Mary Siceloff

Like most estate planners, we always remind clients that tax and estate planning laws are subject to change and frequently do. As busy practitioners, it is impossible for us to reach out to every client when a change might affect him or her, so we remind all clients to come back to see us if they have questions or are concerned about how recent developments affect their plans (and in any event, at least every three to five years).

January 1, 2020 saw one such key change in the law—the implementation of the SECURE Act. The “Setting Every Community Up for Retirement Enhancement” Act made a number of changes to federal retirement program regulations, such as repealing the maximum age at which one can contribute to a traditional IRA and raising the required minimum distribution age from 70 ½ to 72. From an estate planning perspective, however, the biggest change was the partial elimination of what is often called “stretch” treatment for IRAs.

Before the SECURE Act, a person who inherited an IRA could base his or her annual distributions on his or her life expectancy. This allowed for continued tax-free growth and smaller annual distributions, reducing the likelihood of an IRA distribution raising one’s income tax bracket or a person outliving his or her inherited IRA. The SECURE Act eliminated this “stretch” treatment for all but four categories of beneficiaries. Spouses, individuals not more than 10 years younger than the plan owner, chronically ill or disabled individuals, and minor children of the plan participant are now the only beneficiaries allowed to use their life expectancies to determine their annual distributions.

In general, everyone else must distribute their entire inherited IRA over a period of 10 years, although they have complete flexibility to choose when to take distributions within the 10-year period. This change does not allow the IRA to function as an income stream for life, as many IRA owners would want for their successor beneficiaries; and if the IRA is large, this could move a beneficiary into a higher income tax bracket.

So, that’s the law, like it or not (and many do not like the new options). Many people have named their trusts as beneficiaries of their IRAs so that the trustee can elect lifetime treatment on behalf of beneficiaries. Before the SECURE Act, if the trust was drafted accordingly, it would function as what is commonly referred to as a “conduit” trust payable over the beneficiary’s life expectancy. Distributions would be immediately passed out to the beneficiary and taxed as income to the beneficiary (not the trust). This allowed trustors to know that a certain beneficiary would receive a certain benefit for life and avoided the IRA distribution being taxed as income to the trust (trusts often pay the highest rate of federal income tax). Relying on a conduit trust was preferable to naming the beneficiary directly on the IRA because in the latter case the beneficiary could choose to take a lump sum distribution, possibly contravening the decedent’s intent. Now, except for the four categories named above, relying on a conduit trust approach for a beneficiary’s lifetime stretch of an IRA is no longer an option.

For some, this will not be a catastrophe. It eliminates some attractive options, to be sure, but utilizing the conduit trust still allows a stretch of the retirement assets to the beneficiary over ten years (as opposed to the beneficiary taking a lump sum distribution, for example). However, some estate plans are specifically designed to hold retirement assets in trust because an individual beneficiary has serious health or addiction issues that would be significantly worsened if the person received a large sum of money. Other people know a beneficiary of theirs will never be able to support himself or herself or manage his or her own accounts, so they’ve set up what they believe is a lifelong trust to accomplish this on the beneficiary’s behalf. In these situations, having a conduit trust in one’s plan might result in what previously was expected to be a lifetime gift being paid over ten years instead. This really could be a catastrophe.

Fortunately, there are options. A different type of retirement trust called an “accumulation” trust can still hold IRA benefits for the life of a beneficiary, although there are generally less desirable tax consequences. What is right for your plan will depend on your unique situation, so if you have any concerns at all, you should reach out to your attorney for specific advice. The ramifications of the SECURE Act are complicated, and this post has merely highlighted one potential issue. An estate planning attorney, working in tandem with your CPA and/or financial advisor, will be able to help you maximize your retirement plan assets given the current law.

If your business received a Paycheck Protection Program (PPP) loan, now may be a good time to look at the new guidance from the Small Business Administration (SBA) to see whether the business should consider returning the money if the business did not really “need” it.  If, after considering the guidance, the business determines it does indeed need the loan, the business should ensure it has documentation demonstrating such need.

Background

On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act.  This refilled the PPP with $320 billion.  The PPP is a forgivable loan program for “small” businesses.  The Small Business Administration (SBA) administers the PPP.  Earlier in April, a deluge of applications exhausted the PPP’s initial pool of $349 billion.

PPP loan applicants are required to certify that current “economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Civil and criminal penalties attach to such certifications if they are not accurate.  Many PPP loan applicants were therefore concerned about making such “necessity” certification.  The SBA has published PPP Frequently Asked Questions, which it is updating on a regular basis.  FAQ 31 addresses the “necessity” certification.  FAQ 39, following up on public comments by Treasury Secretary Steven Mnuchin, states that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”

SBA Guidance

FAQ 31, published on April 23, provides guidance from the SBA regarding the “necessity” certification.

One of the most important things to take away from this guidance is that existing PPP borrowers that made the certification before FAQ 31 became available will be deemed to have made the necessity certification in good faith IF the borrower repays the PPP loan in full by May 18, 2020.*  In other words, if your business borrowed money under the PPP and you now determine in light of the new guidance that the “necessity” certification was questionable, the business can protect itself by paying back the loan before May 18.

How can a borrower determine whether it can make the “necessity” certification in good faith?  FAQ 31 essentially tells borrowers to ask themselves whether, in light of “their current business activity and their ability to access other sources of liquidity,” they can access enough liquidity “to support their ongoing operations in a manner that is not significantly detrimental to the business.”  FAQ 31 says that, for example, “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”  The preceding example does two things: (1) puts public companies on notice that they will be subject to scrutiny (for example, Shake Shack, which said it will return its PPP loan), and (2) highlights that documentation will be important in a borrower’s ability to justify its “necessity” certification.

Conclusion

FAQ 31 raises questions that are difficult for borrowers to answer without further clarification from the SBA or other authorities.  Exactly how much pain would a borrower need to sustain from getting non-PPP funding before it reaches the “significantly detrimental” threshold that justifies a PPP loan?  There is no bright-line or one-size-fits-all answer.

If a PPP borrower did not consider alternative sources of liquidity when submitting their PPP application, the borrower should now do so.  If funding is available from sources other than the PPP in a manner that is not significantly detrimental to the business, the business should consider returning all PPP loan proceeds before May 18 to avoid facing penalties based on an inaccurate “necessity” certification.  If the borrower concludes that the PPP loan was necessary, the borrower should have documentation supporting the business’s reasonable determination that accessing funding from such alternative sources would be significantly detrimental to the business.

Please note

*In FAQ 47, published May 13, 2020, the SBA stated that this deadline was being extended from May 14, 2020 (which was an extension of the original May 7 deadline) to May 18, 2020. The original post of this article contained the May 7 date.