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Most families do not want to think about an emergency or sudden illness or especially losing a loved one. But creating a checklist for family members may be the most important way to help them navigate a difficult situation.

Often this type of planning is not prioritized. Yet without it, family members may be left scrambling to locate documents and information when a loved one passes away or becomes incapacitated. Lack of direction can lead to delays in getting bills paid or processing the estate.

To help prepare your family, consider creating a plan by collecting and organizing important information.

Here are some key actions for family members to take in the short-term and beyond.

Short-term action

  • Determine if the decedent wished to have his or her organs donated. The family doctor or nearest hospital will be able to provide direction on how to proceed.
  • Contact immediate family and close friends (and employer if applicable).
  • Confirm the decedent’s final wishes around funeral arrangements, burial, cremation, etc. Determine if there are any pre-arranged (and paid for) burial or cremation services. Begin crafting an obituary.
  • Contact the funeral home for services. The funeral home can typically assist with contacting Social Security and beginning the process to obtain death certificates (ask for at least several certified copies required for processing insurance or property titling changes).
  • Locate a safe deposit box or a lock box containing important documents. Family members will need to find wills, trusts, bank and account statements, recent tax returns, life insurance policies, mortgage documents, burial/funeral instructions, titles to property such as auto, deeds, and other estate plan documents.
  • Gather personal identification documents including driver’s license, Social Security card, passport, birth certificate, Medicare card, etc.
  • Locate a military service record if applicable. There are certain funeral services and potential financial benefits available to veterans.
  • Notify the post office, if needed.
  • Establish access to some cash that family members can use as expenses arise.

Next steps

  • Document expenses related to the funeral. Some expenses may be deductible against estate/income tax.
  • Contact key advisors for guidance, including a financial advisor, CPA, or attorney.
  • Determine the executor of the estate. The executor should meet with a probate attorney and begin to collect information on assets owned for the probate process.
  • Notify insurance providers (life, homeowners, auto, etc.).
  • Close credit card accounts and contact utility providers (cable, electric).
  • Gather information for the estate tax filing (form 706). This includes assets, date of death values, and taxes paid. Work with a tax advisor or attorney on preparing these forms.
  • Determine beneficiaries of any retirement accounts. Work with a financial advisor to understand the options and process for the transfer of these accounts.
  • Work with a CPA to gather information for the final tax return.
  • If applicable, evaluate options for Social Security survivor benefits.

In addition to the checklist, individuals may want to prepare a letter that summarizes financial accounts and the financial institutions that hold the accounts. The letter should also include contact information for key advisors including the family’s financial advisor, attorney, CPA, insurance agent, employer, human resources, and pension plan administrator.

Preparing a checklist is an opportune time to initiate a conversation with family members before a loved one dies. In addition to letting them know about final funeral wishes and estate planning, it is important for family members to know where important documents, such as wills, are located.


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Recent tax law changes have increased the state tax burden for residents of high-tax states. Changes that limit deductions have made planning for state and local taxes more important.

Prior to tax reform, many taxpayers could deduct state and local taxes (SALT) on their federal tax return, which partially mitigated the impact of state taxes. SALT primarily consists of state income taxes and local property taxes. (In lieu of deducting state and local income taxes, taxpayers can opt to deduct state and local sales taxes.)

With the new limit on the SALT deduction set to $10,000 annually, residents of states with higher taxes may find they can no longer itemize deductions.

Some trusts may alleviate state income taxes

Incomplete non-grantor trusts (INGs) may help high-income taxpayers avoid state income taxes on certain assets. These trusts are considered “incomplete gift” trusts since contributions to the trust are not taxable gifts for federal gift tax law because the donor/grantor typically retains certain rights, such as the right to change the trust’s beneficiaries, hence the “incomplete” nature of the gift.

  • For an ING to be effective, the assets must be legally sited in a state that has no state income tax, the grantor must typically not be the only beneficiary, and all distributions from the trust are generally approved by a “distribution committee” that consists of the grantor and at least two other beneficiaries. The “distribution trustee” must at all times be composed of enough members to avoid giving any member of the committee, including the grantor, the unilateral power to benefit himself or herself.
  • Since the ING trust is established as a non-grantor trust it is considered a separate taxable entity and taxed accordingly.
  • Assets held in the ING trust are managed by the out-of-state trustee and are typically intangible assets such as investment accounts that can be transferred to a different jurisdiction (unlike physical property such as real estate).
  • Income generated on assets within the ING trust can avoid state income taxes. But federal income taxes apply at trust tax rates (where the highest marginal tax rates ) once income retained within the trust exceeds $12,750.
  • There are nine states that have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The most popular states utilized for these types of trusts are Nevada (NINGs), Delaware (DINGs), and Wyoming (WINGs).

Certain taxpayers may find a benefit

A taxpayer who may benefit:

  • Is already in the highest marginal income federal income tax bracket
  • Holds highly-appreciated intangible assets such as a stock portfolio or stock options (selling a stock or exercising an option within the trust can avoid state income taxes)
  • Is not relying on income produced by the property transferred to the ING — income distributed to trust beneficiaries will be taxed based on their state of residency
  • Has the means to absorb the cost of establishing and maintaining the trust arrangement

Other considerations

States may take legislative action in the future to tax assets held in these trusts. For instance, in 2013, New York lawmakers passed a state law that prevents the avoidance of state taxes through the use of INGs. This law treats ING trusts established in other states as grantor trusts, and it taxes a New York resident grantor on the income, regardless of whether it is distributed from the trust or not.

State tax authorities may also challenge the transfer of an asset to an ING trust and its subsequent sale shortly thereafter as a tax avoidance scheme. To mitigate this risk, the grantor should consider holding the appreciated asset within the trust for a longer period of time before selling the asset.

There may be key legal differences in states offering these trusts. For example, there are some subtle, but potentially significant, differences between INGs in Delaware and Nevada.

Legal advice is recommended. This type of trust planning can be very complex. Consultation with a legal professional who is knowledgeable on these strategies is critical.


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With fewer estates subject to a federal estate tax under tax reform, the focus in estate planning for many has shifted to managing income taxes upon wealth transfer. Given the current landscape, there are estate planning considerations for investors seeking tax efficiency. How assets are valued at death for income tax purposes is one area of opportunity.

As the lifetime uniform estate/gift tax exclusion doubled under tax reform (currently $11.4 million per individual for 2019), only a small percentage of estates will be subject to the federal estate tax. Since many assets when passed to heirs at death benefit from stepped-up cost basis, this is a key planning consideration to minimize potential capital gains taxes.

Here are some considerations for investors seeking to preserve step-up in cost basis on assets passed through their estate plan.

Avoid large gifts of appreciated assets to younger family members. If the federal estate tax is not a risk, families may benefit from transferring appreciated assets to heirs at death to secure a step-up in cost basis. When lifetime gifts are made, the cost basis of assets for tax income purposes is transferred to the person receiving the gift (known as “carryover basis”).

Gift low-basis assets to older family members. Conversely, there may be a benefit to gifting appreciated assets to older family members. The premise behind the gift is that the older family member would, in turn, leave the asset to the person who made the gift. The cost basis of the appreciated asset would be stepped-up at death sheltering the appreciation from capital gains taxes.*

When making a gift to an older relative, there are factors to consider such as long-term care planning. Gifted assets would generally be subject to the asset test for Medicaid purposes. Also, these assets would be subject to claims from creditors, and they would have no legal obligation to direct the asset back to the person who made the gift in their estate plan. (Note: Under IRC Section 1014(e), the stepped-up basis rules do not apply to property acquired by the decedent through gifting within one year of death.)

Incorporate swap powers (under IRC Sec. 675(4)(c)) within irrevocable trusts. Swap powers allow substituting property of equal value into the trust. Appreciated property held in an irrevocable (non-grantor) trust does not generally benefit from a step-up in cost basis at the death of the grantor. With a swap power, the trustee can swap out low basis assets held inside the trust with higher basis assets owned by the grantor. After the swap, the low basis assets held outside of the irrevocable trust could benefit from a stepped-up cost basis upon the grantor’s death.

Spend down retirement assets. Retirement assets do not benefit from a step-up in cost basis at death and are generally taxable to heirs who have to distribute funds under required minimum distribution rules. Some retirees may choose to spend down their IRAs and preserve taxable, appreciated assets for transfer to heirs. At the same time, when withdrawing more funds out of a pretax retirement account, retirees need to weigh the impact on current income taxes.

Lastly, some assets may benefit more than others from a step-up in cost basis at death. For example, depreciated real estate, or master limited partnership (MLP) interests where the taxpayer has benefited from a deduction for depletion may be good candidates for estate inclusion to achieve step-up.

Consider discount planning. Some high-net-worth families may have pursued aggressive valuation discounts in the past to maximize wealth transfer when the lifetime gift/estate tax exclusion was much lower. These valuation discounts set a lower cost basis on these assets, which may have an adverse effect on income taxes. Valuation discounts may not be appropriate for those who determine that a federal estate tax risk will not apply.

Planning should be flexible

With this type of complex planning, it is critical for taxpayers to consult with a qualified tax and legal professional. It is also important to note that tax law is always changing, and there could be a risk in the future of the step-up in cost basis at death being modified or limited, at least for some taxpayers.

*Under IRC Section 1014(e) the stepped-up basis rules do not apply to appreciated property acquired by the decedent through gift within one year of death.


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While progress has been made on marriage equality, same-sex couples may continue to face obstacles to saving and other financial planning issues.

The legalization of same-sex marriage by the Supreme Court on June 26, 201, meant that no state could prevent same-sex couples from getting married and that all states had to recognize the marriages. The ruling also meant that all married couples — same-sex and heterosexual— have access to the same federal benefits, as well as programs administered by Social Security, Medicare, and Immigration Services.

Still, state laws continue to shift around family issues and the LGBTQ community. Same-sex married couples may face challenges when dealing with adoption, employment benefits, and other legal issues.

Same-sex couples who are not married and LGBTQ individuals may also face complicated issues around financial planning and saving for retirement.

A 2018 Prudential study, “The Cut: Exploring financial wellness within diverse populations,” cited income disparity as a barrier to saving. While respondents reported lower levels of income, the study also noted that working arrangements may have an impact as slightly fewer LGBTQ respondents noted that they work part-time.

The Prudential study found:

  • Half of the LGBTQ respondents reported that their household income was below $50,000 compared with a median income of $70,000 for non-LGBTQ respondents.
  • About 41% of LGBTQ individuals surveyed said they were struggling financially.
  • Most respondents were less likely to have started saving for retirement than those surveyed in 2012. In fact, more than half (55%) of LGBTQ men and women had no retirement savings.
  • Just 27% of LGBTQ individuals cited access to a 401(k) compared with 41% of non-LGBTQ respondents.
  • The LGBTQ respondents were also less likely to have a will or estate plan. Overall, they owned fewer investment products such as mutual funds or life insurance compared with non-LGBTQ respondents.

Financial and estate planning

While the marriage equality victory provided many legal protections and benefits for married couples, the federal law still may not cover all areas of financial planning for families. Couples may consider conducting a review of financial and estate plans with a financial advisor. It is also important to review the current status of federal, state and local laws governing property ownership, parental and adoption rights, inheritance, and medical decision-making. There may be differences that could require additional legal documents.

For unmarried couples, financial planning can be more complex without access to the same legal rights and privileges as married spouses. But with proper planning and legal documentation, they can achieve many of the same rights and meet their planning goals.

Some considerations for couples and individuals include:

Designate beneficiaries for retirement plans and investment accounts. A beneficiary designation can help heirs avoid the probate process, which generally does not consider non-married partners as heirs.

Consider life insurance and long-term care insurance. Insurance can help when planning for the future, especially if one partner is financially dependent.

Update legal documents. Unmarried couples do not have the automatic legal protections of married couples. Legal documents and asset ownership decisions are essential. These documents include health-care proxies, medical directives, durable power of attorney, wills, and trusts.

Seeking advice

The Prudential survey found that LGBTQ women and men were more likely to say they would like to get financial advice from others who were more knowledgeable. While LGBTQ women were more likely to welcome financial advice, 40% said they did not currently have a financial advisor.


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Putnam Wealth Management by Bill Cass, Cfp®, Cpwa® - 1M ago

With sweeping retirement legislation garnering massive support in Congress, concerns about the future of the stretch IRA have resurfaced.

A stretch IRA strategy allows non-spouse beneficiaries to “stretch” out required minimum distributions (RMD) based on their remaining life expectancy after inheriting the IRA. The strategy extends the life of the IRA by continued, tax-deferred growth even after the death of the owner. The younger the beneficiary inheriting the IRA, the lower the required minimum distribution, which means more assets remain in the account sheltered from taxes.

For several years, lawmakers have attempted to pass legislation that would end this strategy, putting the beneficiary at risk for a higher tax bill.

With the recent passage of the SECURE Act by the House, policy makers are getting closer to that goal.

How a stretch IRA works

After an IRA owner dies, federal tax law requires non-spouse beneficiaries to withdraw a specific minimum amount each year. The beneficiary can maximize the life of the IRA and defer taxes on those assets for as long as possible. To do this, beneficiaries will want to withdraw as little as possible, preferably the required minimum each year.

Consider this example:

  • John owns an IRA worth $250,000 and is 80 years old. His RMD is $13,368 this year (based on the IRS uniform life expectancy table) [$250,000 divided by LE factor of 18.7 based on table = $13,368 RMD]
  • John dies and his granddaughter Karen (age 22) is the sole beneficiary
  • RMDs going forward for Karen will be lower since her life expectancy is higher
  • Based on her age at 22, with an inherited IRA worth $250,000, the RMD would be only $4,091 (based on IRS single life expectancy table) [$250,000 divided by LE factor of 61.1 based on the single life table = $4,091

For more detail, read Putnam’s investor education article, “Stretch an IRA over generations.”

Lawmakers eye changes to stretch IRA

The stretch IRA has been under the scrutiny of lawmakers for several years. For example, legislation proposed in 2014 would have significantly scaled back the ability for non-spouse beneficiaries to stretch their RMDs. In most cases, these IRAs would have to be liquidated in a five-year period following the owner’s death.

Current legislative proposals on Capitol Hill provide for a phaseout or limited use of the stretch IRA strategy.

Consequently, without the ability to stretch distributions over many years, the beneficiary will see a larger tax bill in some cases.

Planning considerations if the stretch option goes away

  • Non-spouse beneficiaries inheriting IRAs may need to carefully plan for the tax bill on distributions out of the IRA. If the beneficiary is required to liquidate the IRA in a shorter time frame, it may move them into a much higher tax bracket. Non-spouse beneficiaries will want to time the liquidation of the IRA in a year, or years, where their overall income may be lower. Or they may want to make larger charitable deductions in a year when the IRA funds must be withdrawn in order to offset the increased income.
  • The lack of the stretch option makes an IRA a less attractive asset to pass on to the next generation. IRA owners may want to consider spending more IRA assets while living or giving to charities tax free through the qualified charitable distribution (QCD) option.
  • Rather than rely on IRAs for intergenerational wealth transfer, investors may want to consider other tax-advantaged options. If structured properly, whole life insurance can provide an income and estate-tax free legacy to the next generation.
  • For clients with philanthropic objectives, naming a charitable remainder trust (CRT) as an IRA beneficiary may be a means of providing a lifetime income stream to heirs in a tax-advantaged manner.
  • The demise of the stretch option may make Roth IRAs more attractive. Although they also would be subject to the new payout rules as well, beneficiaries would not have to plan for potential “bracket creep” that would apply to taxable IRA distributions.
  • IRA owners may want to reconsider beneficiary designations on IRAs. For example, it may make more sense from a tax perspective to designate beneficiaries who are in lower marginal income tax brackets. Other assets, like appreciated stock held outside of retirement accounts, may be more appropriate to leave to beneficiaries in higher tax brackets considering that these assets will generally benefit from a step-up in cost basis at death.

Revisit estate plan

The potential loss of the stretch IRA option has many implications for investors, particularly in the areas of tax efficiency and estate planning. Investors may want to consult with a financial advisor to review current tax and estate plans and determine whether updates are needed to meet their goals.


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With college costs outpacing inflation and student debt reaching a record $1.5 trillion, it is easy to understand why price plays a role when choosing a college. In the past 10 years, the cost of in-state tuition at a public, four-year institution increased at an average rate of 3.1% per year beyond inflation (The College Board).

Still, there are ways to save money.

Some families that once felt that they had no control over college costs are finding that shopping for a college can be similar to other buying experiences. An increasing number of institutions are offering tuition “deals” for out-of-state students.

Many public colleges have different costs for in-state and out-of-state students. In 2018, the average cost of tuition and fees and room and board for an in-state student at a public, four-year college was $21,370, compared with $37,430 for an out-of-state student (The College Board).

Regional agreements help students save money

Regional “compact” agreements involving multiple states help students save money when attending an out-of-state school.

Fifteen states comprise the Southern Regional Education Board’s Academic Common Market. Eligible students save money on tuition if they are pursuing a degree program that is not offered in their home state. They can enroll at an out-of-state college at in-state rates.

New England residents may receive a tuition break at 82 public colleges in six states that are part of the New England Regional Student Program. More than 800 undergraduate and graduate programs are available. According to the New England Board of Higher Education, participants in the 2017-2018 academic year received an average tuition break of $8,200.

At the Midwest Student Exchange, public universities in nine states agree to cap their costs at 150% for certain programs. Participating private institutions offer a 10% reduction on tuition.The Western Undergraduate Exchange program enables students to pay no more than 150% of in-state tuition costs at participating public colleges in 15 states.

Some institutions offer reciprocity

Some colleges allow out-of-state students to attend their institution at the same price as that of a leading public college in the student’s home state. The University of Maine at Orono, for example, recently began offering students from California, Connecticut, Illinois, Massachusetts, New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Vermont this reciprocity in price. To be eligible, students must earn a 3.0 grade point average and score a combined 1120 on the SAT exams.

In the 2016-2017 year, students who met the academic standards received an average of $13,200 off Maine’s out-of-state tuition and fees. Students with lower GPAs and SAT scores were eligible for a $9,000 discount.

Understanding veterans’ benefits

Through the federal GI Bill, veterans may pursue a college-based education or other options such as vocational schools, entrepreneurial training, or tutoring. In addition, some states offer free tuition for veterans. More than a dozen states offer waivers for tuition and other college expenses.

What about travel abroad?

The desire to travel outside of the United States may not be as costly as it sounds. Depending on the college and the length of the trip, a travel-abroad program may mean that the parent will not have to pay full tuition for the semester, which could represent significant savings. In some cases, a semester on campus is more expensive than a semester abroad.

Meet with a financial planner

Managing costs should be part of the discussion when creating a plan to pay for college and determining how to save, including how to optimize savings in a 529 college savings plan. In addition to seeking advice from a financial expert, parents may want to meet with a college admissions consultant as well as search college website financial aid pages and contact financial aid officers at the schools they are targeting.


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In addition to improving the environment, land designated with a conservation easement can offer tax advantages to a property owner.

A conservation easement is a legally binding permanent restriction on the use of property granted in perpetuity. There are four types of easements: preserving land for recreation, protecting natural habitat, preserving open space , and preserving a historically important area or structure.

Easement requirements

A qualified appraiser must assign a value of the easement, which will determine the amount of the tax deduction. Because it is difficult to find a market comparison, the value is typically determined by calculating the difference between the fair market value (FMV) before the easement places restrictions on use of the property and the value after the easement. This is referred to as a “before and after” valuation process.

  • The appraiser first determines a value based on the highest and best use of the property, which includes current use and the likelihood of development.
  • The “after” valuation considers specific restrictions imposed by the easement.
  • The difference between the two is the value of the easement. In essence, how much has the value of the property decreased as a result of the easement?

A deed of conservation easement must be executed and filed with the local registry of deeds.

  • The deed details the conservation purpose, restrictions, and permissible use. The donor gives up certain rights specified in the deed but retains ownership of the underlying property.
  • Restrictions are binding in perpetuity — not only to the land owner who grants the easement, but also to future owners.

Determining the tax deduction

A contribution of the easement is not technically a “transfer,” and no charitable deduction is allowed unless a conservation easement is executed and signed by the donor and a qualifying organization accepts the easement. A qualifying organization is usually a government entity or charitable organization.

Legislation was enacted in 2015 that expanded the amount of the deduction. Today, a property owner can deduct fair market value of the conservation easement up to 50% of AGI in a tax year (increased from 30%). Ranchers and farmers are allowed to deduct 100%. Any excess amount can be carried over to future tax years (up to 15 years, compared with five years for typical charitable deductions).

The taxpayer must substantiate the easement. Required documents include written acknowledgment from the receiving entity, IRS form 8283 Noncash Charitable Contributions, stamped conservation easement deed, qualified appraisal, and baseline study (includes information on the conservation values of the property completed by a trained specialist such as a biologist, botanist, etc.).

Example of how a conservation easement provides a tax benefit

Consider John who owns a tract of undeveloped forest land and pursues a conservation easement.

  • John contacts a local land trust charitable organization about placing the land in a conservation easement to be utilized for public walking trails
  • The current use valuation, incorporating potential for development, is $1 million
  • The qualified appraisal, based on valuation “after” restrictions are imposed by the conservation easement, is $400,000
  • The difference in value — $600,000 — represents the value of the conservation easement, which can be claimed as a charitable deduction against federal income tax
  • John’s AGI is typically $200,000 annually, which means that he can claim an annual charitable deduction of 50% of AGI, or $100,000 leaving an excess deduction of $500,000, which must be carried forward to future tax years
  • If his income is consistent, the charitable deduction for the conservation easement will be exhausted over six tax years (assuming no other charitable contributions)

Additional considerations

Extinguishment. Conservation easements may be discontinued if an unexpected change in conditions makes it impossible or impractical for the continued use of the property for conservation. This action requires a judicial proceeding. The charitable recipient’s proceeds from sale/exchange of property must be used in a manner consistent with conservation purposes.

Enhancement rule. The property owner must consider enhancement to the value of other property owned by donor (or related person) resulting from easement. The amount of easement deduction is reduced by the increase in value of the other property.

Contiguous parcel rule. Special appraisal rules apply if a portion of the easement is contiguous to other property owned by the donor. For example, if Bob owns 1,000 acres of farmland and decides to put 500 acres of that in a conservation easement.

Potential tax or audit issues with conservation easements

  • An easement granted in exchange for something else is not allowed
  • Inadequate documentation or faulty process
  • Lack of perpetuity in deed terms
  • Reserved property rights inconsistent with conservation
  • Improper appraisal method or overvaluation of the conservation easement
  • Conservation easement syndicates created specifically as abusive tax shelters

Seek professional advice

Use of a conservation easement can impact an individual’s overall tax planning. In addition to seeking advice from a financial advisor, a property owner may also want to consult with a legal expert who specializes in real estate law.


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Before 529 college savings plans became a popular way to fund a college education, many families utilized traditional custodial accounts (UTMA or UGMA). As 529 plans evolved, the definition of qualified expenses expanded, making these accounts more competitive with other savings vehicles.

Tax treatment and custodial accounts

A primary benefit of custodial accounts is that (up to certain limits) any income generated is not taxed or only taxed at the child’s tax rate instead of a higher tax rate. In the past, once the child’s unearned income exceeded a certain amount, the additional income would be taxed at the parent’s (higher) tax rate. Under the Tax Cuts and Jobs Act (TCJA), this excess amount is no longer taxed at the parent’s tax rate. Instead, the additional unearned income is taxed at trust tax rates.

For 2019, here is how the kiddie tax is calculated:

  • First $1,100 of unearned income — no tax
  • Next $1,100 of unearned income — taxed at child’s tax rate
  • Unearned income over $2,200 — taxed at trust tax rates

For more detail on 2019 tax rates including tax brackets for trusts see the Wealth Management Center’s blog, “Key tax figures for 2019.”

The kiddie tax applies to children under the age of 18. Once the child reaches 18, the tax continues to apply unless the child’s earned income represents more than one half of support needs. It also applies at ages 19 to 23 if the individual is a full-time student and relies on parents for at least one half of support needs. The tax would not apply if the child is not considered a dependent of the parents.

The kiddie tax was expanded a few years ago from 17 and under to 18 and under, and from ages 19 to 23 for students. Prior to these changes, the kiddie tax had less impact.

Considering the broader tax benefits, 529 programs may be a more tax-efficient way to save for college.

Advantages of funding a 529 account

Some parents may decide to liquidate their UTMA or UGMA accounts and use the assets to fund a 529 college savings plan.

There are several reasons to consider this strategy:

1. Tax benefits:
529 plans offer tax-free growth and tax-free withdrawals if funds are used for qualified education expenses. Qualified expenses include, but are not limited to, tuition and room and board at any accredited college. Up to $10,000 annually (per student) may be used for K–12 tuition. (There may be adverse tax consequences imposed by certain states.)

2. Financial aid: According to current federal guidelines, 20% of assets in a custodial account are considered when determining a child’s eligibility for aid under the Free Application for Federal Student Aid (FAFSA), compared with generally only 5.6% of 529 assets. Custodial assets are treated as assets of the student, while 529 assets are considered assets of the account holder, which is usually the parent. Also, grandparent-owned 529s are not currently included as part of the asset test calculation for determining financial aid, but may be included in the income test portion of the FAFSA calculation. For more details on how college savings accounts may impact financial aid, read “Understanding the paths to securing college financial aid.”

3. Investment options: UTMA and UGMA accounts do not generally include an age-based investment option, which has become a hallmark of the 529 plan. An age-based investment option adjusts its allocation automatically over time, placing a greater emphasis on preserving assets as a child gets closer to starting college.

4. Tax advantaged gifting: A special provision of 529 plans allows contributions equal to five years’ worth of gifts to a single beneficiary in a single year without triggering the federal gift tax. For 2019, the gifting limit is $15,000 annually for individuals and $30,000 for married couples. The five-year feature means that an individual could gift $75,000 into a 529 in a year, effectively front-loading five years’ worth of gifts.

Considerations before converting UGMA/UTMA assets to a 529

  • Since a gift into an UGMA/UTMA is irrevocable, the custodian must utilize those funds solely for the benefit of that child. In fact, once the beneficiary reaches the age of majority they automatically become the owner of the account. In contrast, parents who contribute funds directly to a 529 have the flexibility to change the beneficiary of the 529 account. Because of these rules, former UGMA/UTMA assets transferred to a 529 must be kept separately from other 529 assets, since the beneficiary on that portion cannot be changed.
  • While 529 plans offer key tax benefits, funds must be used for qualified education expenses. Parents may want to retain some funds in an UGMA/UTMA to cover other expenses such as transportation, which is not currently considered a qualified expense for 529 plans.
  • Converting funds from an UGMA/UTMA to a 529 requires liquidating those assets to fund the 529 with cash. Parents will want to review the potential tax consequences of liquidating UGMA/UTMA assets.

Traditionally, parents had limited vehicles to save for college. But since their introduction more than 20 years ago, 529 plans have evolved into a competitive offering. In 2018, 529 plan assets totaled $328.9 billion in 13.6 million accounts (College Savings Plans Network).

Families may want to seek guidance from a professional financial advisor to set education savings goals and identify investment choices. College costs have risen dramatically in the last decade, making it important for families to make the most of college savings.


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Business owners planning for succession face a complex array of challenges and issues. One key challenge for many is how to efficiently transfer business interests from one generation to the next. One planning strategy — an Intentionally Defective Grantor Trust (IDGT) — may help owners transfer wealth to other family members during their lifetime in a tax-efficient manner.

Why is the trust defective?

The trust is called “defective” because it is drafted in a way that the grantor is considered an owner of the trust for income tax purposes, but not for estate taxes.

In order to accomplish this designation, the trust would need one or more provisions that violate the grantor trust rules under IRC § 671–679. For example, if the grantor retains certain administrative powers over the trust, keeps some rights to borrow from the trust, or maintains a reversionary interest (the ability to regain ownership of property). By including any of these provisions, the trust would be considered a grantor trust for income tax purposes.

As a result, the Internal Revenue Service would not consider the trust a separate (income) taxable entity. Instead, the grantor is responsible for any income taxes generated by the assets held in the trust. For estate taxes, assets transferred to a grantor trust are considered removed from the estate of the grantor and held in the trust.

Using a defective trust in succession planning

Typically, a business owner would utilize an installment sale strategy to transfer their business interests to the trust.

Since the trust is not considered a taxable entity by the IRS, the transfer of ownership interest is not considered a taxable event. For example, there would be no capital gains tax due on the transfer of the business interest to the IDGT.

Business interest is transferred in exchange for a long-term promissory note. The business owner/grantor receives a promissory note for fair market value of the property sold. This acts as an “estate freeze” since future appreciation on the property sold to the trust is removed from the grantor’s estate.

The interest rate on the promissory note is based on prevailing IRS interest rates.

This strategy allows for an income tax-free installment sale of property (with appreciation potential) to be made to a trust whose beneficiaries are the heirs of the business owner.

In a typical IDGT structure, a nominal gift of 10% of the property transferred is made to the trust when executed. This is referred to as a “seed gift,” and is based on the concept that in a typical property sale, a down payment would be made.

Sale of a family’s business interest to an IDGT

  • Bob, the business owner, sells his limited partnership interest to an IDGT for $5 million
  • The IDGT is funded with seed capital of $500,000
  • There is no capital gain generated on the sale to an IDGT since it is a grantor trust
  • The sale includes a 15-year note at 3.15% (AFR rate, January 2019*)
  • The IDGT pays Bob approximately $400,000 annually for the term of the note
  • Assuming the trust assets grow at 8%, at the end of 15 years, more than $5 million would be transferred without any estate or gift taxes to the trust’s beneficiaries

Seek expert guidance

The IDGT strategy may be useful when succession planning involves a family business and beneficiaries who are family members. The trust must be carefully written to meet the IDGT guidelines. Investors need expert financial and legal advice before employing this strategy.

* IRS Rev. Rul. 2019–03.


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According to the latest Trustees report, the Social Security trust funds are projected to be depleted in 2035. This is one year later than last year’s projection. Still, Social Security’s total cost is projected to exceed its total income in 2020 for the first time since 1982. That situation prompted significant reform of the Social Security system by Congress in 1983.


If no modifications to the program are made and current trends continue, reserves will be depleted in 2035. Benefits would still be paid but would likely be reduced to roughly 75% of the former benefit amount. In essence, recipients would receive a cut of roughly 25% in retirement income.

Costs of the program as a percentage of GDP will increase substantially through 2035 because the number of beneficiaries rise rapidly as baby boomers retire. Also, persistent lower birth rates have resulted in slower growth of employment and GDP.

What did government do in 1983?

The last time Social Security saw any major reform was more than three decades ago. To strengthen the program, Congress took several steps including raised the retirement age over time from age 65 to 67, increasing payroll taxes, and taxing a portion of Social Security benefits (based on income). Congress also instituted the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), which limit benefits for retirees who were covered under another pension system and did not pay into Social Security. For more details on the WEP and and GPO, read this SSA article.

Potential modifications to Social Security

Several changes to Social Security that have been proposed or discussed by policy makers in recent years.

Some examples include:

  • Alter the consumer price index (CPI) formula for cost-of-living adjustments (COLA) and change the calculation to “chained CPI,” which would result in a lower COLA adjustment, as compared with the current CPI formula.
  • Increase the wage base for payroll tax contributions. Currently the base is $132,900, which covers 83% of total wages in the United States. The last time Social Security was reformed, this amount represented 90% of wages. If this calculation were updated to 90% of today’s wages, the base would increase to about $245,000 (Congressional Budget Office, December 2016).
  • Gradually raise the retirement age. The age has already increased to 67 for those born in the 1960s and beyond.
  • Increase the payroll tax rate (currently 6.2% up to $130,900).
  • Institute means testing. This action would reduce benefits for those reporting at higher income levels.

Considerations for investors

Many retirees will depend on Social Security for at least a portion of their retirement income. According to the Social Security Administration, 21% of married couples and 44% of single individuals will rely on Social Security benefits for 90% or more of their retirement income.

In a 2015 poll, 36% of those approaching retirement indicated they expect Social Security to be a source of retirement income.

There are planning strategies that workers may consider to prepare for potential cuts to Social Security. Younger workers, in particular, may be affected by cuts due to solvency issues or policy changes. Investors could consider increasing current retirement savings rates to deal with a potential shortfall. Another strategy is to diversify retirement savings to hedge against the risk of rising tax rates. Consider allocating retirement assets into a Roth IRA as well as some pretax accounts. Lastly, since Social Security is often the only source of guaranteed income for today’s retirees, these investors may want to consider utilizing a portion of their retirement savings to purchase a guaranteed income product.


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