Retirement accounts are a seemingly simple and effective way to protect assets from future creditors, but the subtle nuances of what is protected under Missouri law and what is protected in bankruptcy can be complex. In the July/August 2019 edition of the Journal of the Missouri Bar, attorneys Keith Herman and Jeffrey Herman analyze how you can use retirement accounts for asset protection and the potential loopholes to avoid.

Click here to read their full article in the journal.

For the parents of students entering college this fall, you may have a long checklist of to-do items already. It’s possible you are missing one of the most important items, though: Having your child sign estate planning documents.

Why is this important?

Once your child turns 18, you will no longer have the right to make medical or financial decisions on his or her behalf, regardless of the fact that you are paying tuition, carrying him or her on your medical insurance and providing other financial assistance. Therefore, every adult, including your child heading to school, should have at minimum a current medical directive and durable power of attorney for health care decisions as well as a durable power of attorney for financial matters in place. These documents allow your adult child to appoint someone trusted to make medical and financial decisions on his or her behalf in the event he or she is unable to do so (even temporarily).

Whether a routine surgery is needed or something catastrophic occurs, the durable powers of attorney will ensure medical decisions are made and financial transactions are carried out seamlessly and without lengthy, expensive court proceedings. With a little planning, your college student’s immediate needs can be met if and when life gets off track.

Durable power of attorney for health care decisions/medical directive: This is simply a document that states an individual’s desires concerning health care treatment, including “heroic” measures such as artificial nutrition and hydration, and resuscitation, in the event a qualified physician determines that the individual is either in a “terminal” medical condition or is unlikely to regain consciousness. The document also designates one or more agents who are authorized to consent to, or direct the withholding of, health care measures. These agents can also access the individual’s medical records and speak with the medical providers, which can give a parent peace of mind should something happen to his or her adult child at school.

Durable power of attorney for general financial matters: This designates one or more individuals, having broad powers relative to financial, business and other transactions. Customarily, these durable powers of attorney for college-age children are immediately effective. The adult child designates a parent or other trusted individual as the “attorney-in-fact” to make financial and related decisions on his or her behalf, pay bills and deal with landlords. A durable power of attorney that is effective immediately can also allow a parent to access the adult child’s college financial records and manage student loans.

To begin, the child simply needs to decide which trusted individual, as well as one or more back-ups, will act on his or her behalf. There is never a better time to sign durable powers of attorney than right now — well before they are ever needed or the unexpected takes place. The peace of mind and protection these simple yet powerful documents offer make them well worth the minimal costs incurred to create them. 

On July 12, 2019, Illinois Gov. J.B. Pritzker signed House Bill HB1471, which enacts the Illinois Trust Code (ITC) and repeals many of Illinois’ current trust statutes. The ITC was effective as of Jan. 1, 2020. Below is a brief overview.

Illinois Trust Code and Uniform Trust Code

The ITC generally conforms with the Uniform Trust Code (UTC), a comprehensive codification of the common law on trusts, as drafted, published and recommended by the National Conference of Commissioners on Uniform State Laws. The UTC is designed as a template to establish uniform trust laws among states, including, but not limited to, the creation, validity and modification of trusts, rights of certain parties with respect to beneficial interests and creditors, trust administration, trusteeship and trustee powers.

With the adoption of the ITC, Illinois becomes the 34^th state to adopt a version of the UTC, leaving Iowa, Indiana, Oklahoma and South Dakota as the only Midwestern states that have not adopted a version of the UTC. Missouri adopted its own version of the UTC in 2005.

We are evaluating the ITC to determine its application to existing trusts and examining the differences between the ITC and Illinois’ current trust laws. We will publish our analysis and thoughts in upcoming editions of this blog, so please stay tuned. If you have a trust governed by Illinois law, please contact a member of our Trusts & Estates group to review how the new ITC will impact your estate plan.

September 2020 Update

Greensfelder Officers Garrett C. Reuter, Jr. and Betty Schaefer presented to the BAMSL Trust & Estate Planning Institute on “Illinois Trust Code vs. Missouri Uniform Trust Code” in September 2020. To view the presentation materials, please go to the following link:

https://www.greensfelder.com/media/event/468_BAMSL_Presentation-Trust_Codes-Sept2020.pdf

On May 23, 2019, the U.S. House of Representatives, by a vote of 417 to 3, passed legislation called Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act. This legislation, if passed by the Senate and signed by the president, will cause significant changes for retirement planning, many of which are positive, but it also includes aspects that could have a big impact on estate planning.

The following are several of the more positive changes made by the SECURE Act:

• The repeal of the maximum age for traditional IRA contributions;
• The age for the beginning date for mandatory distributions will be increased from 70½ to 72;
• The five-year payout rule on inherited balances is increased to 10 years; and
• Allows for penalty-free withdrawals from retirement plans for individuals in the case of birth or adoption.

A significant, less favorable change made by the SECURE Act is the effective elimination of “stretch” IRA provisions for non-spouse beneficiaries. Currently, upon the death of an IRA account owner, certain non-spouse designated beneficiaries (individuals, groups of individuals or certain see-through trusts) are permitted to receive required minimum distributions (RMDs) over the life expectancy of the beneficiary, typically beginning the year following the year of the IRA account owner’s death. This provides a significant income tax deferral benefit by allowing investment profits to continue to be reinvested without being subject to taxation. That is, the longer the funds stay in the account, the greater the benefit due to the ability to effectively reinvest funds that would have otherwise been used to pay the taxes. Once the funds are distributed, they are included in the beneficiary’s taxable income.

For spouses, not only can they receive distributions based on their life expectancy, they may also “rollover” the inherited IRA into their own IRA, possibly delaying RMDs until the spouse reaches age 70½.

Under the SECURE Act, distributions to non-spouse beneficiaries (other than those who are disabled, chronically ill, or minor children) will be required to be taken over a period that would end 10 years following the year of the IRA account owner’s death. The existing rules described above will continue to apply for spouse beneficiaries. For minor children, the 10-year rule will apply once the child reaches majority.     

This elimination of the stretch IRA provisions will have a significant impact on existing trusts that have been structured to accommodate retirement plans. That is, many such trusts allow the trustee to control distributions to the beneficiary based on the timing of RMDs, typically for the life expectancy of the beneficiary. If the SECURE Act is passed, the trustee could be required to distribute the account during the 10-year period following the IRA account owner’s death, or 10 years following the minor child beneficiary reaching the age of majority, losing the benefit of holding the funds in trust. If the trust allows for distributions to be accumulated in the trust, such distributions would be taxed at the trust’s more compressed tax bracket and potentially higher rates. Consequently, such trusts used in conjunction with retirement planning will need to be re-evaluated and alternative planning structures considered.

There appears to be bipartisan support for the House bill.  The Senate has a similar bill in the works. Assuming that bill will pass in the Senate, the House and Senate bills will need to go through a reconciliation process before being sent to the president for signature.

We will keep you posted on any new developments. Should you have any questions or would like to discuss how these potential changes could impact your retirement and estate planning, please feel free to contact an attorney in our Trusts & Estates practice group.

On June 21, 2019, the U.S. Supreme Court unanimously decided in favor of a taxpayer trust, finding that the state of North Carolina could not tax the trust merely because a trust beneficiary, who received no trust income or right to demand income, resided in North Carolina.

In North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, Joseph Rice formed a trust for the benefit of his children in his home state of New York and appointed a New York resident as trustee. The trustee had absolute discretion to make distributions to the beneficiaries. In 1997, one of Rice’s daughters, Kimberley, a beneficiary of the trust, moved to North Carolina. After the trust was divided into three separate trusts, one for each of Rice’s children, North Carolina sought to tax Kimberley’s trust under a North Carolina law authorizing the state to tax any trust income that “is for the benefit of” a resident of North Carolina. Kimberley had not received any distributions from the trust, could not demand any income from the trust, and no trust assets were located in North Carolina. More than $1.3 million in state income taxes was assessed against the trust. The trustee paid the tax under protest and then sued North Carolina in state court arguing that the tax violated the Due Process Clause.

The state courts agreed with the taxpayer, holding that in-state residence alone was insufficient to create sufficient contacts with the state of North Carolina to allow the trust to be taxed. The North Carolina Department of Revenue sought review by the U.S. Supreme Court. The U.S. Supreme Court eventually granted certiorari to decide whether the Due Process Clause prohibited states from taxing trusts based only on the in-state residency of trust beneficiaries.

In its analysis, the court stated that the due process analysis focuses on the extent of the in-state beneficiary’s “right to control, possess, enjoy, or receive trust assets.” That, “when a tax is premised on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or right to receive that property before the State can tax the asset.” Otherwise, the court stated, “the State’s relationship to the object of the tax is too attenuated to create the ‘minimum connection’ that the Constitution requires.” As a result, because the beneficiary did not receive any income from the trust, had no right to demand trust income or otherwise control or enjoy the trust assets, and because the beneficiary could not count on receiving any specific amount of income from the trust in the future, the court, affirming the decision of the lower court, held that the beneficiary’s residence alone could not serve as the sole basis for North Carolina to tax the trust income.

The full opinion may be found here.

If you have questions regarding how this case may impact taxation of your irrevocable trust, please contact an attorney in our Trusts & Estates practice group.

How many times have you prepared your income tax returns for the previous year, only wishing you knew then what you know now, so you could go back and make more advantageous tax decisions? In most cases, you are stuck with the decisions you made before the new tax year began, even though you may not have all of the relevant tax information available to assist with those decisions until several months into the new tax year. Too bad for you, says the IRS, unless you are an estate or trust.

Under Section 663(b) of the Internal Revenue Code, any distribution by an estate or trust within the first 65 days of the tax year can be treated as having been made on the last day of the preceding tax year. For example, a distribution of $500 of trust income by the trustee to a beneficiary on Jan. 22, 2019, can be treated as having been made in the 2018 tax year or the 2019 tax year. In most years (including 2019), the last day to make a distribution count towards the previous tax year is March 6; but in leap years (next in 2020) the last day is March 5.

The election to treat the distribution as being made in the previous tax year must be made by the fiduciary on a timely filed income tax return (including extensions) for the tax year to which the distribution is meant to apply. A fiduciary may make the election for only a partial amount of the distribution(s) within the 65-day period, but once made the election is irrevocable.

The main advantage of this tax rule is it may provide an opportunity for tax savings. An estate or trust pays income taxes at graduated rates similar to individuals, but for 2018 the top tax rate (37 percent) applies to income in excess of $12,500. However, married couples filing jointly pay the top rate when income exceeds $600,000 (or $500,000 for single filers). In some cases, an additional 3.8 percent Medicare surtax (also known as the Net Investment Income Tax) on the net investment income of the estate or trust may apply, resulting in a total marginal tax of 40.8 percent. To avoid paying such a high tax rate, income from the estate or trust may be distributed to a beneficiary, and the beneficiary will then pay any income taxes associated with the distribution, rather than the estate or trust, at the beneficiary’s individual tax rate. For example, a beneficiary who pays income taxes at a rate of 24 percent would pay less income tax on the distribution amount than a trust already paying at the top rate of 37 percent (or even 40.8 percent). In cases of estates or trusts with large taxable income and beneficiaries in lower tax brackets, the tax savings can be significant.

State income tax consequences may also apply to distributions made from a trust or estate, and there may be limitations on the amounts of distributions a fiduciary can apply using the 65-day rule. It is recommended that you discuss all possible consequences with your tax advisor before trying to apply the rules discussed above. 

The Tax Cuts and Jobs Act of 2017 brought a myriad of changes to the tax law, including for individual taxpayers. While certain deductions that were available to individuals have now been limited — e.g., the $10,000 limit on the state and local income tax (SALT) deduction — the standard deduction has increased to $24,000 for a married couple filing jointly and $12,000 for single filers. In 2017, the standard deduction was $12,700 for a married couple filing jointly and $6,350 for single filers.

As a result of the increased standard deduction, many taxpayers who previously itemized their deductions — that is, elected not to take the flat standard deduction because their deductible expenses exceeded the standard deduction amount — will now find that their deductible expenses are less than the standard deduction.

With the $10,000 limit on the SALT deduction, and with many taxpayers not having a mortgage interest deduction or medical expenses that exceed the minimum amount to be deductible, the charitable deduction could provide a planning opportunity for those with a consistent charitable giving plan.

For example, assume that a married couple annually gives $20,000 to charitable causes, has a SALT deduction each year of $10,000, and has no other deductible expenses. In 2018, they would itemize because their total deductions ($30,000) exceed the standard deduction of $24,000 by $6,000. Assuming that their charitable giving remained the same for four years, their total deductions during the four-year period would be $120,000.

Assume instead that over the same four-year period, the couple “bunches” their deductions by giving $40,000 to charitable causes in years one and three, resulting in total deductions for each of those two years being $50,000 (including the $10,000 SALT deduction each year). In years two and four, because few or no charitable contributions are made, total deductions are $10,000 for the SALT deduction, resulting in the couple taking the $24,000 standard deduction. At the end of the four-year period, the couple will now have used $148,000 of deductions.

As a result of the couple bunching their charitable deductions versus continuing to give the same amount each year, they will likely reduce their overall tax liability for the four-year period.

While this provides a planning opportunity for individual taxpayers, this will likely result in revenue instability for charitable organizations. However, with proper coordination, individuals and the charitable organizations they support can benefit. Furthermore, this strategy could provide the same type of benefit for those planning to contribute to their donor advised fund or private foundation.

If you have questions about using such a charitable giving strategy or would like to talk to someone about other charitable planning opportunities, please contact an attorney in our Trusts & Estates Department.

Recent changes to Missouri law could make it easier for trustees to terminate “uneconomic” trusts.

Sometimes the cost of administration of an existing trust outweighs the justification for continuing to hold assets in the trust. This may be especially true if there is a corporate trustee and the beneficiaries have no estate tax, creditor, or divorce concerns. For such a situation, Missouri law provides a mechanism by which a trust may be terminated in the discretion of the trustee, without having to go to court, if the total value of trust property is under a certain dollar limit. If the total value of trust property is below the limit and the trustee concludes that the value of the trust property is insufficient to justify the cost of administration, the trustee may terminate the trust after providing notice to certain beneficiaries.

For many years, the dollar limit was $100,000. However, beginning Aug. 28, 2018, trustees are able to terminate “uneconomic” trusts that have trust property with a value less than $250,000.

Trustees will still be required to provide the appropriate notices to certain beneficiaries, and they will need to continue to weigh the advantages of holding the property in trust for tax, asset protection, divorce, or other purposes. Following the termination, the trustee will be required to distribute the assets in a manner consistent with the purposes of the trust.

If you would like more information on options to terminate an uneconomic trust, please contact any of the attorneys in our Trusts & Estates department.