Overview: Interest-Only Term Note

Posted on by August 17, 2020

The article “Low-Interest Estate Planning Strategies” described several estate planning strategies that should be considered now that interest rates have reached record lows. One of the strategies that is described in the article is an interest-only term note.

A new calculator has been added to Webcalculators to illustrate the benefits of that kind of loan, which can be used to a exclude significant portion of the value of the note from the lender’s gross estate. Here is a sample of the output from the calculator, and the overview of the calculator is below:

Reporting Excess Deductions on Termination of an Estate or Trust

Posted on by July 30, 2020

The Internal Revenue Service has published a new webpage “Reporting Excess Deductions on Termination of an Estate or Trust on Forms 1040, 1040-SR, and 1040-NR for Tax Year 2018 and Tax Year 2019.”

These are instructions telling beneficiaries of estates and trusts how to report excess deductions on their personal income tax returns. As of 7/30/2020, it read as follows:

“Under Proposed Regulations 113295-18 (PDF), an excess deduction on termination of an estate or trust allowed in arriving at adjusted gross income (Internal Revenue Code (IRC) section 67(e) expenses) is reported as an adjustment to income on Forms 1040, 1040-SR, and 1040-NR; non-miscellaneous itemized deductions are reported, as applicable, on Schedule A (Form 1040 or 1040-SR) or Schedule A (Form 1040-NR); and miscellaneous itemized deductions are not deductible. Taxpayers may rely on the proposed regulations for tax years of beneficiaries beginning after 2017 and before the final regulations are published.

“For tax year 2019, an excess deduction for IRC section 67(e) expenses is reported as a write-in on Schedule 1 (Form 1040 or 1040-SR), Part II, line 22, or Form 1040-NR, line 34. On the dotted line next to line 22 or line 34 (depending on which form is filed), enter the amount of the adjustment and identify it using the code “ED67(e)”. Include the amount of the adjustment in the total amount reported on line 22 or line 34.

“For tax year 2018, an excess deduction for IRC section 67(e) expenses is reported as a write-in on Schedule 1 (Form 1040), line 36, or Form 1040-NR, line 34. On the dotted line next to line 36 or line 34, (depending on which form is filed), enter the amount of the adjustment and identify it using the code “ED67(e)”. Include the amount of the adjustment in the total amount reported on line 36 or line 34.”

New Act on Digital Assets

Posted on by July 27, 2020

S.B. 320 was signed into law by Governor Wolf on July 23, 2020, becoming Act 72 of 2020.

S.B. 320 enacts the Revised Uniform Fiduciary Access to Digital Assets Act as Chapter 39 of the Probate, Estates and Fiduciaries Code, 20 Pa.C.S. Ch. 39, generally effective in 180 days.

The enactment of Chapter 39 will affect the preparation of wills, powers of attorney, and perhaps even trust documents, as explained in the article “Fiduciary Access to Digital Assets.”

Assignment of Municipal Pension in Divorce

Posted on by July 24, 2020

The anti-alienation provisions that protect municipal pensions from attachment only apply while those funds are in the possession of the pension fund administrator, and so a post-nuptial agreement in which a spouse agreed to waive her rights to her husband’s pension, and to transfer those benefits after receiving them from the administrator, was legally enforceable. Estate of Michael A. Benyo v. Breidenbach, ___ Pa. ___, ___ A.3d ___, No. 90 MAP 2019 (Pa. 7/21/2020).

New Act on Charitable Endowments

Posted on by July 24, 2020

H.R. 2484 was signed into law by Governor Wolf on July 23, 2020, becoming Act 71 of 2020.

The act amends Titles 15 and 20 to allow nonprofit corporations and charities to pay out more than 10% of their charitable funds as “income” in the years 2020, 2021, and 2022.  The usual limit is 7%, and this change was thought to be needed to address the financial effects of the COVID-19 pandemic.

The act also amends Title 15 to allow nonprofit corporations to enter into nonjudicial settlement agreements with donors in order to modify restrictions on charitable gifts.

New Record-Low Federal Rates

Posted on by July 18, 2020

On Thursday, the Internal Revenue Service announced federal rates for the month of August under §§ 1274 and 7520 of the Internal Revenue Code (“IRC”) that will be lower than some of the previously record-low rates for June.

  • The §7520 rate, which is used to value life estate, remainders, and annuities, will be only 0.4%. (The rate for June was 0.6%.)
  • The federal mid-term rate under §1274, which defines the market rates of interest for purposes of intra-family loans under §7872 (among other things), will be 0.41%, which is a new record low. The August short-term rate of 0.17% is not a record low, because that rate was 0.16% in October of 2011 (0.18% in June), and the long-term rate of 1.12% is not a record because it was 1.01% in June.

The §7520 rate of 0.4% is peculiar because that rate is defined as 120% of the federal mid-term rate, and yet the mid-term rate is 0.41%. The rate that is 120% of the mid-term rate can be less than 100% of the mid-term rate because the §7520 rate must be rounded to the nearest two-tenths of a percent. Multiplying 0.41% by 120% produces 0.492%, which rounds down to 0.4% (which is the nearest percentage evenly divisible by 0.2%).

For information on estate planning techniques to take advantage of these low rates, see “Low-Interest Estate Planning Strategies.”

Department of Revenue Resumes Processing of Inheritance Tax Returns

Posted on by July 5, 2020

The following message was sent to the Pennsylvania Bar Association on or about 6/29/2020 by Lora A. Kulick, Senior Counsel in the Office of Chief Counsel of the Department of Revenue:

“The department recently received inquiries regarding whether it was issuing Inheritance Tax notices of assessment. It temporarily had not been issuing assessments due to its offices and ROW offices COVID-19 closures. The department now has resumed issuing limited assessments and other notices. The department will continue to increase the number of and types of notices issued. The most up to date information regarding Revenue’s operations can be found on the department’s website at: https://www.revenue.pa.gov/Pages/COVID19.aspx.”