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IRS confirms “clawback” will not apply to gifts made under the increased estate and gift tax exemption

The estate and gift tax exemption is the amount that an individual can transfer to another individual tax-free either during lifetime or at death before a 40% transfer tax is imposed.

What is the current estate and gift tax exemption?

In 2017, the Tax Cuts and Jobs Act (TCJA) raised the base amount from $5 million to $10 million per person. The $10 million base is adjusted annually for inflation. The inflation-adjusted exemption amount for 2019 is $11.4 million for 2019 per person. It will increase in 2020 to $11.58 million per person.

The TCJA also doubled the amount of exemption that may be rolled over, or “ported,” from one spouse to another at the death of the first spouse.

What is the TCJA sunset provision?

The increased exemption amount is temporary and scheduled to sunset, or revert, to $5 million per person (adjusted for inflation) as of January 1, 2026.

The sunset provision created a question as to whether gifts of greater than the inflation-adjusted $5 million exemption made between 2018 and 2025 would be subject to estate tax if the donor died after January 1, 2026. Similarly, the sunset provision also created confusion as to whether amounts ported from one spouse to another in excess of the inflation-adjusted $5 million exemption would remain available to the surviving spouse after January 1, 2026.

What will happen under the regulation issued by the IRS?

On November 26, 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. This regulation was part of Treasury Decision 9884 which implemented changes made by the TCJA.

How will the estate tax be calculated after December 31, 2025?

The final regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the basic exclusion amount applied to gifts made prior to January 1, 2026, or the basic exclusion amount applicable on the date of death. A similar special rule applies to an exemption that is “ported” to the surviving spouse.

As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025. Similarly, spouses who have the benefit of additional, “ported” exclusions made in this period will continue to have the benefit of those ported exclusions after 2025.

An example

In application, suppose an individual transfers $10 million into an irrevocable trust in 2020, makes no further gifts, and dies owning $3 million of other, taxable assets after January 1, 2026, when the estate tax exemption has reverted to an inflation-adjusted $5 million. Assume the inflation-adjusted exclusion amount is then $7 million. The estate tax would be calculated with an exclusion amount of $10 million, not $7 million, leaving only the $3 million of remaining assets exposed to estate tax.

The regulations set out a “use it or lose it” benefit. If an individual dies after 2025 and did not make gifts between 2018 and 2025 in excess of the sunsetted exclusion amount in effect at his/her death, the excess exclusion is lost.

Of course, this is a very simple example. Many situations will be much more nuanced. The final regulations provide a window for strategic gift planning that should be discussed with your estate planning attorney.

2020 contribution limits for 401(k) and IRAs
The Internal Revenue Service released the annual limits for contributions to retirement plans in 2020.

401(k), 403(b), most 457s and Thrift Savings plans

The annual contribution limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings plan increased from $19,000 for 2019 to $19,500 for 2020.

Individuals aged 50 and over can contribute an additional $6,500 to their 401(k), 403(b), most 457 plans or the federal government’s Thrift Savings plan as a catch-up payment.

IRAs

The annual contribution limit for IRAs remains at $6,000 for 2020 with the additional catch-up contribution amount for individuals aged 50 and over also remaining at $1,000 for 2020.
Advanced care planning can’t start too soon
Baby boomers are at the crest of retirement. Born just after World War II, they are between 55 and 70 years old today. The Insured Retirement Institute’s annual study, “Boomer Expectations for Retirement,” found that more than half of the baby boomers surveyed think their health care costs will consume up 20% of their retirement income, or even less. But analysts predict a healthy couple in their mid-60s today, might actually need $300K–$500K just to cover the supplementary insurance, copays, prescription drugs, and other out-of-pocket health care expenses that greet the aging. According to the study, less than ten percent of baby boomers have enough saved up.

A PBS report estimated 70% of seniors will eventually require long-term care, yet only half of seniors surveyed anticipate this need. An overwhelming majority (77%) of seniors intend to live at home for the rest of their lives. This may be optimistic, considering the 70% likelihood of needing long-term care services as one ages. And—spoiler alert—Medicare does not pay for most long-term care or personal (custodial) care services. Current figures report payments of private long-term care insurance benefits at nearly $6 billion per year.

It’s important to become educated in the living care options that will be available for your future. Recognizing there’s a chance of needing long-term care, and planning for those costs, are subjects to discuss with your financial advisors and estate plan attorney. For additional information on services and advanced care planning, check out www.longtermcare.gov.

Survey by the National Council on Aging, as reported by MarketWatch.
After choosing to stay at home, assisted living communities are seniors’ next favorite choice for retirement living. Preferences for other options are depicted in the chart.
Power of attorney: A powerful estate planning tool
Consider this common scenario faced by many families. An elderly woman with dementia has been living in a nursing home for the past year. Her children have been working hard to maintain her home and pay mom’s bills. Mom is quickly running out of money and the kids decide that mom needs to sell her house in order to meet her ongoing (and increasing) financial needs. The children contact a real estate agent who quickly lists the home for sale and soon after a buyer emerges to purchase the home.

The buyer hires an attorney to help ensure that the transaction goes smoothly and that proper title is transferred to her client. The attorney reaches out to a child of the elderly woman and asks, “Is your mother able to understand and sign both the purchase and sale agreement and deed?”

Mom has not previously executed a power of attorney. A power of attorney is a legal document that allows someone (typically called an “agent” or “attorney”) to make financial decisions on behalf of someone else (typically called the “principal”). If mom had previously executed a valid power of attorney, mom’s named agent (presumably one of her children) likely would have been able to sign all of the necessary paperwork in connection with the sale on mom’s behalf.

Given that there is no agent with the authority to sign on behalf of mom, the children would likely need to resort to a court proceeding in which the court would ultimately appoint an individual (most likely the same child that mom would have named as her agent under a power of attorney) to have authority to act on mom’s behalf with respect to the sale. The court proceeding (known as a conservatorship in Massachusetts) might take several months, involve multiple attorneys (further depleting mom’s limited resources), and given the delay, the buyer may go elsewhere and be unwilling to wait for the court proceeding to conclude.

As part of the estate planning process, your attorney can guide you through the considerations involved in selecting the right agent or agents to make financial decisions on your behalf. A power of attorney document can be as short as three or four pages, but if you become unable to make financial decisions on your own behalf, the ramifications of not executing this document can cost your family time and money.
Market Pulse: May 2019 Economic Highlights
What’s happening: highlights from the NP Investment Team

“Sell in May and Go Away” is a well-known financial world adage, based on the historical underperformance of some stocks in the six-month period commencing in May. Unfortunately, the sell-off in the equity markets this May has not been driven by warmer weather and investors out on vacation but rather on concerns about a global growth slowdown due to the trade war.

The S&P 500 is down over 5% for the month of May with tensions between the U.S. and China heating up over trade issues. News of a jump in tariffs on Mexico is certainly not helping the global growth sentiment, which is already sagging. The odds of two rate cuts in the next year are now almost fully priced into the markets, but there is still time to work out a deal before a cut becomes necessary and the U.S. economy is still on solid footing. Unemployment remains at historically low levels; wage growth is accelerating, which will support the consumer; and the recent drop in mortgage rates is boosting the housing market.

Leaders and Laggards: What’s Up and Down in the Stock Market?

Economic Sectors

May 2019 (through 5/30/19)

Year-to-date
2019 (through 5/30/19)

Energy

-10.26%

3.57%

Health Care

-1.78%

1.37%

Consumer Discretionary

-6.39%

14.05%

Information Technology

-7.43%

17.53%

S&P 500

-5.33%

11.25%

Industrials

-6.72%

13.21%

Consumer Staples

-2.62%

10.76%


With concerns surrounding slowing global growth in the month of May picking up, sectors that have led the market year to date have pulled back the most led by the energy sector and information technology sectors. The health care sector has been a relative outperformer this month but for the year remains under pressure due to regulatory concerns surrounding drug prices as we head into the election season, but we remain positive on this group over the long term.

Click here for more information about NP’s investment capabilities.
Charitable giving
There are numerous ways you can choose to benefit a charity. Writing a check. Donating an item in-kind. Making a bequest. Establishing a charitable entity. As you determine what charity or charities you would like to benefit, here are a few options as to how you might achieve your goals.

Giving items in-kind

Whether you are simply cleaning out a loved one’s house, your own closet or planning for an item of interest to you but not your loved ones, you have several options available.

Donating a vehicle to charity
Estate planning for your wine cellar
Handling a woodworker’s tools and equipment after death
What to do with unwanted household items

Giving from retirement assets

The IRS allows taxpayers to donate required IRA distributions to charity during their lifetime as well as to designate a charity as the beneficiary of the balance in an IRA upon the IRA owner’s death.

Giving your required IRA distributions to charity

Giving through an estate plan

For generations, charities have benefited under the terms of estate plans. Some give an outright donation. Some establish a trust for the charity’s benefit.

Specific bequest in a will or trust
Charitable trust option for concentrated equity positions
Valuation of interests in early termination of CRUT

Giving through funds and foundations

Charitable giving of vehicles can be an important financial tool for gift, estate and income tax planning.

Donor advised funds and private foundations

Charitable deductions

Whether the decision to make a donation to a charity is out of the goodness of one’s heart or motivated by tax deduction, the donation must meet the IRS regulations to qualify for tax deduction purposes.

Deducting your charitable donations
Substantiating and reporting charitable contributions
Deducting charity-related travel expenses
Market Pulse: April 2019 Economic Highlights
What’s happening: highlights from the NP Investment Team

This past March we marked the 10-year anniversary of the current bull market. The market reached a low on March 9, 2009 after a punishing bear market triggered by the global financial crisis. This has led to the longest equity market expansion in the last 100 years, extending beyond the prior record, which was set during the 1990–2000 technology boom.

This bull market is now in its 121st month with the S&P 500 returning over 400% during this time period. The average bull market going back to 1928 has been 62 months in duration with an average return of 175%. This bull market stands out due to the outperformance of the U.S. market relative to global indices and for the slower pace of economic growth when compared to prior cycles. While the real economic growth has lagged equity markets and the U.S. has far outpaced the rest of the world, it does not mean the bull market is set to end anytime soon. The U.S. labor market remains strong; solid payroll growth and low unemployment have given households the confidence to spend. Wage growth was slow to improve earlier in the cycle but that has picked up as of late, though it still is not at levels that typically cause the economy to overheat. Business investment was also slow for much of this cycle but that too has picked up in recent years. A combination of higher business and consumer spending should lead to continued positive economic growth here in the U.S.

Leaders and Laggards: What’s Up and Down in the Stock Market?

Economic Sectors

March 2019

Year-to-date
2019 (through 3/31/19)

Energy

2.11%

16.43%

Health Care

0.49%

6.59%

Consumer Discretionary

4.11%

15.73%

Information Technology

4.83%

19.86%

S&P 500

1.94%

13.65%

Industrials

-1.14%

17.20%

Consumer Staples

4.09%

12.01%


Stock market leadership year to date has been led by the technology, energy and industrial sectors as concerns around slowing global growth and trade wars have eased through the first three months of the year. The health care sector has come under pressure due to regulatory concerns surrounding drug prices as we head into the election season, but we remain positive on this group over the long-term.

Click here for more information about NP’s investment capabilities.

Unclaimed funds — What are they and how do I collect?
Unclaimed assets are funds in an individual’s name such as bank accounts, stocks, federal or state income tax refunds, uncashed dividends, insurance premium refunds, etc. that have not been accessed or collected [a year or more after issuance] that will eventually escheat to the state as “Abandoned Property.”

We commonly see the following types of Abandoned Property: uncollected dividends, forgotten bank accounts, uncashed checks and contents of safe deposit boxes.

If unclaimed funds are located in your name, only you, your spouse (or other family member if none) or your estate is entitled to collect the money from your state’s unclaimed funds depository.

There is no central federal source to research unclaimed funds specific to you. However, the National Association of Unclaimed Property Administrators website has helpful information on each state and provides instructions on how to search for unclaimed money in your name and corresponding state.

We recommend you search the Abandoned Property website of each state in which you have resided annually. The collection process is relatively simple and most times can be done online through the National Association of Unclaimed Property Administrators, Office of the New York State Comptroller Unclaimed Funds, Massachusetts Unclaimed Property Division and Illinois State Treasurer’s Unclaimed Property websites.
Retirement saving strategies by age
Retirement saving strategies are likely to evolve throughout your life, with an early focus on putting away whatever you can, followed by protecting and perhaps catching up on your savings, and then sensibly drawing down assets in retirement. How much to save depends on when you want to retire, and your level of current income. Regardless of these variables, implementing a few savings habits at each stage of life can help increase your retirement security.

In your 20s. It may be tempting not to prioritize saving for retirement in your 20s because it feels far away. Saving for retirement can also be difficult in this age group because pay checks can be small, and student debt and rent payments can be large. However, this age is also the best time of your life to save for retirement because even the smallest amount of savings has many decades to grow. Putting money aside early also creates a habit of doing so. At the very least, saving as much as your company will match avoids leaving “free money” on the table.

In your 30s. You will hopefully find yourself with more income during this decade, but are also likely to have new expenses, such as childcare and home maintenance. Having created good savings habits in your 20s may help ensure that you not lose sight of the long-term savings goal. This is a good time to develop a budget. It is also a time where you do not have to be too conservative in your investment choices because you are young enough to withstand market downturns.

In your 40s. This decade usually means less student debt and a profitable time in your career, but you may also be behind in your savings. At this age, you can make more specific retirement plans in order to stay motivated, such as at least maxing out your 401K contributions each year. It is a good time to recalibrate your saving plan as necessary and increase or decrease your contributions accordingly. Failure to continue saving in your 40s compresses the time that you have to achieve your retirement plans.

In your 50s. At this age, you are eligible to make catch-up contributions worth an extra $6,000 to 401Ks, and an additional $1,000 to IRAs. Also, if your retirement account balance is significant, this is a good time to consider shifting some of it to more conservative investments to avoid substantial losses leading up to retirement.

In your 60s. You should view this time as a final chance to get money into retirement accounts before retirement. This is also a good time to consider whether you are financially prepared to leave your job, or whether a part-time or consulting job may be important for you to maintain your lifestyle.

In your 70s. By this time, you likely will have stopped making new contributions to retirement accounts and have started to take withdrawals, while also enjoying investment growth. People who are 70½ years and older are no longer able to claim a tax deduction on traditional IRA contributions, and annual distributions from traditional IRAs are required after age 70½.

Although it may be tempting to put off, or burdensome to stick with, saving for retirement early and consistently will be well worth the effort as you enjoy a long and comfortable retirement.
Market Pulse: January 2019 Economic Highlights
What’s happening: highlights from the NP Investment Team

What is behind the global slowdown and is the worst behind us? At this point last year only one major economy had a PMI below 50 (representing a contraction) but that number has now grown to ten. In most cases, the reasons are mainly domestic, with China experiencing weaker credit growth in response to past policy tightening, Germany being affected by new car emission standards and Brexit weighing on the UK. Importantly, the main headwinds in the two largest economies, the U.S. and China, are starting to fade.

China and the U.S. were last year’s big global headwinds but with Beijing easing and the Federal Reserve dialing back its tightening, signs of a global pick-up are appearing in the markets. China has made 60 easing moves since last June and fiscal stimulus is now on track to exceed 2016’s levels. The president’s hawkish commentary in October raised fears of a U.S. recession but his most recent statements have put those fears to rest for now. The U.S. economy remains healthy, with domestic corporate profits before tax expected to increase by 10% in the first half of this year and unemployment claims hitting their lowest level in 50 years. This is important because it is domestic profits that drive U.S. employment and capital spending.

Leaders and laggards: What’s up and down in the U.S. stock market?

Economic Sectors

January through 1/29/19

Calendar Year
2018

Energy

9.55%

-18.10%

Health Care

2.49%

6.47%

Consumer Discretionary

8.19%

0.83%

Information Technology

5.60%

-0.29%

S&P 500

6.06%

-4.38%

Industrials

9.95%

-13.29%

Consumer Staples

2.70%

-8.38%


The stock market is experiencing a significant rebound to start the year as concerns about the Federal Reserve overtightening and a slowdown in corporate earnings easing. Following the pullback in the 4th quarter of 2018, stock valuations are more attractive and the Nixon Peabody investment team is initiating new positions in companies that we believe will generate positive returns over the coming years. 

Click here for more information about NP’s investment capabilities.
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