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How the CARES Act may affect estate planning  
By Jennifer Davis, Nina Windsor on July 2, 2020 at 1:00 PM

*This publication has been updated to reflect recent IRS guidance.

Although many aspects of the CARES Act focus on relief for small businesses and employees, there are several provisions that are relevant to estate planning.  These provisions may influence planning decisions this year and in the future, including those related to charitable giving and retirement plans.

The CARES Act increases the ability to take charitable deductions

The provisions in the CARES Acts regarding charitable giving may offer unexpected benefits and planning opportunities.

Even for those who do not itemize their deductions, they may wish to begin tracking their charitable deductions again. This is because the CARES Act includes a provision for those claiming the standard deduction. Starting in the 2020 tax year, an individual is eligible to claim $300 for cash contributions to charities in addition to the standard deduction. Although the CARES Act does not specifically mention married couples filing jointly, if the deduction is per individual, the hope is that there is $600 charitable deduction for a married couple.

Individuals who itemize their deductions and make substantial charitable giving are keenly aware of the limits on the deductible amount available for charitable contributions made during a calendar year. These limits are typically determined by a percentage of the individual’s adjusted gross income (AGI). For individuals who itemize, the CARES Act removes the 60 percent of AGI limitation for qualifying cash contributions to public charities made in 2020. Taxpayers may now deduct up to 100 percent of their 2020 AGI for qualifying cash contributions.  Importantly, this applies only to contributions made up to Dec. 31, 2020.

For both charitable giving incentives, one must give cash, as it does not apply to donations of stock, real estate or other non-cash types of property (such as cars). Thus, these cash contributions are best made by check or credit card.

To take advantage of these benefits under the CARES Act, the contributions must be to public charities – not private foundations supporting organizations or donor-advised funds. For a sizable gift, it is a best practice to confirm whether the entity to whom a gift would be made is a public charity.  Lastly, many may wish to accelerate their intended planned gifts and make them before year end.

The CARES Act alters important requirements for retirement accounts

Each year, a retirement plan participant who is over age 72 must receive a required minimum distribution (RMD) from a qualified retirement plan or IRA. If a taxpayer prefers to not receive the RMD this year, the CARES Act provides relief.  Specifically, individuals will not face a penalty if they did not take the RMD prior to April 1 of this year and will not face a penalty if they suspend their distribution for 2020. This waiver under the CARES Act includes inherited IRAs. Based on recent IRS guidance, an individual who already took the RMD for either year, may rollover the distributions to any qualified retirement plan, including the retirement plan from where the RMD was taken, so long as that rollover is completed prior to extended deadline of Aug. 31, 2020.

The CARES Act also contains additional relief for those with unexpected losses in income or unexpected expenses due to the pandemic.  Traditionally, a 10 percent penalty is assessed on any withdrawals from retirement accounts made by an individual prior to reaching the age of 59½. (This is in addition to the potential income tax consequences.) This 10 percent penalty is now waived, under the CARES Act, for distributions up to $100,000 taken on or before Dec. 31, 2020.

Importantly, this waiver is available only to certain “qualified individuals.” First, if an individual or spouse is diagnosed with COVID-19, he or she will automatically qualify for this waiver. Qualified individuals also include those suffering adverse financial consequences due to:

  1. the inability to work because of a lack of childcare,
  2. furlough, reduced hours or the closing of the business where the individual works, or
  3. reduced hours of a business that the individual personally owns or operates.

Recent IRS guidelines have expanded the definition of a qualified individual to include the spouse of anyone meeting the above three qualifications, an individual who had a job offer rescinded or start date for a job delayed and an individual whose has experienced a reduction in pay or self-employment income.  Importantly, this expands the waiver provision to include salaried workers who have had a percentage of their pay reduced without a reduction in hours. Individuals must certify that any criteria used to qualify for the waiver is due to COVID-19.

Funds withdrawn are normally taxable to you in the year the distribution is taken. The CARES Act allows the qualifying individual to mitigate the income tax due on this distribution by spreading the income realized over a maximum of three years.  If it is feasible, an individual may recontribute these funds within three years of the date of distribution. This allows the individual to avoid any income tax on funds recontributed to a retirement account prior to the three-year deadline. Furthermore, the individual is not subject to the annual contribution limits for retirement accounts for the recontributed funds.

These are just a few of the many specific provisions included in the CARES Act that may provide individuals with new and unique planning tools. For more information regarding how the CARES Act may be relevant to planning for your individual position, please contact someone in our Trusts & Estates Practice Group.

Link to COVID-19 Resources page

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