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A power of appointment can provide estate planning flexibility
A difficult aspect of planning your estate is taking into account your family members’ needs after your death. Indeed, after you’re gone, events may transpire that you hadn’t anticipated or couldn’t have reasonably foreseen.
While there’s no way to predict the future, you can supplement your estate plan with a trust provision that provides a designated beneficiary a power of appointment over some or all of the trust’s property. This trusted person will have the discretion to change distributions from the trust or even add or subtract beneficiaries.
Adding flexibility
Assuming the holder of your power of appointment fulfills the duties properly, he or she can make informed decisions when all the facts are known. This can create more flexibility within your estate plan.
Typically, the trust will designate a surviving spouse or an adult child as the holder of the power of appointment. After you die, the holder has authority to make changes consistent with the language contained in the power of appointment clause. This may include the ability to revise beneficiaries. For instance, if you give your spouse this power, he or she can later decide if your grandchildren are capable of managing property on their own or if the property should be transferred to a trust managed by a professional trustee.
Detailing types of powers
If you take this approach, there are two types of powers of appointment:
“General” power of appointment. This allows the holder of the power to appoint the property for the benefit of anyone, including him- or herself, his or her estate or the estate’s creditors. The property is usually included in a trust but may be given to the holder outright. Also, this power of appointment can be transferred to another person.
“Limited” or “special” power of appointment. Here, the person holding the power of appointment can give the property to a select group of people who’ve specifically been identified by the deceased. For example, it might provide that a surviving spouse can give property to surviving children, as he or she chooses, but not to anyone else. Thus, this power is more restrictive than a general power of appointment.
Whether you should use a general or limited power of appointment depends on your circumstances and expectations.
Understanding the tax impact
The resulting tax impact may also affect the decision to use a general or limited power of appointment. The rules are complicated, but property subject to a general power of appointment is typically included in the taxable estate of the designated holder of the power. However, property included in the deceased’s estate receives a step-up in basis to fair market value on the date of death. Therefore, your heirs can sell property that was covered by a general power of appointment with little or no income tax consequences.
In contrast, property covered by a limited power isn’t included in the holder’s estate. However, the new heirs inherit the property with a carryover basis and no step-up in basis. So, if the heirs sell appreciated property, they face a potentially high capital gains tax.
Your final decision requires an in-depth analysis of your tax and financial situation by your estate tax advisor. Contact your FMD advisor with any questions.
© 2024
Businesses should stay grounded when using cloud computing
For a couple decades or so now, companies have been urged to “get on the cloud” to avail themselves of copious data storage and a wide array of software. But some businesses are learning the hard way that the seemingly sweet deals offered by cloud services providers can turn sour as hoped-for cost savings fail to materialize and dollars left on the table evaporate into thin air.
Unclaimed discounts
One source of the trouble was revealed in a report entitled 2024 Effective Savings Rate Benchmarks and Insights, released earlier this year by cloud solution provider ProsperOps.
After analyzing $1.5 billion worth of Amazon Web Services (AWS) bills submitted to hundreds of organizations over a 12-month period, the report writers found that more than half of those organizations neglected to claim discounts baked into their cloud computing deals. As a result, the organizations paid full on-demand rates for “compute” services, such as data processing and computer memory, resulting in unnecessarily high costs.
The predicament reveals a key risk of cloud computing arrangements — particularly with major providers such as AWS, Microsoft Azure and Google Cloud: They’re complicated. Among the chief advantages of the cloud is that it’s scalable; companies can expand or diminish their computing services as their needs dictate. But with scalability, and other cloud functions, comes intense billing complexity that makes it difficult to control costs.
Best practices
So, what can your business do to ensure high cloud costs don’t rain on your parade? Here are a few best practices:
Know what you’re getting into. Just as you would for any other business contract, be sure you, your leadership team and your professional advisors thoroughly review and approve the terms of a cloud services agreement. Generally, the more predictable the pricing, the better.
Get familiar with your bill. Cloud computing invoices can be just as complex as the contracts, if not more so. Dedicate the time and resources to training yourself and other pertinent staff members to be able to read and understand your bill. If something seems inaccurate or difficult to understand, contact your provider for clarification.
Identify discounts … and claim them! If there’s one clear lesson from the aforementioned report, it’s that discounts matter and you should do everything in your power not to leave them on the table. Customers often have three types of savings “levers” to choose from: commitment-based discounts, volume-based discounts and enterprise discount programs.
Learn as much as you can about those offered by your provider. Then use carefully identified metrics to determine eligibility for discounts and claim them when you qualify. Many cloud computing platforms have built-in dashboards that enable you to visualize various metrics. Or you may be able to access a third-party dashboard via a web browser.
Review overall usage. At least once a year, take a broad look at precisely how you’re using the cloud. You may be able to scale down and save money. Also look for unused resources. If you’re paying for a service or certain type of software that you’re not using, ask your provider to discontinue it.
Find the savings
For many types of businesses, cloud computing has become a mission-critical resource. Whether this describes your company or you’re just using the cloud for efficiency and convenience, it likely represents a significant expense that you should manage carefully. Our firm can help you assess the costs — and identify the potential savings — of your current cloud computing arrangement or a prospective one.
© 2024
IRS issues final regulations on inherited IRAs
The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take effect in 2025, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.
SECURE Act ended stretch IRAs
The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”
Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.
The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:
Surviving spouses,
Children younger than “the age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.
All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) of his or her RMDs.
Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.
Proposed regs muddied the waters
In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.
The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.
As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.
Final regs settle the matter
The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.
If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.
To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.
Additional proposed regs
The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.
They also include rules addressing:
The purchase of an annuity with part of an employee’s defined contribution plan account,
Distributions from designated Roth accounts,
Corrective distributions,
Spousal elections after a participant’s death,
Divorce after the purchase of a qualifying longevity annuity contract, and
Outright distributions to a trust beneficiary.
The proposed regs would take effect in 2025.
Timing matters
It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.
© 2024