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Florida Estate Planning and The CARES ACT

As most Americans are painfully aware, the novel coronavirus arrived on the scene in late 2019, and before long was causing major disruptions to life in the United States.  Millions of Americans were put out of work, businesses throughout the country had to close up shop, and even family life was affected.  Previously innocuous visits with relatives now presented the potentially perilous prospect of spreading the virus to vulnerable loved ones. In response to the devastating consequences of COVID-19 and the struggle to slow its spread, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act on March 27, 2020. Now, for Floridians, Florida estate planning and the CARES Act have become front and center in terms of planning.

With over 1,000 pages of text authorizing over $2 trillion in spending, the CARES Act is comprehensive legislation broadly designed to temper the coronavirus’s enormous costs. COVID-19’s emergence revealed potentially dangerous shortages of essential medical and personal protective equipment among American healthcare providers, and, in response, the CARES Act allocated $150 billion toward remedying the shortages.  However, the law’s economic relief to individuals and businesses garnered more of the headlines. The CARES Act includes targeted relief for individual taxpayers, businesses, and entire sectors of the economy.  The effects on financial planning generally—and retirement and estate planning particularly—will likely prove considerable.

CARES Act Aid for Individual Taxpayers

To individual taxpayers, the CARES Act provides $1,200 “recovery rebate” payments—a large portion of which have already been received.  Married co-filers get $2,400, and an additional $500 was allocated for each dependent child under age 17.  The stimulus payments gradually phase out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for co-filers) so that individuals with AGI over $99,000 (or co-filers over $198,000) do not receive any payments.  Because the “recovery rebate” is conceptualized as a pre-paid credit on 2020 tax returns, taxpayers whose incomes significantly differ between 2019 and 2020 may need to make adjustments on their 2020 returns.

Acknowledging the record-high unemployment resulting from coronavirus, CARES Act also includes a $600 per week temporary increase to unemployment compensation.  Additionally, where unemployment is ordinarily not available for self-employed workers and independent contractors, the supplemental unemployment relief under the CARES Act is extended to those often-unprotected groups.

Although the individual stimulus and unemployment payments are relatively small in the grand scheme of things, the funds should help many people who sustained a temporary loss or reduction in income avoid draining too much of their savings.  For retirement planning especially, keeping wealth invested and earning returns is vital to achieving long-term goals.

Florida Estate Planning and the CARES Act

In anticipation of a decrease in charitable giving resulting from the economic slowdown, CARES also expands available deductions for donations.  This is an important aspect of Florida estate planning and the CARES Act.  Taxpayers who use the standard deduction are allowed a temporary “above the line” deduction of up to $300 for cash gifts.  And the ordinary 60% AGI limit for itemized returns is increased to 100% for 2020.  In either case, the deductions can only be applied toward cash gifts to public charities—not private foundations or donor-advised funds.

CARES Act Effects on Retirement Accounts

The CARES Act provisions with the most extensive long-term impact on retirement and estate planning may end up being the temporary waivers of both RMDs and early-withdrawal penalties for tax-deferred retirement accounts.

Under ordinary conditions, 401k and IRA withdrawals, as modified by recent changes under the SECURE Act, taken before an accountholder reaches age 59 ½ are subject to a 10% tax penalty (in addition to regular income taxes owed for the withdrawal).  Under the CARES Act, though, qualifying individual taxpayers have until December 31, 2020, to withdraw up to $100,000 without the penalty.

Penalty-free withdrawals are limited to individuals affected by COVID-19.  However, eligibility is defined broadly to include anyone diagnosed with COVID, or who has suffered coronavirus-related economic harm due to quarantine, layoff, furlough, work reduction, or loss of childcare.  Under these expansive criteria, a substantial portion of retirement accountholders could presumably qualify for the penalty-free withdrawals.

All things being equal, it’s generally preferable to keep wealth safely growing tax-deferred in a retirement account.  But, for individuals and families feeling the economic pinch of coronavirus, the penalty waiver will make it much cheaper to tap retirement wealth to stay afloat until the economic crisis subsides.  For those who need to access an IRA or 401k, the penalty waiver should allow for a smaller overall withdrawal—mitigating some of the long-term impact on a retirement plan.

Withdrawals from pre-tax accounts are still subject to ordinary income taxes—the same as withdrawals made by retired persons.  However, the tax liability can be allocated over the next three tax years or can be avoided altogether if withdrawn funds are “repaid” to the retirement account within the next three years.  Repayment of funds withdrawn under the CARES Act does not count toward annual contribution limits—so a taxpayer can pay back a prior withdrawal and still continue making contributions up to the applicable limit in future years.

The CARES Act also offers retirement-account help to taxpayers who have already reached age 72 by temporarily waiving “required minimum distributions” (RMD).  Normally, retirement-age accountholders must withdraw a minimum percentage of their IRA or 401k’s value each year.   By waiving the RMD requirement for 2020 (and for 2019 RMDs required by April 1, 2020), the CARES Act lets retirees keep some of their wealth in an appreciating, tax-deferred retirement account for an extra year and, hypothetically, avoid the need to liquidate holdings in a down market.  Both outcomes are advantageous for estate plans designed to maximize retirement-account wealth ultimately inherited by beneficiaries.

CARES Act Assistance for Businesses

The CARES Act authorized about $900 billion in aggregate relief for businesses.  Around $350 billion of the funds was earmarked for small business loans, about $50 billion for the struggling airline industry, and most of the remainder was allocated primarily for the benefit of larger business entities.

For small businesses (fewer than 500 employees) affected by the novel coronavirus, CARES facilitates forgivable “Paycheck Protection Program” (PPP) loans designed to lessen the need for employee layoffs.  If PPP loan funds are used for eligible operating costs like payroll, rent, and mortgage interest, the loan principal can qualify for forgiveness—provided at least 75% of loan funds is applied to employee wages and related expenses.

Administration of CARES Act small-business loans was delegated to national banks, and there has been some dispute over whether the money actually ended up in the hands of the small businesses for which the relief was envisioned—and some controversy over the lack of geographic diversity among the loan recipients.  But even for small businesses that couldn’t secure PPP loans or other Small Business Administration relief, the CARES Act offers potentially valuable tax assistance.

Under CARES, employers and self-employed workers have the option of deferring half of FICA taxes (the “employer portion”) for up to two years.  Under the new law, half of the deferred tax money is due by the end of 2021, and the rest must be paid within a year thereafter.  For self-employed individuals, the deferral only applies to half of the self-employment tax.

Businesses can also defer payment of estimated corporate income taxes that came due after CARES was signed into law through October 15 of this year.  And a payroll tax credit is available for businesses that were shut down or saw a revenue declines of at least 50% below 2019 totals.

COVID-19 has already led to substantial legislation and is likely to lead to more in the months to come.  An experienced estate planning attorney in Florida or wherever you reside can provide you with guidance as to the short-term and long-term impact the CARES Act and other coronavirus legislation is likely to have on your retirement, Florida estate planning, and/or Florida business-succession plan.

Steve Gibbs, Esq.