Tax Update: Retirement, Estate Tax Changes, and Adventurous Tax Planning

Graphic of family under umbrella
Where are Americans’ retirement assets? As of June 30, 2022, IRAs were the most popular vehicle, according to data from the Investment Company Institute, with $11.7 trillion. Defined contribution plans—such as 401(k), 403(b) and other plans—hold $9.3 trillion. The time-honored defined benefit plans hold a total of $10.5 trillion, but these are skewed to government plans ($7.3 trillion); private sector plans hold just $3.2 trillion because of the government’s excessive regulation of private defined benefit plans. The surprise is that annuity reserves account for only $2.2 trillion.[1] The grand total is $33.7 trillion worth of assets invested. The pension benefit obligations of defined benefit plans, particularly for government plans, may be more than the assets, meaning they are underfunded.

Change in Estate Tax “Portability”

Estate tax “portability” has recently been in the news. With credit shelter amounts set to be cut in half in 2026, the IRS last July clarified that portability can be elected by a surviving spouse in the five years after the death of the first to die. The old rule was two years. Assets pass tax free to the surviving spouse at the first death, but the second may have an estate size exceeding the 2026 cutoff, if the first’s exclusion amount remains unused. The method of using the first’s exclusion amount is simple: just file an estate tax return, even if no tax is due, to elect portability. In 2020, 3,441 estates filed returns.[2] Only 326 were for estates valued at less than $10 million. This does not seem to be anywhere close to the number that should be electing portability.

Adventurous Tax Planning

The release of former President Trump’s tax returns should receive a comment from us. We’re old school enough to believe that the privacy enumerated in the Internal Revenue Code’s “Taxpayer Bill of Rights,” and backed by criminal penalties, should deter individuals from releasing another’s tax information. We’re pretty sure those penalties would apply to us, if warranted. However, we view tax return information as confidential.

The popular press has highlighted two areas of concern: intrafamily loans and the conservation easement. Intrafamily loans must be structured to avoid being reclassified as a gift. We’ve previously discussed in this column some of those requirements. The conservation easement actually involves donating the property to a land trust at an independent third-party valuation/appraisal, which, from news reports, Mr. Trump appears to have done. Since the press has used the word “loophole,” we’d offer this definition proposed in a recent letter to the Wall Street Journal: a loophole refers to a flaw in the law that allows a work-around to circumvent the intent of the law.[3] The current law allows intrafamily loans and encourages conservation easements. We would, however, offer our standard prescription for tax planning that takes advantage of what is allowed: just don’t be greedy.

In closing, this article has discussed retirement planning, estate tax return preparation, intrafamily loans, and valuation of conservation easements or charitable gifts for tax purposes. We have prepared and will prepare all of these, as requested. If you or any other advisors have questions about these topics, please contact your investment manager or one of us.

— William H. Darling, CPA – Chairman & CEO
— Jeanne M. FitzGerald, CPA – Tax Manager

1 “Your Nest Egg,” WSJ, 10/28/22.     
2 Lynnley Browning, “How to Avoid the Estate Tax Hit That’s Coming in 2026,” Financial Planning, November/December 2022, p. 35.
3 “Not Everything Is a Loophole,” Letters, WSJ, 1/6/23.