Tax and Estate Planning in the Current Environment

By Steffi Gascón Hafen and Timothy J. Kay

In response to the COVID-19 pandemic and the resulting financial market turmoil, taxpayers are left with many questions regarding their obligations and the future of their holdings. In the near term, taxing authorities across the country have acted quickly to issue tax relief measures for affected taxpayers. In the long term, taxpayers should consider the current state of their holdings and the long-term projected growth or decline as a result of the market turmoil, as well as their family wealth planning and needs.

Tax Filing Obligations

• Federal Tax Relief. The IRS has postponed the time to file and pay Federal income tax returns, subject to certain dollar thresholds, to July 15, 2020. Please see this Federal Tax Relief Legal Alert for more information. 
• California Tax Relief. The Franchise Tax Board of California (FTB) has postponed California income tax returns with filing or payment due dates between March 15, 2020 and July 15, 2020 (whether calendar or fiscal year filer), to July 15, 2020. Please see this California Tax Relief Legal Alert for more information. 
• 2019 Gift Tax Returns. The Federal tax relief only applies to Federal income tax, so 2019 gift tax returns and gift taxes continue to be due by April 15, 2020, subject to the normal procedures for obtaining automatic filing extensions. Remember, obtaining an extension of time to file a gift tax return is not an extension of the time to pay gift taxes.
• Estate Tax Returns. Similarly, there is no relief of the time to file or pay estate taxes. The due date for the Federal estate tax return continues to be nine months from the date of the decedent’s death, with the ability to file Form 4768 for a six month extension of the time to file. 

Charitable Giving

• Maximizing Deductions. Some taxpayers may find themselves wanting to donate more to their favorite causes during this health crisis. Under the Tax Cuts and Jobs Act (the “Act”), effective January 1, 2018, cash charitable contributions can be deducted in full up to 60 percent of the taxpayer’s adjusted gross income (AGI), up from the 50 percent threshold in place before the Act. However, the Act increased the standard deduction from income taxes for married persons to $24,000 and capped the state and local tax deduction at $10,000. Charitable gifts totaling less than the standard deduction in a year may provide no income tax benefit. Here’s a strategy: A taxpayer may take advantage of the higher standard deduction in one year and obtain a charitable deduction in excess of the standard deduction in another tax year by “bunching” the charitable contributions one would normally make in multiple years into one tax year. This could be the year. Gifts of appreciated securities can provide more tax benefit to the donor than gifts of cash under most circumstances.
• Donor Advised Fund (DAF). A donor advised fund allows a donor to donate assets to a DAF “sponsor”, qualify for a charitable deduction now, and allow the donor to direct the distribution of their funds over time. Front-loading charitable contributions to a DAF can allow the donor to bunch charitable gifts and qualify for deductions now, while still retaining the flexibility to decide in the future to which charities funds will go.

Wealth Planning

• Roth Conversion. Given the current depressed value of IRAs and the fact some may be in a lower tax bracket this year compared to future years, this may be a good time to convert a traditional IRA to a Roth IRA to permanently avoid income tax on the future growth of the account. Furthermore, while traditional IRAs are subject to minimum distributions, Roth IRAs are not, allowing the IRAs to grow more rapidly over time.
• Business Succession. In 2020, the gift and estate tax exempt amounts and GST tax exempt amount is $11.58 million ($23.16 for married couples). With business values depressed but expected to rebound overtime as certainty over the impact of the health crisis increases, some may consider passing on the torch to the next generation of family business owner and using their gift tax exemption earlier. Especially for those already considering retirement or bringing in the next generation alongside them, current low interest rates and values may tip the decision to act now. Traditional transfer techniques, such as sales to intentionally defective grantor trusts in exchange for notes, can be supercharged using valuation discounts and temporarily depressed values. 
• GRATs and Stock Portfolios. Grantor Retained Annuity Trusts (GRATs) allow a Trustor to effectively make a low interest loan of investment assets for the benefit of beneficiaries, with all appreciation and earnings in excess of the interest rate passing to the beneficiaries transfer tax-free. In this historically low interest rate environment, this means less will be required to be returned to the Trustor over the term of the GRAT and more value shifts to the beneficiaries. In addition, given the temporarily depressed value of publicly-traded stocks, stocks can be transferred at a lower value, but rebound in the hands of beneficiaries.

As the world temporarily goes virtual, it is important to work with an estate planning team ready to assist you from the comfort of your home. A check-up call or video conference with your digitally-equipped estate planner is advised to ensure your current planning objectives are protected.

Guidance in response to the COVID-19 pandemic is constantly being updated. This article is merely intended to introduce you to recent FTB and IRS accountments, and related planning issues, and is not a substitute for careful tax planning. If you have any questions, you are strongly encouraged to reach out to your tax advisor.