The sweeping impacts of the COVID-19 pandemic have upended all of our lives in different ways. Given the seriousness of the situation and for many, a new work from home reality, there has never been a better time to re-examine you and your family’s financial plan. We have written about the need for financial planning given unexpected situations such as incapacitation before, but given this unique situation and the passage of the CARES Act, we feel it is necessary to return to a few key planning opportunities.
Review Estate and Incapacitation Documents
Use this opportunity for a complete review of important documents. Ensure your Powers of Attorney (POA) designations are updated. POAs are legal documents that allow you to name an “agent” (also sometimes referred to as an “Attorney-in-fact”) to act on your behalf for financial or health care decisions and are key components of any estate plan.
The pandemic has changed how we think about medical directives. COVID-19 has led to incapacitation and isolation, and changes how we think about resuscitation and information sharing. A careful review of estate planning, insurance, and other basic documents is warranted, including:
- Insurance policies (life, LTC, disability, etc.)
- Trusts, if necessary
- Medical Directives
- HIPPA privacy forms
- ICE contact(s) in your cell phone (In Case of Emergency) – simply type “ICE” before or after their name
Once you’ve reviewed your key documents, the next step is to consider any changes that should be made given our new circumstances. A significant planning opportunity is The CARES Act’s suspension of required minimum distributions (RMDs) in 2020. Congress suspended RMDs for the many retirees whose retirement accounts lost value during the market correction and who want to give assets time to recover. Retirees who have other sources of income or sufficient cash in taxable accounts may want to rethink their RMD strategy.
If you already began taking RMDs in 2020, take advantage of the 60-day indirect rollover rule that allows you to deposit funds back into your retirement account. This does not work if you withdrew from an inherited IRA, however. Consult with your tax advisor on your exact situation or if taxes were withheld.
Take Advantage of Low Interest Rates
Due to historically low interest rates, now could be a good opportunity to refinance your mortgage or student loans. Keep in mind that refinancing a mortgage always involves closing costs, which are sometimes rolled into the new loan. Make sure you won’t end up paying more over time. While many federal student loans were automatically suspended, for some private loans you may need to call and request a suspension.
More Planning Opportunities
A few of my colleagues recently wrote a piece on Planning Opportunities in a Volatile Environment, including harvesting capital losses, Roth IRA conversions, and Estate and Charitable Planning opportunities. With portfolios down due to the market swoon, a $100,000 account at the start of the year could now be worth far less, resulting in potential capital losses and/or fewer taxes due on Roth conversions. In addition, many individuals will have lower taxable incomes this year because of the RMD suspension or because of a disruption in business, potentially placing them in a lower tax bracket and resulting in more flexibility from a tax planning perspective. As with Roth conversions, lower portfolio values can enhance the opportunity to take advantage of the $11.58 million federal gift and lifetime estate tax exemptions ($23.16 million for a married couple) through gifts of assets that you anticipate will later rebound in value. Check with your tax and estate planning advisors to see what makes sense given your unique financial situation.
In terms of Charitable Contributions in 2020, the CARES Act allows a $300 above-the-line deduction, whether you itemize or not. This is typically only deductible if you itemize. Now even if you take a standard deduction, you can claim $300 for any charitable gifts. While this may only have a small bottom line impact on your taxes, it can have a big impact on charities and non-profits negatively impacted by the pandemic. For those who itemize, the CARES Act also removes the deduction limit of 60% of adjusted gross income and also allows for the recapture of prior years’ carry forward contributions.
Consult the Planning Opportunities in a Volatile Environment piece for more information regarding some of these additional planning opportunities and check with your tax advisor to see what makes sense given your unique financial situation.
Be Aware of Potential Roadblocks
Prior to this unprecedented moment, having documents notarized required in-person contact. Some states have passed laws allowing for virtual notarization. Check with your financial institution and monitor your state’s rules on how to get important documents notarized virtually.
In addition, keep in mind that courts are backed up, so it is more important than ever to avoid probate. A legal process that used to take 6 months now might take 9 months or longer. Ensure all your documents are in order and everything is titled properly to avoid the extra headache of excessive back-ups in the court system.
Don’t Forget About the SECURE Act
Although only recently passed in December 2019, the SECURE Act is already having a significant impact on many people’s tax situations. Use this as an opportunity to implement a few additional planning strategies if you haven’t already.
The SECURE Act eliminated the stretch IRA provision for non-spouse beneficiaries, meaning taxes on inherited IRAs have to be paid within a 10-year period. The prior law allowed for inherited IRAs to be stretched and paid out over a beneficiary’s life expectancy.
For the beneficiary inheriting an IRA, this can have a substantial impact. The 10-year payout period will force larger amounts to be paid out earlier, increasing taxable income and likely pushing beneficiaries into much higher tax brackets. This also applies if a conduit trust is named the beneficiary, as these trusts are also required to pay RMDs out over 10 years. Plus, this means those funds paid out in RMDs lose the creditor protection of the trust. Accumulation trusts may avoid some of these limitations but consult with an estate planning attorney to see what makes the most sense for the beneficiaries.
While today’s world can feel unsettling and the future uncertain, ensuring you have your finances in order can help. The seriousness of the COVID-19 pandemic has added increased urgency. If you are unsure where to start, have a discussion with one of our advisors to understand how both the CARES Act and SECURE Act may impact your specific situation and could lead to potential opportunities.