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As people continue to grapple with the fallout from the novel coronavirus (COVID-19) pandemic, it’s important to consider the impact of the crisis on your retirement and estate plans. Few people are immune to the virus’s financial effects, but there are strategies available that can aid your recovery. These include estate planning opportunities that are especially effective in the current environment, as well as relief available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Windows of opportunity

Tax reform legislation enacted in 2017 doubled the lifetime gift and estate tax exemption — through 2025 — to an inflation-adjusted $11.58 million (a combined $23.16 million for married couples). This creates a window of opportunity to use your gift tax exemption to transfer assets to your loved ones. This window is scheduled to close on January 1, 2026, when the exemption amount drops to $5 million (indexed for inflation), although it’s possible the window will be closed sooner. It’s also possible that future lawmakers will reduce the exemption amount even further. Acting now allows you to lock in the elevated exemption amount and remove any future income and appreciation on transferred assets from your estate.

Another reason to act soon is that in the current economic climate, many assets have declined in value. This allows you to transfer a greater amount of wealth without triggering gift taxes. Also, because interest rates are low, estate planning tools that are most powerful in a low-interest environment — such as intrafamily loans and grantor retained annuity trusts (GRATs) — are especially attractive.

Financial relief

The CARES Act offers welcome tax and retirement relief designed to help people ride out the current storm. Key provisions include:

• Suspension of required minimum distribution (RMD) requirements for IRAs and certain qualified retirement plans in 2020. Skipping RMDs in 2020 is particularly advantageous because the amount is based on year-end 2019 account values. Otherwise, you might be forced to liquidate account assets at depressed values.
• Relief for early withdrawals. If you were affected by the COVID-19 pandemic, the law permits you to withdraw up to $100,000 this year from IRAs, 401(k) plans or certain other retirement plans without a 10% penalty, even if you are under age 59½. In addition, you can avoid tax on these funds by recontributing them (without regard to otherwise applicable contribution limits) within three years. To the extent withdrawals aren’t recontributed within that period, they’re taxable, but the tax may be prorated over three years. You qualify for these benefits if either 1) you or your spouse or dependent was diagnosed with COVID-19, or 2) you suffered financial hardship as a result of the pandemic because you were quarantined, furloughed, laid off, had your work hours reduced, were unable to work due to lack of child care, or a business you own closed or reduced its hours.
• Doubling of the amount you may borrow from certain qualified retirement plans to the lesser of $100,000 or 100% of your vested account balance, for loans made within 180 days after the law’s enactment date (March 27, 2020). If you had any outstanding loans on that date, you may delay any repayments due in 2020 for one year.
• Relaxed restrictions on certain charitable deductions. For charitable gifts made this year, the act increases the deduction limit from 60% to 100% of adjusted gross income and creates a new $300 above-the-line charitable deduction for non- itemizers. These benefits are available for cash gifts to qualified public charities other than donor-advised funds and supporting organizations.

Review your plans

In light of our uncertain economic environment and the relief provided by the CARES Act, now’s a good time to review your retirement and estate plans and adjust your strategies if appropriate.

© 2020