Act is that there is no longer an age limitation for funding traditional IRAs.   Prior Federal law restricted deductible and nondeductible contributions to a traditional (non-Roth) IRA to qualifying persons under the age of 70 1/2.   The SECURE Act has removed this age cap.    In certain situations, this change might allow for certain additional opportunities to fund a Roth IRA.

How Will the Act Affect Your Beneficiaries?   The answer is … It depends.    Most notably, the SECURE Act has dramatically restricted the ability of certain account holders of inherited retirement accounts to “stretch” their distributions over their life expectancy.   Prior law permitted certain beneficiaries to stretch the distribution of their inherited retirement accounts over their life expectancy, thereby allowing the undistributed balance in their accounts to continue to grow tax-free.   Prior law also allowed one to leave one’s retirement account to a trust which, if properly drafted to satisfy Federal tax law, could direct distributions to a beneficiary for life while also protecting such distributions from creditors of the beneficiary, and allowing the balance remaining in the account at the beneficiary’s death to be held for one’s other family members.

The SECURE Act has curtailed these very favorable prior options, thereby curtailing additional years of income tax deferral and of tax-free growth.  Most beneficiaries under the new Act must receive the entire amount of their inherited retirement account within 10 years of the death of the person who funded the Retirement Plan.   There are, however, 5 excepted categories of designated beneficiaries to whom this new rule applies:   (1) your surviving spouse, (2) your minor children (but not your grandchildren), (3) disabled individuals, (4) chronically ill individuals, and (5) individuals who are not more than 10 years younger than you.  Note that on the death of the eligible designated beneficiary or the attainment of majority of a minor child, the 10-year payout rule will apply.

Given the potentially complex effects of the Act on your Retirement Plans and your estate plan, what action should you and your estate planning attorney take right now?

  1. Review your current beneficiary designations of each of your Retirement Plans.
  2. Review your current estate plan, including your Will, any trusts you have created (either as part of your Will or as one or more independent trust documents), and your financial/legal Power of Attorney.
  3. Review the projected changes to distribution and income taxation of your beneficiaries under actions 1 and 2, above, given the Act’s new rules.     Are these consequences what you intended, or must you make changes to prevent unintended or unfavorable results?

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Is Your Estate Plan Digitally Vigilant?

Given the prominence of our use of computers, the cloud, and online technology in our professional financial, and personal lives, it is indisputable that a good estate plan—including your Will, Power of Attorney, and any applicable trusts—must clearly address your wishes as to your intended beneficiaries of your digital assets and the person or persons […]

Given the prominence of our use of computers, the cloud, and online technology in our professional financial, and personal lives, it is indisputable that a good estate plan—including your Will, Power of Attorney, and any applicable trusts—must clearly address your wishes as to your intended beneficiaries of your digital assets and the person or persons you wish to control and gain access to these assets upon your incapacity or death. But there is more that you need to know.

What are “Digital Assets? These assets can include the following, to name only a few: 1. Emails. 2. Files stored on the hard drive of your computer or other drives, including, for example, your saved passwords to banking and investment accounts. 3. Photographs, documents, music, and videos stored in the cloud or posted to social media sites. 4. Blogs written by you. 5. Cryptocurrency. 6. Popular digital storefronts such as eBay© pages, and valuable web domains.

The State of the Law in Pennsylvania Regarding Access to Digital Assets is… “None Yet”. As of the writing of this article, all but 7 states have passed legislation that, at a minimum, confers power on personal representatives of estates (executors or administrators) to access and manage the digital assets of the deceased. Many of those states’ laws also confer similar powers on those appointed as agents under Power of Attorney and as legally appointed guardians. In 2015, the Uniform Law Commission developed a Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) for consideration and possible adoption by the legislature of each state. Despite prior bills introduced in the Pennsylvania legislature, Pennsylvania has yet to enact any form of RUFADAA, although legislation currently awaits action by the Pennsylvania Senate.

Compounding the hazards of the absence of current state law regarding digital access, a common continuing practice of certain social media sites and email accounts such as Gmail is to rely on their stated “terms of service” and “privacy policy” language to dictate what will happen to those accounts or assets at the death of the account holder. Google, for example, has an “active account manager” designation (https://myaccount.google.com/Inactive) that is useful only if one arranges his or her digital affairs before death. Facebook provides for your appointment of a “Legal Contact.” Without proper powers and directives in your estate planning documents, those persons you appoint to administer your assets during your incapacity or after your death might find themselves “locked out” of your accounts and barred from protecting and directing your valuable digital information and other digital assets.

How to Protect Your Digital Assets in the Absence of State Law. Because Pennsylvania has not yet adopted the RUFADAA or any similar access to digital asset law, it is important that you do the following:

  1. Clearly include appropriate authorization in your Power of Attorney, Will, and any trust you create that will empower your Agent, Executor, and Trustee to gain access to and manage your digital assets. Be as specific as possible as to your wishes and the consent and directions you intend those fiduciaries to have.
  2. Provide clear and detailed direction in your Will and any trusts as to who will receive or inherit these digital assets upon your death. In addition, specifically identify in those documents any digital accounts, such as social media accounts, or other private or confidential information or files that you wish to be deleted upon your death.
  3. Prepare — and update as necessary — as a separate, private document a complete inventory of your digital assets, online accounts, and their corresponding passwords. Keep a copy of the inventory with your secured personal documents and provide an up to date copy to your Estate Planning Attorney for your confidential file. (Many of my most technologically vigilant clients, for example) provide me with a sealed envelope containing this updated information on January 1 of each year.) Consider storing such passwords through corresponding websites or applications (for instance, the stored password options associated with your online bank or brokerage accounts). If you use a password management application, be sure to include that information in your inventory.

An experienced and adept Estate Planning Attorney will work with you to plan effectively for the proper disposition and management of these valuable—and too often overlooked— assets.

An Allentown native, Judith A. Harris, Esquire, LL.M (Taxation) is an Equity Member of the law firm of Norris McLaughlin, P.A., a full service business law firm (including Immigration Law, and a member of the MeritasTM Law Firms Worldwide network) with offices in Allentown, PA, Pennsburg, PA, Bridgewater, NJ, and New York City, and Co-Chair of the Firm’s Estate, Trust and Individual Tax Practice Group.

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Effective Estate Planning: A New Era

Truth be told, effective estate planning for individuals is not all about the Will, and in current times, rarely has been. The variety of personal and business assets owned by individuals, advancements in medical science resulting in longer lives, the ease of global travel and ownership of multiple homes, and noteworthy changes in tax law, […]

Truth be told, effective estate planning for individuals is not all about the Will, and in current times, rarely has been.

The variety of personal and business assets owned by individuals, advancements in medical science resulting in longer lives, the ease of global travel and ownership of multiple homes, and noteworthy changes in tax law, require greater attention to detail and more careful planning by the attorney and the client in the estate planning process.

An attentive and experienced estate planning attorney will rely on financial and other information provided by you in drafting appropriate estate planning documents for the client.  At a minimum, these documents should include a Will, Financial Power of Attorney, Health Care Power of Attorney, and Advance Directive/Living Will.  They might also include one or more desired trusts or other strategic tax planning or wealth transfer documents.  Everyone who seeks an estate plan that carries out his or her wishes and minimizes tax should focus on the following considerations.

  1. Income Tax Planning is the new Estate Planning.  The Tax Cuts and Jobs Act (TCAJA) effective this year includes not only a historic increase of the Federal Estate and Gift Tax exemption to $11.18 million per person in 2018 but also notable changes to the income treatment of certain business and personal income and limitations on the availability of longstanding deductions.  These changes warrant careful consideration of current and projected income tax planning opportunities in the course of planning for one’s estate.
  2. Complete and accurate financial and other information provided by you is the basis for your Estate Planning Attorney’s advice and documents.  An experienced Estate Planning Attorney will typically ask you to complete a comprehensive financial and personal questionnaire prior to your meeting and will carefully review your completed document with you.  Your information is both critical to the tax and legal advice rendered and forms the basis for the advice and estate planning and other documents that follow.
  3. View your Estate Planning Attorney, Accountant, and Financial Advisor as a team.  Certain issues arising in the estate planning process warrant communication and analysis among your trusted advisors.
  4. Pay careful attention to the beneficiary designations you have in place for your Qualified Retirement Plans, IRAs, and Annuities.  A common misconception in estate planning is that qualified retirement plans, IRAs, and annuities are governed by one’s Will, rather than by one’s signed beneficiary designation form filed with the account custodian.  There is no substitute for your scrupulous recordkeeping and careful tax and legal analysis with your Attorney when planning for tax-qualified retirement plans and IRAs.
  5. Similarly, pay careful attention to understanding and updating the ownership and beneficiary designations of your Life Insurance policies.   Understand the tax and other consequences of such planning.  Careful planning can prevent unintended tax or other consequences. 
  6. Consider your current and future gifting objectives as to your family and charitable organizations when planning your estate.  Your estate planning attorney can provide strategic and tax recommendations as to the timing of certain gifts during your lifetime as opposed to after your death.  Careful planning in light of the TCAJA is critical.
  7. Plan for the proper treatment of Digital Assets in your Estate Plan.  A good estate plan should clearly address your wishes as to your intended beneficiaries of assets such as the files of the hard drive on your computer, photographs stored in the cloud or posted to social media sites, cryptocurrencies, popular digital storefronts such as eBay™ pages, and valuable web domains, for example.
  8.  Devote appropriate attention to your and your beneficiaries’ citizenship and residency status and planning for your out-of-state and international assets.  These assets might include interests in real estate or other non-liquid investments and bank accounts.  Review these with your attorney to understand not only the tax implications and residency issues that might accompany these assets, but also the planning and any tax saving opportunities available to you.
  9. Plan for and communicate your wishes as to your funeral or other disposition of your remains, and other special arrangements that might include religious or other specific services, memorials, or celebrations.  Your estate planning attorney will advise you as to applicable law in this area and how to ensure that your wishes will be honored.
  10. Understand the best practices of recordkeeping for you, your family, and your business.  An adept estate planning attorney will guide you and your family with practical and useful information to maintain that information necessary to support your estate and tax planning objectives.

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Home Is Where the WHAT IS?

Strategic Use Of Domicile And  Residency Laws In Income Tax And  Estate Planning For Individuals Given advances in communication and other technology, global business opportunities, and the ease of travel, it is not surprising that many of my clients live and work all over the United States and the world.  Many began their lives as […]

Strategic Use Of Domicile And  Residency Laws In Income Tax And  Estate Planning For Individuals

Given advances in communication and other technology, global business opportunities, and the ease of travel, it is not surprising that many of my clients live and work all over the United States and the world.  Many began their lives as Pennsylvania residents.  Others settled in this state to embark on career opportunities or adapt to personal and family matters.  Still, others maintain multiple residences and/or offices in various parts of our nation and the world.    Career-related moves, family needs, retirement, and climate are some of the factors responsible for such changes over the course of one’s professional and personal life.

How does one make tax sense of — and manage — effective income tax and estate tax planning in the context of a multi-jurisdictional existence?    A wise client will seek appropriate legal and tax counsel in planning to strategize and maximize the benefits of such changes from a tax and estate planning perspective.   Effective counsel can provide further legal guidance, as well, as to the relative benefits of business taxes, creditor protection, homestead laws, and other legal aspects of the states under consideration.
Your income tax and estate planning efforts in this context are effective if you can fully answer the following questions:

1 Are my Will, Power of Attorney (financial, legal, and medical), Living Will, and any trusts I have created valid in the jurisdiction of my domicile?

2 Do they—or other documents or planning techniques implemented for me– adequately address my ownership of real estate in other jurisdictions?

3 Of what jurisdiction am I a resident for income tax purposes for the current year? For the prior year?  For future years?

4 Have I complied with all applicable state laws in filing my annual income tax returns?

5 Do I understand, and am I observing, the necessary formalities in my desired state of domicile/residence (physical presence in the state for at least the required period, voter registration, driver’s license, locations of doctors, lawyers, family, friends, religious community, favorite charities, etc.) to support my legal and tax residence there?

6 Have I effectively disengaged from all other states with which I have contacts, in order to substantiate my non-resident status in those states?

7 Do I understand any legal and tax differences among jurisdictions in their treatment of inherited assets by surviving spouses?

8 Am I retaining adequate records to support my domicile and residency tax planning?

9 Do I have the proper professional advisors (including an estate and tax lawyer) in place to recommend and create an estate and income tax plan for me that will achieve my personal and legal objectives, with optimal tax savings?

While the details of such a planning analysis extend beyond the scope of this article, a comprehensive, rather than piecemeal, approach to this planning is critical.   The foregoing questions and the following summary should prove helpful to the thoughtful client contemplating strategic estate and income tax planning in a multi-jurisdictional situation.

The legal concepts of “domicile” and “residency” constitute the core of this planning process.  The legal term “domicile” is generally defined as the place where an individual has his or her permanent home, and the place where one intends to return whenever he or she is absent.  A state’s statutes, and the case law interpreting those statutes—for purposes of this article, the law of Pennsylvania—often uses “domicile” and “residency” as interchangeable terms. The PA Supreme Court has ruled that domicile must be shown by both intention and conduct,  and the burden of proof of a change in domicile is borne by the person claiming such change.

While the definition of domicile is important in determining the state in which one’s Will should be probated, and his or her estate opened at one’s death, it will not preclude the need to commence estate administration in other states in the deceased client owned real estate.

Pennsylvania defines a “resident individual” in 2 ways:   (1) an individual who is not domiciled in Pennsylvania but is present in Pennsylvania for more than 183 days in a calendar year, Or (2) a person who is domiciled in Pennsylvania, maintains a “permanent place of abode” in Pennsylvania, and spends at least 30 days in Pennsylvania each taxable year.   Thus, if a person is domiciled in PA and maintains a permanent abode in PA, such is enough to render him or her a Pennsylvania resident for income tax purposes.   As such, taking the steps necessary to establish residence in a state other than Pennsylvania will not of itself terminate one’s status as a Pennsylvania domiciliary for income tax purposes, and adequate case law in PA supports this caveat.

The tests applied by PA courts with respect to one’s residency at death for PA Inheritance tax purposes are somewhat subjective in nature—and not unlike those discussed above.
Effective estate and income tax planning for the increasing number of clients with multiple residences in, or other personal or professional contacts with, various jurisdictions warrants comprehensive planning with a qualified professional team, including a skilled estate and tax lawyer, and can present strategic opportunities to the savvy client.

An Allentown native, Judith A. Harris, Esquire, LL.M. (Taxation) is an Equity Member of the law firm of Norris McLaughlin & Marcus, P.A., a full service business law firm (including Immigration Law, and a member of the Meritas™ Law Firms Worldwide network) with offices in Allentown, PA, Bridgewater, NJ, and New York City, for which she has chaired the PA Office’s Estate, Trust and Tax Practice Group.

1 See Black’s Law Dictionary 435 (Fifth Ed. 1979).
2 Dorrance’s Estate, 163 A. 303, 309 (Pa. 1932).
3 In re Nomination Petition of Prendergast, 673 A.2d 324, 327-38 (Pa. 1996).
4 72 Pa. C.S. Section 7301.
5 61 Pa. Code Section 101.1  (A “permanent place of abode” need not necessarily be owned by the taxpayer.)

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