February, 2020

     The income, estate and gift tax laws that are relevant to estate planning have changed in many ways in recent years. This page is intended to summarize some of those changes. If you would like to discuss how these changes may affect your personal estate plan, please contact us to schedule an appointment. The information on this website is not legal advice.


     One of the most significant recent changes affecting estate planning was the passage of the SECURE Act in December 2019. That Act changes the income tax rules for many retirement accounts, effective January 1st 2020. This summary highlights the estate planning effects of selected provisions of the Act.

     Tax deferred retirement savings represent a substantial portion of the assets of many individuals. “Tax deferred retirement savings” refer to retirement savings plans such as traditional 401(k) plans, 403(b) plans, and traditional individual retirement accounts (IRAs). A common feature of these plans is the benefit of tax deferral that they receive: (i) they are funded with pre-tax contributions, and (ii) no income or gain earned in the account is taxed until funds are withdrawn.

     Minimum Required Distributions

     The SECURE Act changed the age at which account owners must begin taking withdrawals from tax deferred retirement savings accounts. Withdrawals from these accounts generally must begin in the year the account owner reaches age 72 (age 70 ½ for account owners born before June 30, 1949). Thereafter, account owners must make annual withdrawals, based on the individual’s life expectancy. When funds are withdrawn, the amount of the withdrawal is included in the account owner’s taxable income for the year.

     Taxation of Beneficiaries

     Many of the SECURE Act provisions affect the beneficiaries who receive tax deferred retirement savings accounts after the original account owner dies. Just like the original account owner, a beneficiary who withdraws funds from a retirement savings account must include the withdrawal in his or her taxable income for the year. Under previous law, many retirement savings plans gave individual beneficiaries the ability to “stretch” their withdrawals over their own life expectancies, if certain requirements were met. This was an attractive option, allowing additional tax-deferred growth of the account while spreading the income tax consequences of withdrawals over many years.

     Under the SECURE Act, some individual beneficiaries still will have the option to stretch withdrawals over their own life expectancies but many beneficiaries will be required to withdraw the entire account balance within five or ten years of the original account owner’s death. The required rate of withdrawal depends on the beneficiary designated and the relationship of that beneficiary to the original account owner. For example:

• An account owner’s surviving spouse who is the designated beneficiary of a retirement savings account will still have the ability to “roll over” the account into the surviving spouse’s own IRA. After a rollover, the surviving spouse will be subject to the same withdrawal rules as if he or she had been the original owner of the account. That is, after attaining age 72, the surviving spouse must take annual withdrawals calculated based on his or her life expectancy.

• A surviving spouse who elects not to roll the account into his or her own IRA still will be able to take withdrawals based on the surviving spouse’s life expectancy in most situations. Additionally, certain types of trusts for a surviving spouse will still qualify for withdrawals based on the surviving spouse’s life expectancy.

• An account owner’s minor child who is designated as the beneficiary of a retirement savings account will be allowed to take relatively small withdrawals, based on the child’s life expectancy, until reaching adulthood. Once a child reaches the age of majority, the adult child will have ten years to withdraw the entire remaining account balance.

• Withdrawals based on life expectancy are still allowed for certain disabled or chronically ill beneficiaries (or trusts for their benefit), and for beneficiaries who are no more than ten years younger than the original account owner.

• All other individual designated beneficiaries must withdraw the entire account balance within ten years of the original account owner’s death.

• Beneficiaries who are not individuals (or certain types of trusts) are still required to withdraw the entire account balance within five years of the original account owner’s death.

• These new rules apply to traditional IRAs and Roth IRAs, but the impact on Roth IRAs is less because Roth IRAs generally do not include taxable income, so distributions from Roth IRAs generally are not taxable. The timing of beneficiaries’ withdrawals from Roth IRAs nevertheless is governed by these new rules. Thus, most beneficiaries (other than the original account owner’s spouse) will need to withdraw the Roth IRA account balance within ten years following the account owner’s death.

     Charities as Beneficiaries

     If you named charities as the beneficiaries of your tax deferred retirement savings, you do not need to make changes due to the SECURE Act. Designating a charity as a beneficiary of tax deferred retirement savings account continues to be a tax efficient way to make charitable gifts. The charity may withdraw the funds from the tax-deferred account, but since the charity is exempt from the income tax, it will not have any income tax liability. At the same time, other assets that may not carry the same income tax liability will be available for gifts to non-charitable beneficiaries. In addition to income tax savings for the beneficiary, any assets paid to charity are eligible for a deduction for estate tax purposes.

     Reminder: The Charitable Rollover

     The “charitable rollover” became permanent law in December, 2015. This income tax planning tool continues to be a good option if you have reached age 72 and your required minimum distribution exceeds your desired income. In short, you may direct the custodian of your account to pay all or a portion of your mandatory distribution, up to $100,000, directly to one or more public charities that you select. (Private foundations, supporting organizations and donor advised funds are not eligible recipients.) The portion of the distribution from your retirement savings account that is paid directly to charity is never included in your taxable income. This reduces your overall taxable income and may keep you in a lower tax bracket. The charitable rollover is a significant tax benefit regardless of whether you will continue to itemize deductions in light of the increase in the standard deduction that took effect starting in 2018.

     Additional Considerations

     If your retirement savings plan is invested in illiquid assets, such as real estate or a closely held business interest, it is important that you work with your advisors to ensure you have a workable plan for administering your account during your lifetime and after your death.

Estate and Gift Taxes

     The federal estate and gift tax applies to gifts made during life and transfers from a decedent’s estate following death. Each individual has an exemption amount, meaning that no tax is assessed until an individual’s cumulative lifetime gifts and transfers from their estate exceed the exemption amount.

     The federal estate tax exemption has increased dramatically in recent years. As of January 1, 2020, the exemption is $11,580,000, and that amount is adjusted for inflation annually. However, this exemption amount is set to expire in 2026, when the exemption amount will revert to $5,000,000, plus inflation adjustments for years after 2011. It is possible that Congress will change the federal estate tax laws between now and 2026, or thereafter, but any such changes are impossible to predict.

     The federal “portability” law that became effective in 2011 permits a surviving spouse to use all or a portion of his or her predeceased spouse’s unused federal exemption. Effectively, this means that with appropriate planning, spouses can transfer $23,160,000 before any federal estate or gift tax is assessed. (When the increased exemption expires in 2026, the amount that spouses can transfer will be reduced to $10,000,000, adjusted for inflation).

     In addition to the federal estate tax, Oregon has a state estate tax, which operates separately from the federal estate tax. Since 2006, the Oregon exemption has been $1,000,000, and it is not adjusted for inflation. Washington also has an estate tax, and the exemption is currently $2,193,000. Washington’s exemption is adjusted for inflation from time to time. The “portability” provision does not apply to the Oregon estate tax nor to the Washington estate tax. The lower exemption amount and the lack of portability means that proper planning is still important.

     As of 2020, the federal marginal estate tax rate is 40%. The Oregon estate tax rate ranges from 10% to 16%, depending on the size of the estate. The Washington estate tax rates range from 10% to 20%. These rates are assessed on the value of transfers in excess of the available exemption amount.

     As noted above, the federal tax applies to lifetime gifts and transfers at death. Neither Oregon nor Washington imposes a gift tax.

If you are ready to review your estate plan in light of changes in the law, changes in your family or changes in your assets, please contact us to make an appointment with a Duffy Kekel attorney to review your estate plan.


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