New Retirement Plan Distribution Rules Likely on the Way

Several years ago, the SECURE Act was passed, which had major changes to the tax rules relating to retirement plan distributions. Another act on that subject is working through Congress - the Enhancing American Retirement Now (EARN) Act. A version has passed the House of Representatives, with the Senate working on its own version. Given the almost unanimous passage by the House, there is a very good chance that the Act will make its way into law.

We cannot tell what all the provisions will be, but here is a list of items that are in one or both of the House and Senate bills and thus have a reasonably good chance of being in the final version:

• extending the date on which the required beginning date is based, from the year in which the employee or IRA owner reaches age 72 to the year in which he or she reaches age 75, effective after 2031
• allowing up to $2,000 per year of 401(k) assets to be used for long-term care insurance
• reducing the  Code Sec. 4974 50% excise tax on the failure to take a required minimum distribution to 25% and reducing it to 10% for an individual who, during a correction window, corrects the shortfall and submits a return reflecting the tax
• indexing for inflation the $100,000 limitation on qualified charitable distributions from an IRA and permitting a one-time election to treat up to $50,000 in distributions (also indexed for inflation) from an IRA to a charitable remainder trust or charitable gift annuity as if they were made directly to a qualifying charity
• excluding from the additional 10% tax on early distributions under Code Sec. 72(t), distributions made to a terminally ill individual; 
• excluding from the additional 10% tax on early distributions under Code Sec. 72(t), distributions of up to $1,000 per year to meet expenses relating to personal or family emergencies
• excluding from the 10% additional tax on early distributions under Code Sec. 72(t), eligible distributions of up to $10,000 (or, if less, 50% of the account balance) for distributions to domestic abuse victims

Time Period to File Estate Tax Return to Make Portability Election Extended to 5 Years

If a spouse dies and his/her estate does not fully use the decedent's remaining unified credit, the surviving spouse can use the unused credit if certain conditions are met. One of the conditions is that an estate tax return is filed for the decedent that makes a portability election, even if no estate tax return is otherwise needed.

An estate tax return is due 9 months after death, with an automatic extension granted for 6 months if timely requested. When no return is required, a return being made solely to make a portability election can be filed late, up to two years after death of the first spouse, if the extension procedures of Rev.Proc. 2017-34 are followed (generally, filing a return within that time period while adding a specified legend to the top of the return).  

This two year period has now been extended to 5 years. This was principally due to the IRS receiving too many Form 9100 requests (requiring a private letter ruling) after the two year period but often within 5 years. To save IRS resources, the extension period is now 5 years.

Note that if it turns out that an estate tax return was otherwise required, the extension is null and void.

Rev.Proc. 2022-32

HUSBAND USES TENANCY BY ENTIRETIES PROPERTY TO MAKE A GIFT TO GIRLFRIEND - WHAT'S THE REMEDY?

In Florida, tenancy by entireties (TBE) property of two spouses provides various benefits. These include protection of the assets against creditors of only one spouse, avoidance of probate, and protection of one spouse from unauthorized disposition of TBE property by the other.

Regarding this last point, it is well settled in Florida that an estate by the entireties is vested in the husband and wife as one person, and neither spouse can sell, forfeit, or encumber any part of the estate without the consent of the other, nor can one spouse alone lease it or contract for its disposition without such consent. 

What happens if this is violated? If this rule is violated, can the injured spouse recover the assets from a third party recipient, or is the remedy of the injured spouse only a judgment against the wrongful spouse and collection from the assets of that spouse? Where the wrongful spouse has insufficient assets to make the injured spouse whole, the ability to collect against the transferred assets could be critical to the injured spouse.

A recent Florida case summarizes and applies the law in Florida on this issue. In the case, the husband diverted millions of dollars of TBE property to the husband's girlfriend. While a matter of dispute, the trial court believed this was done without the wife's consent.

The court allowed a constructive trust to be applied to the assets in the hands of the girlfriend. Interestingly, and importantly, the court noted that such a constructive trust can be imposed even if the recipient did not engage in any wrongful conduct. Thus, the case confirms that an injured spouse can go against the recipient of property to collect back any property transferred without the injured spouse's consent.

Wallace v. Torres-Rodriguez, 3rd DCA 5/11/22