Retirement Plan Trust

Posted on February 27, 2019

Article written by Jonathan B. Osler, Esq.

If you are reading this article, chances are good that you have done an excellent job socking away funds in an Individual Retirement Account (IRA) or in multiple IRAs.  Indeed your IRA may be the single largest asset in your investment portfolio, or even your entire estate.  Because IRAs are such valuable assets, it is therefore vital to plan for how your IRA will be distributed when you pass away.  The realm of IRAs can be tricky, however, as retirement plans are governed by a set of complex regulations.  Poor planning can lead to major tax consequences down the line for beneficiaries, or simply fail to meet your objectives.  If you have a large IRA—typically $250,000 or greater—then you should consider leaving your retirement account to a Standalone Retirement Plan Trust (RPT), rather than transferring it to your beneficiaries outright, or through a Revocable Living Trust.  This article explores the numerous advantages of using an RPT for the disposition of your retirement account—read on to learn more! 

Before we discuss the RPT, there are a few key characteristics of IRAs that everyone should keep in mind when doing IRA planning.  For example, although the tax code requires beneficiaries of an inherited IRA to withdraw a percentage of the IRA each year—this is called a required minimum distribution (RMD)—it allows the remainder of the principal to continue growing tax-deferred.  The RMD is determined by the beneficiary’s age and life expectancy, and the younger the beneficiary, the smaller the RMD that is required to be withdrawn each year.  Although the beneficiary of an inherited IRA must take out the RMD, the tax-deferred growth in the account can far surpass the amount that must be withdrawn, so the account actually becomes larger over time.  This concept is commonly referred to as the IRA “stretch-out,” and it is far better for the beneficiary from a tax perspective in comparison to cashing out the IRA in a lump-sum distribution.  If the beneficiary takes the lump sum, he or she will owe ordinary income tax on the entire balance of the IRA—resulting in the beneficiary losing up to 37% of the IRA in taxes right off the bat!  In addition to the stretch-out, it is important to know that your IRA is protected from creditors (up to an amount determined under federal bankruptcy laws and adjusted for inflation annually; for 2018 this number was just under $1.3 million).  However, due to a recent Supreme Court ruling, inherited IRAs received in an outright distribution do not enjoy the same creditor protections.  Finally, for those with Revocable Living Trusts, if the IRA pays out to your trust and the trust has multiple beneficiaries, the RMDs for all beneficiaries will be tied to the eldest beneficiary’s age.

Now to better appreciate the benefits of the RPT, it is important to understand the disadvantages of naming a beneficiary outright as the recipient of your IRA.  With an outright distribution, you have no control over the treatment of your IRA.  A beneficiary could squander a significant portion of the IRA in taxes alone by choosing to cash out the IRA immediately or by withdrawing it over five years.  Due to lack of guidance or financial immaturity (among other reasons) the beneficiary may sacrifice the stretch- out without comprehending the consequences.  Also an outright distribution leaves the IRA vulnerable to the beneficiary’s creditors, which can include a spouse in divorce or a plaintiff in a lawsuit.  Further, a distribution to a minor must be paid to a guardian, and if no guardian exists, the court will step in and manage the IRA through a custodial account.  Upon reaching the age of majority the beneficiary takes full control of the IRA, opening the door for mismanagement of the account as a result of the beneficiary’s age and financial irresponsibility.  Additionally, if the beneficiary predeceases you and no contingent beneficiary is named, the IRA becomes subject to the court’s probate process—and a deleterious consequence of probate is that the IRA must be cashed out, with all the taxes due immediately.  If a beneficiary is incapacitated, there is the risk that an outright distribution of the IRA will result in court interference and loss of government benefits.  Finally, if the beneficiary is your spouse, he or she can take the “spousal rollover” and name new beneficiaries, perhaps against your original wishes. A blended family this could mean disinheritance of your children from a prior relationship.

Thankfully, all the potential negative consequences of an outright distribution can be avoided with the Standalone Retirement Plan Trust.  By creating an RPT, you can control the disposition of the IRA through the terms of the trust.  The RPT can be set up to prevent the beneficiary from cashing out the IRA or taking distributions that exceed the annual RMD, thereby ensuring that the beneficiary receives the maximum stretch-out.  Moreover, by naming a trust as the primary beneficiary of the IRA, your beneficiary receives the benefit of asset protection, which keeps the IRA out of the hands of creditors or a spouse in divorce.  The trust also guarantees continuity in the event of the beneficiary’s death, as the terms provide for successor beneficiaries as well as Trustees to manage the RPT—a significant benefit if the next beneficiary in line is a minor.  By virtue of the IRA being held in trust, the asset cannot accidentally become subject to probate or court interference.  The RPT also can be designed to provide for an incapacitated beneficiary or a beneficiary with special needs, and to prevent the beneficiary from losing or failing to qualify for government assistance. Importantly, the RPT can protect against accidental or intentional disinheritance in blended families; for example, the trust’s terms could dictate that your spouse receives RMDs for life, with the remainder of the IRA passing to your children from a prior relationship.  And, if you already have a trust-based plan, such as a Revocable Living Trust, RPTs can be used to circumvent the rule that ties RMDs to the age of the eldest beneficiary.  The IRA can be subdivided and designated to multiple RPTs, each with its own beneficiary, and the beneficiary of each separate trust then takes RMDs based on his or her own life expectancy.  With this method, the IRA can be split between your child and a grandchild, for example, without the grandchild taking RMDs based on the life expectancy of the parent.  Thus, RPTs are an excellent complement to an existing trust-based plan, as both your specific goals for the IRA and general wishes for the disposition of your estate can be achieved through the coordinated use of separate trusts.

When conducting IRA planning, the RPT can be a superb tool for meeting your objectives.  If you have a large IRA, and you wish to maximize the tax-deferred stretch-out and to provide asset protection for your beneficiaries, then the RPT is an ideal vehicle for achieving your goals.  To learn more about how the Standalone Retirement Plan Trust can form an essential part of your estate plan, contact us today to schedule a conversation with one of our Estate Planning attorneys.

Posted in Estate Planning

Tax Savings For Small Business Owners Under IRC Section 199A

Posted on January 31, 2019

Article written by M. Eldridge Blanton III, Esq.


The Tax Cuts and Jobs Act of 2017 (TCJA) took effect on January 1, 2018. Taxpayers filing in 2019 will use TCJA provisions to report their 2018 taxes.

Owners of small businesses will be able to claim significant deductions from their income if they are structured as pass-thru entities. These entities include sole proprietorships, partnerships, S-corporations and LLCs.

Under the TCJA the C-corporation tax rate was reduced from a top rate of 35% at the entity level to a flat rate of 21%. Combined with the top rate on dividend income of 20% at the shareholder level, the C-corp top rate was reduced from 48% to 36.8%. The C-corp tax cuts were made permanent.

By contrast, pass-thru entities are not taxed at the entity level but at the owner’s individual rates. The top individual rate was reduced from 39.6% to 37%. Because Congress wanted to incentivize the creation of small businesses, section 199A was added to the TCJA. Section 199A provides for a 20% reduction against small business income, resulting in a top tax rate on such income of 29.6%. Both the lower individual rates and the 199A deductions are due to sunset at the end of 2025.

Consider two examples:

Dan was the sole shareholder of a C-corp. The C-corp had taxable income of $100,000. Under prior law, the tax at the entity level would have been 35% or $35,000. The remainder of $65,000, would have been taxed as dividends at the shareholder level at 20% or $13,000. The combined tax would have been $35,000 plus $13,000 or $48,000, 48%.

If Dan’s firm had been organized as an LLC, there would have been no tax at the entity level. All taxable income would have been passed thru to Dan and taxed (at the highest individual rate) at 39.6% or $39,600.

Second example:

After the enactment of the TCJA, Dan’s C-corp has taxable income of $100,000. The entity level tax is 21% or $21,000. The remaining $79,000 in dividends is taxed at the shareholder level of 20% or $15,800 for a total tax of $36,800 or 36.8%.

If Dan’s firm (post-TCJA) had been organized as an LLC, there again would be no tax at the entity level. The taxable income of $100,000 would be reduced by 20%, leaving $80,000 which would be passed thru to Dan. At his new(top bracket) rate of 37%, his tax would be $29,600, 29.6%.

So, for the next 8 years (income in years 2018-2025) owners of small businesses will be eligible for significant deductions against their small business income.  It is beyond the scope of this newsletter to recount all of the details of 199A, but certain basic concepts should be noted AND ACTED UPON FOR THE FILING OF 2018 TAXES.


It’s widely assumed that only certain types of businesses are eligible for the 199A deduction. This is only partially true. ALL pass-thru entities are eligible for the deduction, up to a point.  Only certain types of pass-thru businesses can deduct income over and above these thresholds.

The thresholds for 2018 income are $157,500 for single taxpayers and $315,000 for joint returns. These thresholds apply to the taxpayer’s TOTAL taxable income (after deductions), not just to the income from the small business. The eligibility is phased out if the taxpayer’s TOTAL exceeds the relevant threshold,  and is lost completely at $207,500 for single filers and $415,000 for joint filers (a $50,000 and $100,000 phaseout window respectively).

However, the thresholds cited here DO NOT APPLY if the small business is accorded favored treatment. Engineering and architectural firms are specifically exempted and can apply the deduction against ALL of the firm’s net income. The 199A language uses the term “Specified Service Trade or Business” (SSTB),  which is a way of saying which types of pass-thru businesses CANNOT use the deduction to offset income in excess of the thresholds. These disfavored businesses include those in the fields of:

  • health
  • law
  • accounting
  • consulting
  • athletics
  • financial services
  • brokerage services


  • “Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. “1

In other words, if the success of the business is tied to the reputation (good will) or skill of the owners, the owners can use the 199A deduction up to the threshold (and phase out) levels but not beyond. All other pass-thru businesses, and specifically including engineering and architectural firms, despite their reputation or skill can use the deduction against ALL of the net income of the business.


The amount of the deduction is premised on a number of factors, but the starting point is Qualified Business Income (QBI). QBI is the net amount of taxable income, less capital gains and losses and certain dividends and interest income.  Importantly, QBI is computed on a per business, not on a per taxpayer, basis. For a taxpayer with multiple businesses, the QBI for each is calculated and the per business QBls are netted, to yield a total QBI for the taxpayer.

The 199A deduction is, generally, the LESSER of:

  • 20%  of QBI, plus 20% of REIT dividends and 20% of qualified publicly traded partnership income


  • 20% of taxable income minus net capital gains.2

At this point a few more examples may be helpful. 3

Example 1

John grosses $100,000 in a sole proprietorship. After taking $30,000 in deductions, his taxable income is $70,000. John can use the 199A deduction to further deduct 20% of $70,000 or an additional $14,000.

Example 2

Abby earns $425,000 as a partner in a law firm. Her husband Andrew is between jobs and has no earnings.  Due to various deductions, Abby and Andrew have taxable income of $315,000. They file jointly.  Despite Abby’s income coming from an SSTB, they are entitled to a 199A deduction because their taxable income does not exceed the threshold for joint filers. Their deduction is 20% of $315,000 or $63,000.

Example 3

George earns $200,000 as a sole proprietor consultant and also recognizes $100,000 of long term capital gains. Because his personal deductions total $150,000, his taxable income is $150,000.  His taxable income adjusted for the net capital gains is $50,000.

George can use the 199A deduction, but his deduction is only $10,000. (20% of $50,000).

One prong of the 199A formula calculates his deduction as $40,000, his QBI of $200,000 times 20%.

But the second (lesser of) prong yields a deduction of only $10,000 ($150,000 of taxable income minus $100,000 of long term capital gain or $50,000 times 20%).


As is evident from this discussion, the 199A deduction can be dauntingly complex in some situations and will require help from an accountant. 4 However, for many taxpayers, the deduction will be easy to calculate and the savings can be significant. Consider a retired couple with modest investments and receiving social security. However, they own a number of residential rental properties which net them $100,000 a year after the normal deductions for expenses. If this couple were to form an LLC and have the LLC own the properties, they could save $20,000 per year ($100,000 times 20%). Of course, they could also declare the rentals to be a sole proprietorship, which is considered a pass-thru entity and achieve the same tax result.

The 199A deduction is NOT available for shareholders/ owners of C-corps. Conversion from a C-corp to an S-corp or LLC involves the dissolution of the C-corp, usually with adverse tax consequences in the form of depreciation recapture. There are, however, many small C-corps with few if any depreciable assets. The owners of these entities may well want to consider such a conversion.

1    IRC Section  199A(a) and (b)

2 IRC Section 199A (a) and (b).

3 Stephen L. Nelson, CPA, Maximizing Section 199A Deductions, pp.11-12, 2018.

4 There are 184 pages of Proposed Regulations governing Section 199A.

Posted in Estate Planning

Gifting in the New Year

Posted on January 8, 2019

Article written by Kevin O’Donnell, Esq.

Everyone likes receiving gifts but most do not associate gifting with estate planning.  Many of our clients use gifting as a part of their estate plan for several reasons.  By giving while you are alive, you have the luxury of seeing the recipient enjoy the gift.  Furthermore, giving while you are alive permits you to place restrictions on the gift to ensure it is used in the manner you desire.  But gifting can have several consequences that must be considered to ensure it is aligned with your estate planning goals.

            First, gifting can have tax consequences because the United States has a Federal Gift Tax.  The gift tax is a “transfer tax” which means it is levied upon the transfer of assets from the donor (the one who makes the gift) to the donee (the recipient of the gift). 

            Fortunately, most of us will never pay gift taxes because:

  • The “Gift Tax Annual Exclusion Amount” (or GTAE for short) allows you to give away up to fifteen thousand dollars ($15,000) per donee per year without reporting the gift to the IRS.  This means if you have four children, you can currently give away up to sixty thousand dollars ($60,000) per year without the IRS even knowing about it.  If you are married, each spouse has his or her own GTAE meaning couples can give up to one hundred and twenty thousand dollars ($120,000) each year; 
  • If you exceed the GTAE in a given year, you are required to report the amount in excess of the GTAE to the IRS on your tax return; but
  • You will not have to pay a gift tax unless and until you have given away more than the Unified Credit Amount (currently about eleven million dollars ($11.2M) after the enactment of the Tax Cuts and Jobs Act of 2017) during your lifetime.

            Clearly most of us (myself included) do not have to currently worry about the gift tax.  But, it is important to report any sizable taxable gifts (those in excess of the GTAE) on your tax return because of their effect on your Unified Credit Amount[1].  Each time you make a gift in excess of the GTAE during your lifetime, your Unified Credit Amount is decreased by that amount.  If, for example, you made a gift of one hundred thousand dollars ($100,000) in 2018, you would report a taxable gift of eighty-five thousand dollars ($85,000) on your tax return and your Unified Credit Amount would be reduced by eighty-five thousand dollars ($85,000).  If the Unified Credit Amount remains historically high it will likely have little effect on your estate planning but if they are lowered in the future it may require more complex estate planning to ensure you are not subject to the estate tax.

            Second, you should consider the consequences gifting may have on the capital gains tax.  The capital gains tax is levied on the difference between the purchase price of a capital asset and the sale price of a capital asset.  If, for example, you purchased rental property for ten thousand dollars ($10,000) in 1965 and sold it in 2018 for one hundred thousand dollars ($100,000) you would have a taxable capital gain of ninety thousand dollars ($90,000) and would owe the IRS capital gains tax of approximately twenty percent or eighteen thousand dollars ($18,000).

            If, however:

  • Instead of selling it, you gave the rental property to your son while you are alive he would receive your tax basis in the property (the price for which you purchased the property in 1965).  As a result, he would have a tax basis of ten thousand dollars ($10,000) and he would have to pay the same eighteen thousand dollars ($18,000) in capital gains tax if he sold it for one hundred thousand dollars ($100,000); but
  • If, instead of giving it away while alive, you left the rental property to your son at your death through your will or trust he would receive a “step-up in basis.”  This means he would receive a tax basis equal to the fair market value of the rental property upon the date of your death rather than the price for which you purchased the property in 1965.  Assuming the property was valued at one hundred thousand dollars ($100,000) on the date of your death, he would pay no capital gains tax if he sold it for one hundred thousand dollars ($100,000).

            As you can see, all things being equal, it is often better to hold onto property until you pass away rather than giving it away while you are alive.  If you give capital assets (real estate, stocks, etc.) away while you are alive the recipient of the gift will likely have to pay capital gains tax if they choose to sell the asset.  If you hold onto the capital asset and it passes to the recipient at your death typically they will be able to avoid paying most, if not all, of the capital gains tax on the sale of the asset.

            Finally, gifting can cause problems for anyone applying for Medicaid to pay for long term care costs.  Medicaid is a federal program which can be used to pay for the costs of a nursing home but only if the applicant has less than two thousand dollars ($2,000) in assets.  Medicaid also has a “look-back rule” which penalizes applicants if they have given away assets within five years of the date of their application.  The purpose of the rule is to penalize those who attempt to qualify for Medicaid by giving their assets to family members in an attempt to look impoverished, but the rule can easily ensnare an innocent applicant who was regularly making contributions to a grandchild’s college fund or making donations to charity.  Thus it is always important to review your gifting strategies as you get older. 

            Gifting can be a great part of your estate plan but should be done with caution.  If you have any further questions about how gifting fits into your estate plan please contact us today to set up a consultation. 

[1] The Unified Credit Amount is the amount of assets you are permitted to give away during your lifetime and at your death without being subject to the Gift and/or Estate Tax.  The current Unified Credit Amount is about eleven million dollars ($11.2M) but that amount is subject to the whim of Congress and has historically been closer to one millions dollars ($1M). 

Posted in Estate Planning

Paying for Long-Term Care for Veterans

Posted on December 18, 2018

Article written by Kevin O’Donnell, Esq.

           Assisted living facilities and nursing homes have become astonishingly expensive.  If you are a veteran and struggling to plan for how to pay for long-term care costs without spending all of your hard earned money, you may qualify for a relatively unknown benefit called Aid and Attendance.  Aid and Attendance provides supplemental income and/or assistance with the cost of nursing homes and assisted living facilities if you meet strict eligibility rules.  

            Unfortunately, the eligibility rules for Aid and Attendance are complicated.  The good news is we are here to assist.  If you believe Aid and Attendance might be right for you or your loved one, we suggest meeting with one of our Elder Law attorneys to discuss whether you are eligible for Aid and Attendance, whether Aid and Attendance is right for you, and how to plan so that you can be eligible in the future without spending down all of your assets.

            What is Aid and Attendance?

            Aid and Attendance is a program through the Department of Veterans Affairs which provides eligible veterans with supplemental income and/or assistance with long-term care.  To be eligible for aid and attendance:

            (1)        you must not have been dishonorably discharged, must have served at least 90 days active duty with at least one day served during a declared state of war, and must be either disabled or over the age of 65;

            (2)        you must have a medical condition that requires “the regular attendance of another person” to assist in activities of daily living (“ADLs”); and

            (3)        you must be financially eligible based on the VA’s asset and income rules.

            Am I financially eligible?

            If you want to determine whether you are financially eligible, it is imperative you meet with one of our Elder Law attorneys because the VA’s asset and income rules are quite complicated and have recently changed.  A full discussion of the changes is beyond the scope of this newsletter, but the new rules changed eligibility for Aid and Attendance in three significant ways.

            (1)        In order to be eligible, a veteran’s “net worth” (which includes annual income) must now be less than $123,600.  Previously, the VA considered a Veteran’s net worth on a case-by- case basis, weighing the veteran’s (or the surviving spouse’s) life expectancy against the rate his or her assets were being exhausted by long-term care and other deductible expenses.

            (2)        The VA now imposes a three-year look-back period (similar to Medicaid’s five-year look-back period) to prevent a veteran from qualifying from Aid and Attendance by reducing net worth by giving away assets. Previously, there was no formal look-back period.

            (3)        The VA now only excludes two acres of a veteran’s personal residence from the calculation of “net worth.”  If a veteran’s residential lot area exceeds two acres, the value of additional land is included in calculation of the veteran’s net worth.  Previously, the entire value of a veteran’s personal residence was excluded regardless of its size.

            If you are a veteran and want to know more about how Aid and Attendance can assist with the costs of long-term care, contact us today to schedule a conversation with one of our Elder Law attorneys.  While every situation is different, our Elder Law attorneys can determine (1) whether Aid and Attendance is the best program for you;  (2) whether you are eligible for Aid and Attendance; and (3) how to best plan so that do not have to spend down your assets to become eligible for Aid and Attendance in the future.

Posted in Estate Planning

Democrats Win the House

Posted on December 11, 2018

Effect of the Midterm Elections on Your Estate Plan

Article provided by WealthCounsel;

Content edited and modified by Stephen M. Watson, Esq.

Estate planning is meant to be an ongoing process, not a one-time transaction. In the same way that you never stop budgeting, saving, and investing as you go through life, it is also sensible to see estate planning as a lifelong project. Let’s look at some of the considerations you should make now that the 2018 midterm elections are in the history books.

Planning in a Fluctuating Political Climate

Estate plans must change when you experience any major life change, such as marrying someone new or welcoming a child to the family.

But you also need to respond effectively to large-scale changes that are external to your personal life, such as legislation that impacts the way your assets are taxed. Regardless of your political leanings, it’s safe to say the United States is continuing to experience a period of dramatic political and legal change.

Elections like the 2018 midterms — and the resulting political change — often create fear and anxiety about how the impact of new laws and tax policy will affect your life. But you can offset that uncertainty by focusing on making the smartest estate planning decisions possible in light of the results. We’re watching the situation as it moves forward both from a federal and state law perspective, and will keep you informed of legal and tax changes that affect you and your loved ones.

The Midterm Split: Democrats Won the House, Republicans Kept the Senate

Before the midterm elections, it was unclear how legislation like the 2017 Tax Cuts and Jobs Act would be affected. Now that we know the House and Senate are split between Democratic and Republican control, it remains to be seen how well the parties will work together on a common agenda.

So what does a divided federal government mean for you? The budget reconciliation strategy the Republicans used to pass the Tax Act will no longer be as viable an option, which could slow additional legislation the Republican-controlled Senate proposes. According to Kiplinger, “What is likely off the table with a Democratic House and Republican Senate is tax reform 2.0, which would make certain provisions of the 2017 tax law permanent, locking in individual and small business tax cuts. Social Security and Medicare reforms, which might have helped offset the effect of the tax cuts, are also likely off the table.”

When the new Congress first convenes in January, we will continue to monitor proposed legislation so you are informed about potential risks and opportunities for your estate plan.

Some Things Are Constant, No Matter Who’s in Charge

Amid so much political uncertainty, it’s important to remember there are many foundational constants in estate planning that are important no matter who’s in charge politically or what the tax laws look like. As part of your financial wellness team, we’re staying informed and will be here to guide you in matters of estate planning.

In order for you to grow and retain your wealth, careful estate planning is always a necessity — regardless of which party controls Congress. Many things may change, but a lot will remain the same: no one can legislate away irresponsible spending, divorce, lawsuits,bankruptcy, sibling rivalry, and the many non-tax reasons to utilize estate planning. An up-to-date comprehensive estate plan remains the best option for passing along your wealth and your values to the next generation.

Will your estate plan do what want it to do?Is it customized to help you thrive in the current U.S. legislative landscape?  Are there any changes in Virginia law that may affect your plan? Let’s take a look. Give us a call today.

Posted in Estate Planning